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Steel Sector, Sanctions and the Future

Steel Sector, Sanctions and the FutureSteel Sector, Sanctions and the Future

Steel production is expected to grow over the coming years as an easing of sanctions placed on Iran will boost the steel industry, a new report projected.

 Despite the Iranian steel industry’s resilience in the face of attempts by western powers to isolate it from external trade, a cut in external business has negatively impacted the steel industry. This has ensured that imports have also been restricted.

There are industrial deficiencies in certain market segments. These deficiencies mean that Iran will struggle to meet all its domestic demands in spite of declining steel consumption.

Iran is under sanctions placed by the UN, EU and US, which have severely damaged the domestic industries. The sanctions which were put into effect to restrain Tehran’s nuclear energy program, are some of the most stringent to date. Iranian officials are negotiating with the P5+1 – the US, Britain, France, Germany, China and Russia – in the hope of easing the sanctions, in exchange for curbing the scope of Tehran’s nuclear activities.

Negotiations between the West and Iran are likely to continue over the coming quarters with a very gradual easing of sanctions on non-essential sectors, “thus giving the West leverage over Iran by maintaining banking and oil restrictions,” according to Business Monitor International’s October report on Iran.

The metals sector will be one of the primary beneficiaries of the eased sanctions as it is used as a stimulus for Iran to continue talks.

Iran exchanged the halting of parts of its nuclear activities for partial easing of sanctions, as part of an interim deal between Tehran and the P5+1. This reduction in sanctions is already beginning to bear fruit. Iran exported an average of 1.35mnt of steel in 2012 and 2013, but has exported 1.26mnt of steel during the first seven months of this year, according to a report by Iran’s top steelmaker, Mobarakeh Steel.

Crude steel output rose 11.1% year-on-year (y-o-y) to 13.27mnt in the first 11 months of 2013, representing one of the strongest growth rates in the world, rivaling Turkey’s. Whilst the growth rate of steel output will slow on the back of higher base effects, Iran will be able to increase exports of low quality steel.

 Liberalization

Some progress has been made to becoming self-sufficient in its metals sector in recent years. 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 WTO and has a stated policy goal of becoming an official member of the organization, a goal it hopes to achieve within five to six years. However, such a timetable is too optimistic, as Iran is facing stiff opposition from the US and other key bilateral partners in light of the continuing concerns over its nuclear energy program, BMI states. 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 Rouhani administration has implemented reforms in its foreign trade regime, easing the duties and tax on importing cars, though some limitations were recently imposed. An ad valorem commercial benefit tax – a tax based on the assessed value of property – applies to most imports. The tax ranges 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%.

  Hampered Growth

Metal’s export growth is being undermined by strong growth in Middle Eastern production capacities, as well as the ongoing economic sanctions regime. Operating rates for metal processors 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 automotives and construction segments where investment has been restricted, BMI reports. Even with strong export growth, the moderation in domestic consumption means that metal processing plants are operating well below nameplate capacity.

 Growth Plans Fail

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.

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 of the plan will be on private sector investment, particularly in the mining sector in order to improve iron ore availability.

The objective is to raise Iran’s steelmaking capacity from 20mnt per annum in 2012 to 55mntpa by 2025, with an interim objective of 48mntpa by 2015.

The medium-term self-sufficiency of the country in billet, depends on securing financing for 10-12 melt shops currently under construction that have a combined capacity of 4-5mntpa. At least four of these are being spearheaded by the private sector.

With financing and hard currency in short supply as a direct result of international sanctions, analysts express grave doubts about Iran’s ability to meet its output targets.

The sanctions regime will affect Iran’s ability to export and attract investment, which will be crucial to realizing the government’s long-term goals for steelmaking. Steel output is expected to be increasingly devoted to the domestic market. External steel trade, both in terms of exports and imports will dwindle as a result of a prolonged sanctions regime.

“If planned capacity increases come into effect, we anticipate diminishing capacity utilization as exports decline and the domestic market fails to absorb output growth,” BMI forecasts.

 The Dragon to the Rescue

Low capacity utilization will damage the profitability of the Iranian steel industry, as well as create potential market instability. Furthermore, the domestic industry is unable to satisfy the country’s needs due in part to the technological problems caused by lack of investment and expertise. This is something that would come with the involvement of global majors in the industry.

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 steel production growth over our 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 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. That said, there have been some setbacks within the China-Iran relationship when the Asian giant pulled out of the development of phase 11 of the $4.7 billion South Pars gas field.

In aggregate, the outlook for Iran’s metals sector is improving for the first time in years as sanctions begin to be eased following negotiations with the Western powers. On the whole, however, given the bearish outlook for steel prices due to weakening global demand, and the fact that any rapprochement with the West, “if indeed they happen,” will be drawn out and not have a significant impact in the near term.

Financialtribune.com