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Iran’s Steel Industry “a Rising Star”

Iran’s Steel Industry “a Rising Star”Iran’s Steel Industry “a Rising Star”

A foreign steel market analyst doubled down on his impression of the Iranian steel industry following his weeklong stay in Iran and extensive interviews held with industry players in a report published recently.

Peter Marcus, the founder and managing partner of World Steel Dynamics, made a presentation on the potential of Iran’s steel industry at the Iranian Steel Market Conference held in Tehran on February 16, 2016, Minews reported.

“It is quite evident that the Iranian steel industry, despite its current financial crisis, will be one of the global industry’s ‘rising stars’ in the next decade,” he said in the opening of the report.

This is while “steelmakers in a number of countries, including China, are now falling stars,” he added.

Marcus says the Iranian steel industry’s risks and problems seem to be considerably less than those faced by steelmakers in most other countries.

 Advantages and Challenges

According to Marcus, the advantages of Iran’s steel industry include:

- A highly favorable steel demand outlook

- Access to low-cost energy in the form of natural gas and electricity

- Fairly low-cost iron ore mines

- Convenient locations for exports

- Attractive capacity expansions via direct-reduced iron and electric arc furnace methods

- Government support for the industry.

However, the industry will be facing an array of challenges in the next decade, including:

- A severe shortage of capital since the government is not providing direct financial help, while the steel mills’ profitability has plummeted sharply in the past 18 months

- Capital from domestic sources is extremely expensive given the current interest rate of about 20% on bank loans (recently down from 27%)

- The risk that the Iranian currency, the rial, would appreciate sharply in the next decade, which will boost the Iranian steel mills’ production costs as per the US dollar parity rate

- Far from adequate low-cost iron ore reserves to meet the objectives set in the 20-Year National Vision Plan (2005-25), namely annual production of 55 million tons of crude steel

- The threat of rising domestic natural gas prices

- Water shortages and the need to engage in more underground and higher cost extraction of the iron ore

- Lack of a sufficient countrywide rail transportation system

- Poor labor productivity since the government wants to maximize the number of steelworkers due to the high unemployment rate.

Marcus emphasized that given the current reduced profitability of the steel business in Iran and the lack of direct governmental financial support, it is clear that Iranian steelmakers and iron ore producers need to attract equity funding and loans from offshore groups.

Iranian industrialists could benefit substantially from strategic partnerships with foreign companies, especially since steel’s technological revolution has continued to advance at a rapid pace in the past decade and Iranian steelmakers have been left behind due to economic sanctions.

The analyst noted that on a global scale, oversupply of steel, with China as the main culprit, will be the norm and consequently cause steel export prices to stay lower than domestic prices.

However, striking a positive note, he forecast steel demand outside of China to grow 2-3% per annum in the next decade, mostly owing to the defeat of the “Chinese steel exporting armada,” and the country’s major shift from fixed asset investment spending to household spending in order to propel its economy.

According to Marcus, well-positioned steel companies, such as Iran’s Mobarakeh Steel Company, will have the opportunity to benefit from merger and acquisition activities and boost their competitive marketplace positions in the upcoming steel industry climate.

Steel demand growth in Iran will be sizable in the next decade, according to Marcus, due to an expected sharp rise in fixed asset investments in the post-sanctions era.

FAI’s rising share in GDP will cause infrastructure development to pick up and manufacturing companies to expand and prosper.

  MSC at Forefront

The country’s largest steelmaker, Mobarakeh Steel Company, which accounts for about 60% of Iran’s steel sheet deliveries, including subsidiaries, in Marcus’ opinion, is the “brightest rising star” in Iran’s steel industry.

In fact, World Steel Dynamics recently added Mobarakeh Steel Company to its list of 37 world-class steelmakers.

Marcus noted that MSC ranked 13th due to factors such as considerably expanded production capacity, location in a high-growth market close to customers, pricing power in the domestic market, cost-cutting efforts, harnessing steel’s technological revolution and its high profitability.

MSC is the largest integrated steel producer in the Middle East, with its main plant near Isfahan Province plus two steel-producing subsidiaries, Hormozgan and Saba steel complexes.

Besides the steelmaker’s “ultra-low production costs,” including an operating cost to produce hot-rolled band just below $300 per ton, the company is positioned to expand capacity at a relatively low capital investment cost.

Furthermore, MSC is currently operating its facilities at more than 90% of their capacity, which is over 6.5 million tons of steel sheet products per year and is one of the highest operating rates in the country.

In Marcus’ view, other Iranian steel companies will hardly be able to keep up with Mobarakeh due to their fund shortages, relatively higher-cost expansions and inability to match MSC when it comes to improvements in product quality, including the production of automotive sheets.

Financialtribune.com