Achilles’ Heel of Iranian Mining: Underdeveloped Transportation

There were high hopes for the Iranian mining industry after the lifting of international nuclear sanctions against Iran. Exploiting massive reserves of copper, iron ore, zinc and lead in an energy-rich country that has just moved out of economic isolation sounds like a recipe for success. But why has the sector’s growth been slower than expected?

There are too many chinks in the mining industry’s armor. One could argue that outdated exploration and production technologies are the main issue, as they retard the process of tapping much-needed new reserves (bauxite, for instance) and make the production process increasingly costly and less optimal. One could also say that mismanagement and oversized workforce are the main issues driving up costs and reducing competitiveness.

So what is to be placed on top of the priority list in addressing the issues facing the mining industry?

The industry has been around for a good few decades, producing basic and high value-added materials despite all the impediments. But perhaps the least discussed issue sapping the sector’s competitiveness is the underdeveloped transportation infrastructure, the growth of which can benefit the economy beyond the mining industry.

 Global Race to Lower End Prices

What made China able to become the industrial goliath it is today, showering the world with cheap mineral products–especially steel–was to a large extent due to its determined focus on improving transportation in a quest for reaching the lowest final price possible.

“The current [trade] war between the United States and China is about final prices of products. China produces something in a far corner of the world, ships it over to the US and takes over the market. That’s all it’s about,” says Mehdi Karbasian, the head of Iran’s largest state-owned mining holding, Iranian Mines and Mining Industries Development and Renovation Organization.

For transportation in Iran, however, things are not looking good.

“Our railroads do not have the required capacity for transporting all our mineral products, and loading and unloading limitations at docks that cannot handle over 30,000-ton ships increase our final prices. We are not able to compete with the Australians and Brazilians, even though we have cheaper energy costs,” the official was quoted as saying by the Transportation Industry Monthly.

Karbasian, who is also deputy minister of industries, mining and trade, sees the issue as structural, stressing that developing countries usually do not prioritize logistics development, as decision-makers fail to pursue unified and coherent economic policies.

In Iran, the government’s dominance over the economy and the widespread presence of quasi-state entities in the management of key sectors have complicated the process of decision-making on the macroeconomic level.

There are currently 11,000 kilometers of railroads across Iran and about 3,500 km more are under construction.

Minister of Roads and Urban Development Abbas Akhoundi said the government would operate 1,800 kilometers of railroads by the end of the current fiscal year (March 20, 2018), of which more than 900 kilometers pertain to double tracking.

“The extent of our railroad network is simply insufficient for the 1.6 million-square-kilometer country. Moreover, there are major bottlenecks, including three in the northeast-south corridor connecting [Khorasan Razavi Province] to Bandar Abbas where freight transportation is limited to 1.5 million tons [per year],” he said.

 Bottlenecks, Insufficient Extent

Khorasan Razavi Province is home to Iran’s largest iron ore zone, Sangan, which holds over 1.2 billion tons of estimated reserves. A good number of Iran’s mines and iron ore processing plants are located there, which ship their goods to the port city of Bandar Abbas for exports.

According to former CEO of Islamic Republic of Iran Railways, Saeed Mohammadzadeh, the share of Iranian railroads in steel transportation is one-third.

Some 60 million tons of steel products were transported in Iran during the last Iranian year (March 2016-17).

IRIR recently signed a deal with Esfahan Steel Company for transporting ESCO’s products to the southern port of Shahid Rajaee. The agreement stipulates transporting at least 250,000 tons of ESCO products for export via railroad.

ESCO is reportedly also planning to use railroad for its shipments to the eastern city of Zahedan close to Pakistan’s border and exports to Afghanistan.

The targets of Iran’s Sixth Five-Year Development Plan (2017-22) have stipulated that the share of rails in overall cargo transportation should increase from the current 12% to 30%.

Iranian railroads transported 40.3 million tons of cargo last year, which shows a 35% rise compared to the preceding year.

According to the Ministry of Industries, Mining and Trade, a total of 388 million tons of goods were transported by road in the last fiscal year, 33.8% of which were mineral products. About 24% of Iran’s metal products came from the industrial Isfahan Province and 10.6% from Khuzestan.

Isfahan also accounted for 10.7% of mineral goods, followed by Iran’s largest iron ore zone, Khorasan Razavi, with 9.8%, the mineral-rich Yazd Province with 9.9% and Kerman Province with 8.1%.

 Prerequisite to Realization of National Plans

The significance of developing the national railroad is highly felt for implementing Iran’s ambitious steel expansion program. The country plans to become the world’s sixth largest steelmaker by reaching a crude steel production capacity of 55 million tons by 2025. Experts believe at least 20 million tons of the figure must be exported for the program to become viable.

“If we are to produce 55 million tons of steel under the current conditions of our transportation sector, it will be as if we first build a factory in the middle of Tehran and then wonder how to ship the products out,” said Saeed Mohammadzadeh, former managing director of Islamic Republic of Iran Railways Company, during the Seventh Iranian Steel Market Conference in February.

Based on IRIR’s forecasts, 224 million tons of mineral products will be transported in Iran per annum by 2025.

The government and the private sector need to join hands in developing the transportation sector by boosting investments, as IRIR’s revenues from duties on transportation are not sufficient for its expansion plans.