DRI, Semi-Finished Steel Offer Best Value for Iranian Exports

The Iranian government has ambitious plans for the country’s steel industry now that international trading sanctions against the Middle Eastern country have been lifted.

But which is the right strategy to pick? At what point in the steel value chain can Iran be most competitive and make the best use of its natural advantages?

Much of the discussion last week among the more than 350 delegates at Metal Bulletin’s Second Iranian Iron and Steel Conference in Isfahan, Iran, focused on those questions.

Metal Bulletin is a London-based specialist international publisher and information provider for the global steel, non-ferrous and scrap metals markets.

 Optimizing Natural Gas Resources  

Iran holds vast reserves of natural gas. Given the current market environment of depressed oil and gas prices, and difficulties in finding off-takers, the country will benefit most from using its huge energy resource at home, delegates heard.

“The problem for Iran is how to use its vast gas reserves. Neighboring countries are reluctant to purchase gas from Iran at market prices. They demand discounts or can’t actually pay,” Bahador Ehramian, board member of the Iranian Steel Producers Association, said.

“And the seaborne market for liquefied natural gas cannot accommodate another major competitor, after Qatar has already made large investments and cannot find enough off-takers.”

Ehramian noted that a price war with Qatar would make many investments less feasible.

“What Iran can do instead with its gas is to turn it into products derived from gas,” he said.

In his view, Iran should not go down the steel product value chain, as it would find lower returns and diminishing margins in competition with cheap finished steel supplies from China.

“The highest equilibrium for Iran is to export DRI [direct reduction iron] to the neighboring region and generally to the rest of the world,” he said.

Hot briquetted iron from Iran should be particularly attractive for steel producers in Europe, which use the electric arc furnace production method. A supply of price-competitive raw materials from Iran could in turn improve their competitive position, Ehramian added.

 Competing in Semi-Finished Products

Conference discussions also highlighted Iran’s competitiveness in semi-finished products. Imports of such materials into the country have almost completely stopped, while its export volumes of billet and slab are expected to double to 3.4 million tons per year from 1.7 million tons in 2015.

Exports of finished products, in comparison, are expected to see only a small increase to 2.5 million tons in 2016, compared with 2.2 million tons last year.

“In the past couple of years, due to [the flood of cheaper steel products from] China, marketing finished steel has become more difficult,” Ehramian said.

Esfahan Steel Company, Iran’s largest producer of construction steel, with a market share of 19%, mainly exports its bar and beam products to neighboring countries. But it is now also looking for new destinations for its semi-finished material.

“We are looking to sell billets to European customers,” ESCO’s sales and marketing deputy, Ehsan Dashtiyaneh, said.

 Government Plan

While the industry discusses value optimization for Iranian exports, the official plan from the government focuses on an ambitious expansion program for the domestic steel industry.

“The steel production target of 55 million tons by 2025 is feasible and possible,” Mehdi Karbasian, deputy minister of industries, mining and trade and chairman of the Iranian Mines & Mining Industries Development & Renovation Organization, told Metal Bulletin.

He called on the government to offer support in the form of domestic financing and in attracting investment from abroad.

Many people, however, are skeptical that the target of 55 million tpy of output can be achieved.

“The target is based on an optimistic point of view,” Dashtiyaneh said. “We have considerable resources but there are challenges: 35-40 million tpy is an achievable target.”

> Domestic Demand Vs. Exports

Much of the government’s plan will depend on a recovery in Iranian domestic demand, but also on the recovery of steel demand worldwide.

The target of 55 million tpy vastly exceeds even the most optimistic scenario for domestic demand growth, which forecasts 35 million tpy by 2025.

In the last Iranian year (March 2015-16), the country’s apparent steel consumption did not exceed 15 million tons, according to market participants.

But in a scenario with 55 million tpy of production and 35 million tpy of domestic consumption, the additional 20 million tpy would need to be exported.

“The Middle East can be a great market for us,” Bahram Sohbani, managing director of Mobarakeh Steel Company, said, adding that this year Iran will become a net exporter of steel.

He describes the government’s targets as “both optimistic and realistic”.

Whether export expansion will happen on the projected large scale or in expected smaller volumes, new potential export markets must be identified well in advance.

“We need to train professional marketing teams to gain new markets all over the world,” Dashtiyaneh said.

Around 70% of Iran’s exports today go to Iraq, Afghanistan and Central Asian countries.

Dashtiyaneh advocates that steel producers come together to compete and that the government should facilitate mergers.

 Finance

The largest bottleneck for Iran’s ambitions for industrial growth, whether in steel or other sectors, is finance.

Depressed oil prices are adding further pain to the government’s strained finances.

“We produce oil and our industry is built on oil. But the oil price has dropped drastically, which has affected the country,” Karbasian said. “Unfortunately, our national financial supplies cannot totally support our industries. So foreign investment is considered favorably by the government.”

Wang Jian, managing director of China’s Sinosteel Equipment & Engineering, complimented Iran on its ambitious plans and called for more cooperation between the two countries, based on complementary interests.

“Now we see the start of a new era, as China has become an industrial giant and Iran has come out of the sanctions period,” he said. “When we talk about opportunities, we must also talk about needs.”

Iran needs technology, professional knowhow and financing, while China, based on its growing car production and usage, needs petroleum.

“We will need a lot of imports of crude oil from Iran,” Jian said.

 Inefficiencies

As well as access to finance, there are other challenges in the way of Iran’s ambitious agenda for the steel sector. Prohibitive internal transport costs, particularly for iron ore from mine to port, were mentioned repeatedly at the conference.

The lack of a developed railroad network means that much of the transportation to ports is done by truck, which is time-consuming and expensive even though fuel in the country is cheap.

“We do not have railroads at many production plants. For exports, we need to have a better transportation system,” Sobhani said.

The same applies to energy supply to steel production sites.

“We have all the capacity here, but efficiency is missing,” Karbasian said. “We witness very harsh competition in the world, so quality and prices are the most important issues.”