Iran has an ambitious target to become the world’s 6th largest steel producer by raising crude steel production capacity to 55 million tons per year, as part of the goals envisioned in the 20-Year National Vision Plan (2005-25).
The government is moving on this path by building steelmaking and raw material production plants across the country. In fact, the industry has already realized about half of the expected steelmaking capacity, according to the Ministry of Industries, Mining and Trade.
But as Iran moves closer to achieving its declared goals, key questions regarding the industry’s approach and its outlook need to be answered, according to a presentation made by the London-based Commodities Research Unit Group at the Iranian Mines and Mining Industries Development and Renovation Organization’s headquarters in Tehran earlier this week.
First, what steel products need to be produced and sold in order for Iran to maximize its potential, and for the iron and steel industry to maximize value creation? Second, how can Iran make the most of opportunities in export markets in the region, and beyond?
First established in 1968, CRU is a privately-owned business intelligence company focused on global mining, metals and fertilizers markets. It provides consultancy, business analysis, news, data and conferences services.
The text of CRU’s presentation was published in social media in a communiqué and seen by Financial Tribune.
Global Iron Ore Outlook
The global iron ore market experienced a turbulent trend in the past 15 years, as it saw an unparalleled price decline from highs of $170 per ton in 2012 to lows of $38 per ton in late 2015. Prices have slightly recovered in 2016, with 62% Fe iron ore CFR China at $59.39 per ton on Friday. According to data presented by CRU, prices are set to drop their recovering trend and depress further into the next year.
The unfavorable outlook is due to the fact that a total of 237 million tons of low-cost iron ore supply is approaching over the next five years by global iron ore giants such as Samarco, Anglo-American, Vale, Roy Hill, Rio Tinto and BHP Billiton.
This creates an opportunity for Iran’s steel industry to import low-cost, quality iron ore to feed its growing steel mills as prices are unlikely to rsie over the next five years.
Steel Industry Future
Global crude steel production increased sharply over the past two decades, led mainly by China’s astonishing rise as the world’s steel powerhouse.
From the maximum production capacity of about 100 million tons in 2000, the industrial giant reached production of nearly 900 million tons per year in 2015. China currently produces more than half the world’s crude steel.
But in recent years global consumption has not managed to keep pace with steel capacity-making, resulting in a built-up overcapacity. For instance, the consumption growth rate for flat products has been negative ever since the third quarter of 2014. It sank down to -4% in late 2015 – its lowest in years.
All fingers are pointed at China as the main culprit, as the steel behemoth regularly diverts its excess production of long and sheet products to external markets at cheap prices, undercutting the competition and disrupting the markets’ balance in the process. The country exported more than 52 million tons of long products and 12 million tons of various steel sheets in 2015, indicating a more than 500% surge over a five-year period.
The build-up of global overcapacity and the increase in Chinese steel exports reaching international markets has also led to a decline in base steel prices. American, German, Asian and Chinese steel were all hit, shrinking from highs of $1,000-$700 per ton in 2008 to $700-$300 per ton in 2015.
There is hope on the horizon, however, as the Chinese government plans to cut up to 150 million tons of steelmaking capacity by 2020 through closures and consolidation.
CRU forecasts Chinese crude steel production to stabilize at around 2015 levels in the next five years. Yet globally, steel production is forecast to rise by 7.4% to around 1.8 billion tons per year.
Moreover, global steel consumption is forecast to increase at a faster pace of 7.7% as overcapacity is reduced over the 2015-20 period. According to CRU, Iran will be one of the fastest growing steel sheet consumers globally. The country’s CAGR is forecast at about 3.7% for the period, well above the 1.8% world average.
Downstream Steel Sector Challenges
Reaching the 55-million-ton target capacity is one aspect of a successful steel strategy. But another equally important factor is developing the right capabilities in the downstream sector while capacity is being increased.
CRU believes that the necessary capabilities include being able to produce semi-finished products, base-grade hot-rolled products (hot rolled coils, rebars, wire rod, etc.), high-grade rolled products (cold rolled coils, galvanized coils, color-coated steel, drawing-grade wire rod, etc) and high value-added downstream products (customized grades, components, etc.)
Achieving such capabilities will lead to maximum value creation for Iran’s steel industry both in domestic and export markets.
Rails are an instance of high value-added products. They are hot-rolled long products made out of steel billets in a rail mill.
Iran has an extensive infrastructure investment plan in developing railroads across the country over the next few years, such as the one being built to connect the southern Chabahar Port to Afghanistan. This means there is need for a massive supply of rail. But the local steel industry cannot afford to meet this need alone. Rail products, therefore, have to be imported, such as recent order for 150,000 tons of rail from India’s Jindal Steel & Power Plant.
This opens an opportunity for the development of the domestic rail capability. As Iran ramps up its crude steel production, according to CRU, there is a commercial logic for part of that production volume to be transformed into and sold as rail products.
This opportunity goes beyond achieving self-reliance in rail production: there are currently no rail mills in any other Middle Eastern country, and with Iran’s geographical advantage and its access to cheap energy sources, this indicates a significant potential for the country to become the key supplier of rail products to the Middle East.
CRU’s second suggestion for high value-added products to manufacture is steel sections, also known as structural steel. Sections are also hot-rolled long products made out of steel billets and blooms in a sections mill.
Iran’s large growth potential in the construction and infrastructure sectors make it a potentially attractive market for steel sections. However in countries like Iran, construction is largely characterized by the use of concrete and reinforcement steel bars, as opposed to steel frames made of sections such as beams and channels. Constructing a building with steel sections requires 60% more steel compared to traditional methods using concrete and reinforcement steel bars. Furthermore, it is usually cheaper to build high-rise buildings out of steel frames than by using concrete and rebars.
The only limitation is that international experience suggests that a shift from concrete-based construction to a steel frame-based model typically requires the supply side of the market to move first. Meaning that only when sections are produced locally and are readily available, can construction engineers, architects and designers start to incorporate a new model based on steel frames in their projects (such as modern steel and glass buildings). This change requires extensive training and preparation of all parties involved, as well as investment in domestic steel section plants.
This supply-side transformation could open a potential opportunity for the Iranian steel industry while sections can prove to be a commercially viable form of supporting Iran’s crude steel production expansion.
