Government Plans to Sell off Loss-Ridden Steelmaker to MSC

The government is planning to sell its stake in the beleaguered Esfahan Steel Company to Iran’s largest steelmaker, Mobarakeh Steel Company, the deputy cooperatives minister for planning and financial affairs announced.

“Last week, we had talks for selling Esfahan Steel Company to Mobarakeh Steel Company,” Ali Sarzaiem also told Bourse 24 on Wednesday.

Sarzaiem added that ESCO has provided a report to the ministry on the possible sale.

The ministry’s objective for the sale, the official explained, is to reduce its footprint in businesses ownership and address ESCO’s losses and other financial woes.

Sarazeim did not elaborate on the deal, but rumors indicate that the stake put up for sale is Social Security Organization’s total stake of 55.9% in ESCO.

Together with its subsidiaries, MSC is the largest flat steel producer in the Middle East and North Africa region and Iran’s largest steelmaker, supplying 20% of the region’s steel demand and accounting for 1% of Iran’s GDP.

Interestingly, MSC had denied having any plans to purchase ESCO before the official announcement.

“We will support and cooperate [with ESCO] for its growth and success, but currently have no plans to buy shares in the company,” MSC’s Managing Director Bahram Sobhani was quoted as saying by ILNA on Tuesday.

This is while market rumors were barely of the scale to require a CEO statement, making Sobhani’s announcement more like a defiance of government decision made without MSC’s knowledge.

ESCO is Iran’s oldest steelmaker and the largest producer of structural steel. It was jointly established in 1965 by Iran and the Soviet Union’s Tyazhpromexport Company. Its steel production facilities became operational in 1972.

And why wouldn’t MSC, which has in recent years embarked on an accelerating acquisition path, want ESCO in its portfolio?

ESCO has piled up 22.64 trillion rials ($526.57 million) of accumulated losses so far, according to the company’s H1 data published on www.codal.ir.

Analysts believe this is mainly due to a chronic overabundance of workforce–reaching 16,000, five times what current production requires, as well as coal price rises and a recession in the local market for long products.

In fact, no one seems to want a block share in ESCO. Iran Privatization Organization has struggled for the past two years to sell off steel pensioners fund’s 16.75% stake in the steelmaker to no avail.

“Mobarakeh is somehow being forced to make this buy against the company’s will … Esfahan Steel Company’s accumulated losses are no small amount to absorb,” an ESCO official with knowledge of the negotiations told Financial Tribune.

The source, who asked to not be named, said the purchase, if materialized, will prove costly for both MSC and Social Security Organization.

“Social Security Organization bought its block stake in ESCO at 5,110 rials per share and the shares are now at about 800 rials. Selling them at the current price is a total loss; they can only price it higher in a block sale,” the official said.

The pressure on MSC could also be from within, said the source, as its primary shareholder and Iran’s largest state-owned mining holding, Iranian Mines and Mining Industries Development and Renovation Organization, has previously expressed dissatisfaction with ESCO’s state and direction.

“Real privatization has not happened in steel industry … If companies were completely state-owned, IMIDRO could prevent crises occurring in them. ESCO, for instance, was sold to pension funds … and SSO, and they are already in financial distress … and unable to provide for their own pensioners,” IMIDRO chief Mehdi Karbasian said back in December 2015.

 MSC’s Vast Portfolio

With IMIDRO at its helm, MSC has performed a kind of reverse privatization in the mining industry in recent years.

The giant steelmaker has acquired controlling stakes in all corners of the industry. It owns 10.4% and 10% in Chadormalu and Golgohar, Iran’s two largest iron ore miners, as well as a 38% stake in Mines and Metals Development Investment Company–a majority shareholder in the two mines, effectively taking control of Iran’s flagship ore producers.

Some of its stakes in the steel sector include owning Metil Steel Company (with 10 subsidiaries) and Tuka Foolad Investment Company (with 30 subsidiaries), a near-total ownership of the slab-maker Hormozgan Steel Company and 52.57% share in Amir Kabir Steel Company.

If the ESCO purchase does go through, despite the financial strain it might put on MSC, it will nonetheless make it an actual goliath in everything steel-related.

MSC has its own iron mines, concentrate, pellet and DRI plants, as well as all types of flat steel production–only missing heavy plates, which MSC intends to cover by acquiring Khuzestan Oxin Steel Company.

Acquiring ESCO, as a long-time producer of structural steel, will add the only missing link in the chain to MSC’s roster.

Whether this will prove beneficial to the industry as it streamlines production and exports, or a burden by stifling competition is anyone’s guess.