A Balancing Act: Iran’s Shrinking Steel Usage VS. Rising Output

Iran’s steel consumption has experienced a downtrend for the past six years, highlighting the country’s ailing market and subdued demand.

The country’s apparent steel use per capita stood at 238.7 kg of finished steel products in 2016. This is 15% less than Iran’s 265.2 kg standing in 2010, according to World Steel Association’s latest report.

Following a steep 31.8 kg drop in per capita use of the industrial material in 2012, the country registered a slight 7.1 kg increase the next year. But the growth did not last and the industry recorded downticks every year up to the end of 2016.  

Iran’s total apparent steel usage exhibited the same trend, as it stood at 19.1 million tons in 2016, down nearly 9.5% compared to 21.1 million tons in 2011.

Established in 1967, the Brussels-based WSA represents over 150 steel producers making about 85% of world’s steel, in addition to national and regional steel industry associations and steel research institutes.

The data should set alarm bells ringing at the Ministry of Industries, Mining and Trade, which is planning to boost Iran’s crude steel output capacity to 55 million tons by 2025 to improve the country's ranking to become the world’s sixth largest steelmaker.

Iran is already boosting capacity and output. According to Iranian Mines and Mining Industries Development and Renovation Organization, Iranian crude steel production capacity grew 32% from the fiscal 2013-14 to 29.8 million tons last year (March 2016-17) and is expected to reach 31 million by the end of the current fiscal year (March 2018).

Steel production rose 15% during the same four-year period from 16.1 million tons to 18.5 million tons.

Iranian steelmakers are also moving against the global trends of higher capacity utilization. For Iran, the ratio has seen a downtrend since the fiscal 2014-15. It dropped to 62% last year and is forecasted to shed another 2% this year.

What this indicates is that Iran is creating more steelmaking capacity than it can use. Ergo, with lukewarm demand at home, reaching the targets of the so-called 20-Year Vision Plan (2005-25) could be more damaging than beneficial for the industry.

That is unless the government can revitalize the moribund domestic construction sector to stimulate demand for steel, or if steelmakers can further boost the export of the expected excess output–a tricky tightrope to walk.

What Brought Iran Construction Sector to its knees?

The combination of galloping inflation, economic sanctions and an ill-famed housing scheme has inflicted damage on the steel sector.

Initiated in 2007, Mehr Housing Scheme was a large-scale construction program by the previous administration meant to provide two million low-income people with housing units through free land and cheap credit.

The scheme boosted demand for all construction materials and gave rise to an unrestrained capacity-making by the producers. For instance, many new rebar-making and cement plants were established during the time in order to cash in on the escalating prices.

However, as the project’s funding slowed down, a market glut was inevitable, one that persists up to this day.

According to Roads and Urban Development Minister Abbas Akhoundi, the government’s sloppy intervention in a sector dominantly operated by private contractors is the main cause of the recession.

Most big-cap contractors are now in deep debts lingering from previous projects. And with the government’s firm grip on inflation, the scenario is unlikely to change anytime soon.

This is while the beleaguered housing sector is slowly showing signs of life. According to the Central Bank of Iran, the number of home sales in Tehran rose by 6.4% in the second month of the current fiscal year (started April 21). The total number of sales stood at 16,374 residential units with an average price of 45.3 million rials ($1,210) per square meter, with prices registering a growth of 5.7% year-on-year.

According to Mehdi Sarlak, a steel market analyst, improved housing sector conditions are unlikely to revive domestic demand for steel as the sentiment in the industrial material’s market is closely tied to state construction projects.

“Unless the recession is completely overcome, no new construction projects will be launched. Hence, demand for steel is not expected to pick up,” Sarlak was quoted as saying by SMT daily.

The conclusion here would be what most local steelmakers have already arrived at: The sector needs to set sights on foreign markets.

Export-Oriented Industry?

Iranian steelmakers, looking for a way out of the recession-hit market, have been gearing up for exports for some time now.

The prime example would be the main Iranian long steel producer Esfahan Steel Company, which is now exporting all its products, according to the company's manager, Ahmad Sadeqi.

"Domestic demand is quiet and 100% of the company's products are being exported for the time being," he says.

"Esfahan Steel is being saved by its profitable exports and we hope that this will continue in future."

Steel mills exported over 3.74 million tons of semi-finished and 1.79 million tons of steel products in the last fiscal year (March 2016-17), registering a 108% and 16% growth compared to the preceding year, according to Iranian Steel Producers Association.

The aggregate 5.53 million tons of exports were equivalent to about 30% of the country’s output for the period.

Iran is currently the world’s 20th largest exporter of steel, according to WSA.

Interestingly, Iran’s rise in exports has been so rapid that a few markets have been spooked regarding dumping practices or have already slapped anti-dumping tariffs on Iranian goods.

Thailand, for instance, set what it calls "definitive anti-dumping duties" on the import of hot-rolled flats in coil and sheet forms from Iran last week. The range is from as low as 7.25% to as high as 38.27% and is in place for a period of five years from May 16.

Also last year, the Brussels-based steel lobby group Eurofer declared that Iranian steel export had become a “threat” to European markets.

The group’s members, who produce more than a quarter of EU’s iron and steel products, were startled by data showing Iranian HRC shipments growing nearly eightfold between 2013 and 2016 to over 1 million tons. Most were made by Iran’s largest steelmaker Mobarakeh Steel Company.

The European Commission was expected to set preliminary anti-dumping duties on Iranian HRC back on April 7, but backtracked on its decision a few days later. EC announced that it might still impose definite duties within the next six months, according to Metal Bulletin.

Making things even more complicated for the industry is the opposition to expanding exports by local downstream producers. They claim that there are not enough semis to feed their rolling mills. Rebar producers have been most vocal, demanding steelmakers to prioritize the local market.

Last year was also witness to a dispute between MSC and the Construction Pipe and Profile Manufacturers Association.

The association accused MSC of refusing to provide the sector with their needed feedstock of flat steel, overcharging local buyers and prioritizing exports. After dragging on for months with some consumers voicing the same complaint, the Industries Ministry officially ordered MSC to shift its focus to the local market. Consequently, MSC’s exports growth dropped markedly last year.