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Local Producers Poised to Expand Market Share
Economy, Business And Markets

Local Producers Poised to Expand Market Share

Economic sanctions were lifted from Iran in January 2016 and since then optimism has been building around the nation’s economic growth going forward.  
Crude oil exports remain the mainstay of the Iranian economy as well as trade balance, so the country is very likely to continue expanding this market. As per the estimates of International Energy Agency, Iran is capable of increasing oil production by 500,000 bpd just from existing oilfields.  
Nevertheless, a sharp downward correction in seaborne oil prices over the past year is likely to impact trade balance. Thus, the country is looking at ways to curb imports and promote exports of non-oil commodities, reads an article published by London-based business intelligence company CRU Group.
The full text is reproduced below:
As per Iran’s Ministry of Industries, Mining and Trade, 16.5% (amounting to over $7 billion) of Iranian non-oil exports were from the mineral products industry in the last Iranian year (March 2015-16), 38% of these exports were of steel products (primarily flat steel products).
At the same time, import of steel products by Iran shrunk by over 7% year-on-year (in volume terms) in H1 2016.
Looking at the potential positive impact that the steel industry can have on the country’s trade balance, the government has formulated and is aggressively pursuing its 55 million-ton production by the 2025 Vision Plan.
The country’s largest steel producer, the state-owned Mobarakeh Steel Company, is spearheading this ambitious plan by announcing a program to increase its steelmaking capacity to 25 million tons/year by 2025, from 6 million tons in 2015.  
MSC is an integrated steel sheet producer and any capacity expansion by this company will have a substantial impact on Iran’s steel sheet market balance.
In the following sections, CRU delves deeper into the Iranian steel sheet market in terms of demand prospects, production outlook and trade.

  Automotive, Construction Boom
As per CRU’s Steel Sheet Market Outlook, Iran is the 14th largest consumer of steel sheet products in the world, with an apparent consumption of 7.3 million tons in 2015.
Over a five-year period ending in 2020, Iran is seen to be one of the fastest growing steel sheet markets among the top 20 steel sheet consuming nations.  The country’s steel sheet consumption growth is forecast to be more than double the world average over 2015-20.
The country’s steel sheet consumption will be driven up by fresh investments in the housing and automotive sectors.  
Since the lifting of economic sanctions, the Iranian government has attracted a significant interest from foreign construction project developers as well as financial institutions interested in property investments.  
In a recent related development, South Korea’s Daelim Construction Company secured a government contract to construct a 500-hectare Kharazmi Township near Tehran at a cost of $1.09 billion.
Moving on to the automotive sector, Iran is home to the largest automotive group in the Middle East, namely Iran Khodro Company. The country’s automotive sector was dealt with a severe blow in 2012 when nuclear sanctions against Iran intensified, as local production fell sharply from a 2011 record of 1.6 million vehicles due to the pullout by French automakers.  
With the lifting of sanctions, the prospects for Iranian automotive industry have brightened. Industry forecasts suggest that Iranian car production is likely to grow by 15% y/y in the current Iranian year (March 2016-17). This would mean that the country’s vehicle production is likely to cross the 1 million mark after a hiatus of 4 years.  
In a related development, French automaker PSA Peugeot recently formed a joint venture with IKCO to set up a new facility to produce Peugeot 208, 2008 and 301 models over the next five years.
CRU expects growth in these key sectors to propel Iranian steel sheet consumption over the forecast horizon.  
A general rise in consumer income, and thus spending, is also likely to support output growth in the consumer durables and white goods sector.

  MSC Tightening Grip on Local Market
As was previously mentioned, Isfahan-based Mobarakeh Steel Company is the largest steelmaker in Iran with an integrated flat steel production capacity of 5.2 million tons of steel sheet products annually.  The company’s product portfolio (as in 2015) includes HR coils (70%), CR coils (25%), tin plate (1.5%), galvanized and color-coated coils (3.5%).  Apart from MSC, the other major producers of steel sheet products in Iran include Saba, Kashan and Sepiddasht Steel plants (all subsidiaries of MSC).
MSC has an integrated DR-based EAF capacity for hot metal supply and, for it being government owned, enjoys low cost iron ore (from government-owned mines) and natural gas supplies (at about $1.5/mmbtu). These are, thus, major factors in reducing the cost of production for MSC.  
Apart from these, the company has undertaken a number of renovation and modernization initiatives for its DR plants, steel plants and rolling mills, which allow the plant to run at optimum capacity utilization.  This is another factor that brings down site operating costs of the plant. A comparison of the plant’s approximate HR coil production cost with CRU’s global cost curve for HR coil rolling puts MSC in a very cost competitive position globally.
MSC has consistently held a market share of over 60% in the Iranian steel sheet market since 2013 (the rest being imports) and is making continuous efforts to substitute imports to as much extent as economically feasible.  For instance, the company has very recently added high strength automotive grade steel sheet to its product portfolio to meet specific requirements of major Iranian automakers, namely IKCO and SAIPA.  
As in 2015, 75% of MSC’s total steel sheet output catered to the domestic market while the remaining 25% went off as exports (primarily to European nations).
As was highlighted earlier, MSC has very ambitious plans for expanding capacity to 25 million tons by 2025. CRU expects the domestic market to remain the primary focus of the company, wherein the company is likely to expand its market share beyond 75%.
However, the company will need to look for broader export avenues as well, considering its cost competitiveness in a global context.  
In fact, MSC has entered into a contract with the biggest steel distributor in Europe, Marcegaglia of Italy, to market its products more effectively in the European market. The company has set aside a target of achieving 2 million tons of steel sheet exports in 2016, a target which may get negatively affected by the economic impact of the recent Brexit vote by the UK.
Nonetheless, MSC is positioning itself well in the Iranian (as well as the global steel sheet) market and is likely to increase its dominance in global steel trade.
Despite the anticipated prowess of MSC gaining further market share in the Iranian steel sheet market, imports are likely to fall only gradually in Iran.  There are two prime assumptions behind this forecast:
1. Longstanding relationships between local end users and their suppliers in other countries will take time to sever, as quality standards/requirements may be stringent. Thus, local mills may take time to cater to these specific needs.
2. Economics may not allow local mills to invest in high cost infrastructure for a niche market segment.  
Local producers have not shown much interest in producing high end and thinner gauge products. Nonetheless, substitution of standard gauge steel sheet products is imminent, once local output goes up.  
The government is also providing support to the local steel industry to fight off cheaper imports by means of higher import tariffs.
Import duties for all flat steel products were increased by 10-11% by the government, starting March 20, 2016.

  Conclusion
Iranian steel sheet market, while being one of the fastest growing in the world, is fast moving towards self-sufficiency owing to fresh investments being made in the steel sector.  
Thus, despite a rise in demand, we are likely to see a gradual fall in Iranian steel sheet demand over the forecast horizon.  
There is likely to be near complete (if not full) substitution of standard gauge products, as cheaper imports will be curbed by government protectionist measures.  
Nonetheless, thin/high end grade steel sheet imports may continue, despite there being a risk that local producers may opt to invest in such facilities following some form of government support (either in the form of tax exemption or higher import tariffs).

 

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