The steel industry’s outlook is improving as the Iranian government plans to increase the country’s steel production capacity from 20 million tons per annum (mtpa) to 55mtpa by 2025, with an interim objective of 48mtpa by 2015.
In its Iran Metals Report Q1 2015, Business Monitor International has forecast that the production of steel will continue over the coming years, as western sanctions against the Iranian economy have been easing in the past year. But it says serious challenges remain.
“The Iranian steel industry has proven to be remarkably resilient in the face of attempts by western powers to isolate it from external trade,” said the report which was released earlier this month. “While a cut in external trade has negatively impacted the steel industry, isolation has ensured that imports have also been restricted.”
The report predicts the country will struggle to meet all its own needs in spite of declining consumption. “We expect growth in Iran’s steel production over the coming years as sanctions are eased on the metals sector.”
The metals sector will be one of the primary beneficiaries of the easing of sanctions, the report noted.
The reduction in sanctions is already beginning to bear fruit. Iran exported an average of 1.35 million tons of steel in 2012 and 2013, according to a presentation by Iran’s top steelmaker, Isfahan Mobarakeh Steel, but has exported 1.26 million tons of steel during the first seven months of 2014. “Whilst the growth rate will slow on the back of higher base effects, Iran will be able to increase exports of low quality steel,” the report says.
Iran has made some progress toward becoming self-sufficient in its metals sector. Progress has been made in trade liberalization efforts, with bans on the import of certain products removed, tariffs lowered and all import quotas on cars eliminated. Iran currently has observer status at the World Trade Organization (WTO) and has a stated policy goal of gaining access, which it hopes to achieve within five to six years.
“However,” the report says, “such a timetable is too optimistic, as Iran is facing stiff opposition from the US and other key bilateral partners.”
In effect, WTO talks have been halted for political reasons. Iran has 13 import tariff bands with tariff rates ranging from 4% to 174%. A gradual reduction of tariffs has brought the simple average tariff rate down to 22.6%, from 27% in 2003-2004.
The government has implemented reforms in its foreign trade regime, lifting the ban on automobiles. An ad valorem commercial benefit tax applies to most imports, ranging from 5% to 375%. Customs duties for chemicals, metals and medical equipment are set at 10%; food, minerals, leather, paper and machinery at 15%; and electronic machinery at 25%, according to the report.
“Export growth is being undermined by strong growth in Middle Eastern capacities, as well as the ongoing economic sanctions regime,” BMI’s report adds. “Operating rates can only be raised through market diversification, a process that has been severely curtailed by the sanctions regime imposed by the US and the UN. Market growth is particularly limited in the metals-intensive automotive and construction segments where investment has been restricted. Even with strong export growth, the moderation in domestic consumption means that metal processing plants are operating well below nameplate capacity. However, in late-2013 Iranian carmaker Iran Khodro Industrial Group (IKCO) announced that it plans to increase its daily production to 2,800 cars in 2014 and plans to produce 1.2 million cars by the end of 2016, of which 50% will be exported to international markets.”
Financial Challenges
The Iranian government finalized its Comprehensive Steel Plan in 2013, which is due to point the way towards self-sufficiency in steel products and increase exports. The focus will be on private sector investment, particularly in the mining sector in order to improve iron ore availability.
Iran’s medium-term self-sufficiency in billet depends on securing financing for 10-12 meltshops currently under construction that have a combined capacity of 4-5mtpa. At least four of these are being spearheaded by the private sector.
However, BMI doubts Iran will face serious challenges to meet its targets, given financing and hard currency in short supply as a direct result of western sanctions. It argues that the sanctions regime, if it continues, “will affect Iran’s ability to export and attract investment, which will be crucial to realizing the government’s long-term goals for steelmaking.”
Nevertheless, there is still promise from projects being agreed and planned for the future, such as that agreed between China and Iran, and will help sustain BMI’s forecast for sustained steel production growth over its medium-term outlook (2013-2018).
The Chinese government has made an offer to build a new freight rail line in Iran, according to Engineering News-Record. The freight line is aimed at allowing continuous rail transport of goods from China, through the Middle East, to Europe. The project is expected to cost $2 billion, starting in Tehran and running to Khosravi on the Iraqi border.
The line will also offer a passenger service. Iran’s minister responsible for transport is reported to have invited bids to construct the line, the report says.
Tax Reform
There has been some reform of the tax regime that could help industry grow. The tax regime in Iran has undergone substantial reform, with a flat corporate tax rate as opposed to the old, progressive corporate tax system, BMI says. “Resident companies enjoy a corporate tax rate of 10% on taxable income, with the remainder taxed according to a progressive scale ranging from 12% to 54% according to their income. The authorities are planning to curb tax exemptions.”
The flat corporate tax rate is 25%, down from a previous cap of 54%. According to the tax code, the taxable income of companies or non-resident persons operating in sectors including construction, technical installations, transport, preparation of construction and installation drawings, surveying, supervising and technical calculations is limited to just 12%.
