The Nat’l Rail Conundrum

Esfahan Steel Company’s rail production line was officially launched last week.

First Vice President Es’haq Jahangiri and Minister of Industries, Mining and Trade Mohammad Reza Nemtazadeh visited the site in Isfahan Province to inaugurate the long-delayed project besides a new steel casting line.

The rail production line, developed by the German Kuttner Company and capable of producing 400,000 tons of UIC60 rails per year, makes ESCO the sole producer of the industrial commodity in the Middle East.

The project was implemented using more than 1.5 trillion rials ($43.6 million at market exchange rate) of government credit.

The construction of the new continuous steel casting line added 1 million tons to ESCO’s crude steel production capacity to stand at 3.6 million tons per year. Its implementation cost over 932 billion rials ($25.8 million) of government credit. The main purpose of this new line is to maximize the use of the company’s cast iron output.

ESCO (locally known as Zob Ahan-e Esfahan) is Iran’s third largest steel production plant directly controlled by the Ministry of Industries, Mining and Trade, which teamed up with the Ministry of Roads and Urban Development two years ago to develop the so-called “National Rail Project” to reduce reliance on imported rails.

The project, however, was delayed on several occasions and caused a shortage for the growing number of domestic rail development projects amid limited imports.

Official reasons cited for the delay were “global and domestic recession in the steel market, ESCO’s lack of liquidity and the Islamic Republic of Iran Railways’ refusal to pre-purchase the tracks”.

After a period of lull, one of the first developments in the project’s progress happened back in late October, as ESCO signed a contract with IRIR to produce 40,000 tons of U33 rail tracks, 10,000 of which were to be delivered by the end of the current Iranian year (March 2017).

According to Minister of Roads and Urban Development Abbas Akhoundi, Iran needs to build 1,500 kilometers of railroads for which it needs 1.8 million tons of rails.

According to IRIR, Iran needs an average of 300,000-400,000 tons of rails per year to meet the needs of this key transport sector.

  Inception of National Rail Project

ESCO was jointly established in 1965 by Iran and the Soviet Union’s Tyazhpromexport Company in Isfahan Province. The company’s steel production facilities became operational in 1972.

It is currently the country’s largest producer of structural steel, exporting to over 23 countries in Asia, Africa and Europe.

The company first started rail production with the standard of U33 in limited quantities back in the early 90s. U33 rail tracks are capable of supporting a speed of up to 160 kilometers per hour.

It took about 15 years before the need for large-scale domestic rail production was felt. The idea was triggered when the former government thwarted a deal to import 100,000 tons of rails from Spain, arguing that imports should be curbed so that domestic production can be spurred.

This led to the signing of a deal between ESCO and IRIR. The company’s rails, however, received a lukewarm reception due to their limited speed support and low quality compared to the global offerings at the time. Consequently, the IRIR placed no new orders and called on ESCO to produce UIC60 rails, which are capable of supporting higher speed limits.

Seeking to boost its product quality, ESCO held an international tender for the production of UIC60 rails in 2012.

“The best producer among the companies present was chosen for cooperation,” Mansour Yazdizadeh, ESCO’s sales manager, told Tasnim News Agency in December 2012. The foreign company’s identity remains unknown, as ESCO representatives declined to comment on the issue.

Fast-forward to July 2014, IRIR and ESCO signed another agreement for the production of UIC60 rails, with the deadline for its shipment set for September 2015. ESCO missed the deadline and no new developments took place up until this year.

  Questions Arise

The main question that arises is why did IRIR sign a deal to purchase U33 tracks while it questioned their quality and usability many years ago? This is while the newly-launched rail production line is reportedly geared to manufacture the superior UIC60 type.

ESCO declined to comment on phone on the details of the National Rail Project, including whether it is still capable of producing U33 or not, and if so, has the production quality improved.

The domestically produced rails are set to be priced higher than the foreign offerings, especially Chinese and Indian rails, according to managing director of IRIR, Mohsen Pourseyyed-Aqaei.

Yet the IRIR has agreed to purchase the more expensive ESCO-made tracks to support domestic production.

Pourseyyed-Aqaei voiced his concern back in October that cooperation with ESCO will prove uneconomical for IRIR in the long run.

China, India and Turkey have exported 10,000, 40,000 and 1,700 tons of rails respectively to Iran during the first half of the current Iranian year (started March 20). The three countries have signed long-term export contracts with the Ministry of Roads and Urban Development.

These foreign offerings prove more economical for the country unless slapped with import tariffs.

  A Debt-Laden Giant

ESCO’s Managing Director Ahmad Sadeqi told reporters at the new rail plant’s inauguration ceremony that the company is grappling with financial issues and is struggling to keep its head above water.

“Esfahan Steel Company is currently 6.6 trillion rials ($1.9 billion) in debt and filed a 1.2 trillion-rial ($33.1 million) loss in the last fiscal year (March 2015-16),” he said.

“Over 3.1 trillion rials ($907.7 million) of the total debt is to the banks and the remaining 3.48 trillion rials ($996.5 million) are owed to organizations, mines and firms procuring the company’s raw materials.”

The official blamed the banks’ high interest rates as the main cause of the financial burden and said many of ESCO’s subsidiaries, including coal companies, are at the brink of bankruptcy.

The major steel producer has taken measures to avert bankruptcy, but tactics to improve technology, boost product quality and downsize the workforce have not solved the issue so far.

This has prompted the company’s majority stakeholders, Social Security Investment Company (known by its Persian acronym SHASTA) and the Steel Pensioners’ Fund for retired Iranian steelworkers, to sell 73% of the company’s ownership through a block sale inn the over-the-counter Iran Fara Bourse back in June.

Over 5.7 billion of ESCO’s shares were offered for 4,116 rials per share. However, the bid did not generate even a single buyer, as “ESCO has been making losses and potential buyers cannot count on getting any dividends”, Ali Khosroshahi, the head of Omid Investment Bank’s marketing division, told Financial Tribune.

The last serious bid for the company’s purchase, going up to 4,894 rials per share for 53% of the company’s ownership, was made back in 2012 by Mahan Steel Company and a consortium made up of Behin Pouya Brokerage and Bank Shahr. The owners, however, called it off, citing “changes in block sale regulations.”

Despite failing in both sales attempts, ESCO has not yet lost its enthusiasm. According to IFB, a 16.75% stake of the company valued at $112.8 million is set to be offered again in the over-the-counter market for 3,000 rials per share on November 16.

It must be noted that the shares do not come with voting rights and are priced 300 rials higher than ESCO’s current share price in IFB. The company appears to be betting strongly on the profits it can make from the rail sales, as it accumulates fresh debts by launching new development projects.

However, the lack of enthusiasm from the IRIR and the company’s current financial condition makes it highly unlikely for the sale to fare any better than before.

There are signs of ESCO being abandoned by the government, too. In his speech, Sadeqi said it is “impossible” for the company to single-handedly overcome the crisis it is facing, calling on the government to help the country’s third-largest steel producer.

First Vice President Es’hagh Jahangiri struck a somber note at the inauguration ceremony, however, saying that “the company’s managers must not wait for the government to solve their problems”, calling on them to be “creative” in finding their way out of the crisis.