Steel Potential, Challenges in Iran

There is a mismatch between Iran’s steelmaking capacity and steel demand at present.

A number of obstacles must be overcome for its steel industry to reach its true potential, reads an article published in Metal Bulletin magazine’s latest edition. The full text follows:

The international community’s interest in Iran, particularly its steel sector, has increased significantly since sanctions were partially removed at the beginning of this year. Many foreign steel producers, traders and equipment suppliers have rushed back to Iran to renew ties, seeing great business potential in this market.

Nevertheless, as much as it is promising, the Iranian market still remains challenging.

On the one hand, with the liberalization of trade relations and the inflow of investments into different sectors of the country’s economy, it is expected to see significant growth in steel consumption. 

Investments in steel production itself will spur the country’s export potential.

Iran holds abundant raw materials and energy resources to feed its growing steelmaking industry.

On the other, the recovery of the economy is still hampered by lingering banking issues, which means steel-consuming and steelmaking project realization may take longer than expected.

Besides, the industry suffers from water and electricity supply problems as well as inland and external transportation problems.

Export markets are not so welcoming now, in view of the number of antidumping investigations and protective duties being applied internationally.

 Domestic Market Transformed

The structure of the Iranian steel market has changed over the years of sanctions. Following the implementation of a number of steel projects and decreased consumption, Iran is losing its status of net-importer.

Iran used to purchase around 3 million tons per year of billet (in 2012, for example), with Russia and Kazakhstan being the largest suppliers. In 2014, however, this figure plunged to around 250,000 tons, while in 2015-16, billet imports shrank further to just occasional deals.

Now, with the expansion of production facilities, the country faces the need to find markets for its steel. 

Iran’s steelmaking capacity stands at around 28 million tons, according to Mobarakeh Steel Company’s Managing Director Bahram Sobhani. 

Over the first nine months of 2016, Iran’s steel production reached 13.21 million tons, up 8% year-on-year, according to the World Steel Association.

Despite these positive dynamics, this figure means that the steelmaking capacity utilization rate is little over 60%. One of the reasons for that is a stagnation of consumption in major steel-intensive sectors.

In the last Iranian year (March 2015-16), the country’s steel consumption was assessed at 15-16 million tons, according to estimates by market participants. This is down around 1-1.5 million tons year-on-year. 

“The problem is in the lack of investments in steel-consuming sectors,” a producer said.

The World Bank expects GDP growth of around 4% for Iran this year. 

“The hike of activity in the oil and gas sector will contribute 2.6% of this growth. The balance will come from the services sector. Steel-intensive sectors such as construction and infrastructure are not expected to show sizable growth until 2017,” the same producer said.

Nevertheless, this is not the only challenge for Iranian steelmakers. The government plans to increase annual steel output to 55 million tons by 2025, with the largest portion of steelmaking projects to be commissioned in the next three years.

A number of MoUs have been signed this year with international equipment suppliers to buy machinery for these projects. But if they are all implemented, they could lead to overcapacity and cause price erosion for domestic steel products, potentially exacerbating the already challenging steel markets.

Some market participants have cast doubt on whether all of the announced investment programs will be realized on time, or if, in fact, all of them will go ahead.

For example, the state-supported “eight provincial projects”, which have a total steelmaking capacity of more than 6 million tons, date back to 2006. 

However, by the end of 2016, they will have just their direct-reduced iron plants commissioned, while the steelmaking plants will not come on stream until 2017-18 at the earliest.

Depending on the pace of the country’s economic development, the output is expected to reach 35-40 million tons per year.

 Are Exports Viable?

Considering the availability of the nation’s natural resources and growing steelmaking capacities, as well as the currently weak domestic consumption, Iran’s potential for steel exports is quite high.

In the last Iranian year, the country’s total steel exports stood at 3.8 million tons. Around 50% of this volume were made up by flat-rolled products, mainly HRC, while up to 40% constituted semi-finished products, predominantly billet. 

Major export destinations for Iranian flat products were European countries such as Italy, Spain and Germany, as well as the UAE in the Middle East. In the billet segment, the UAE, Oman and Jordan were the main trading hub.

Until this year, Saudi Arabia was also one of the most promising destinations for Iranian billet, but after relations deteriorated in January, the countries broke diplomatic ties, which meant Iran stopped exports to this destination.

There is also an obstacle to hot-rolled coil exports from the European side in the form of an anti-dumping investigation, where Iran has been targeted together with Brazil, Russia, Ukraine and Serbia.

The European Commission may impose provisional anti-dumping measures on HR coil from the five countries within nine months of the start of the investigation–that is by April 7, 2017.

In 2015, Iran’s HR coil exports to Europe were a little over 1 million tons, while in January-August 2016 they reached 781,000 tons, according to Eurofer.

For the current Iranian year (ending March 20, 2017), the country has an export target of around 6 million tons of steel products. However, it will be hard to reach, if new sales outlets are not found.

“We plan to strengthen our positions in the export market through competitive prices, high quality, timely delivery as well as new destinations,” the country’s largest semi-finished steel producer Khouzestan Steel Company’s deputy managing director for sales and marketing, Bahman Tajallizadeh, said.

Thus, KSC has become more active in slab sales this year, sending trial lots to Brazil and increasing sales volumes to Southeast Asia. Over the first eight months of 2016, the producer exported 1.09 million tons of semi-finished products.

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 billet to European customers,” ESCO sales and marketing deputy, Ehsan Dashtiyaneh, told Metal Bulletin earlier in October.

As for flat steel export barriers in Europe, market insiders believe Iran may offer new products, rather than change destinations.

“If an anti-dumping duty is imposed, Mobarakeh Steel Company (Iran’s largest flat steel producer) may replace HRC exports to Europe by slab and coated steel,” a market source said.

Recently, however, the producer has increased focus on the domestic market, as “there has been a rise in domestic demand from new water projects and recent investments in the oil industry”, according to the company source.

 Imports to Shrink

Despite MSC’s attention being concentrated on the domestic market, there is still insufficient local supply of thin hot-rolled coil (2 mm thickness and below), for which there is great demand in Iran among pipe and profile producers.

In 2015, Iran imported around 3.3 million tons of flat steel products. Out of the total volume, 70% were hot-rolled coil and the rest cold-rolled coil and hot-dip galvanized. These products were imported despite a 15% import duty.

This Iranian year, import duties have been raised to 20% for HR coil and CR coil, and to 26% for HDG. Duty increases caused a lot of concerns among local consumers who appealed to the government to reduce them. The duties, however, remained unchanged. 

Instead, one of MSC’s mills–Saba Steel Complex, which is able to produce 700,000 tons per year of HR coil–was largely dedicated to the production of thin HR coil, the company said in August.

The move seems to have had its effect as over the first nine months of 2016, Iran imported about 1.7 million tons of flat steel products, a market source estimates.

“MSC continues to grow, I will not be surprised if next year, the import figure will be even smaller,” a market participant said, indicating the planned expansion of Saba Steel Complex steelmaking and rolling capacity in 2017 to 1.6 million tons.