The prospect of the Fifth Iranian Conference on the steel and mine industry, which is due to be held on January 27-28, is already stirring the nerves of some industry commentators and analysts. The conference is set to be a large event and its organizers are hopeful to attract more than the 1052 participants that came last year. Evaluating the current state of the Iranian steel industry can give us a good picture of how much interest foreign investors might show in it.
The Iranian steel industry, although long nurtured as one of the most advanced sectors of Iran’s industrial economy, has lately been under pressure by collapsing iron ore prices, Chinese steel dumping and the rather vague ownership structure of its main conglomerates.
Global iron ore prices have plunged since late 2013. Averaging over $130 per metric ton between 2009 and 2013, prices have been on a downward fall for most of the past two years as major firms such as BHP and Rio Tinto continue to expand output while China, the main growth market of the industry, has been facing industrial overcapacity and a housing slump, says a recent report by Bloomberg. Morgan Stanley predicted that prices in 2015 will average $79 a ton, while Citigroup has warned that prices may even fall below $60.
These rapidly falling global prices have easily outplayed domestic iron ore production, which has been unable to compete on such price levels. According to Fooladnews and based on the latest statistics of Iran’s Customs Administration, this has in turn led to a massive increase in iron imports. In the first nine months of the current Iranian year, which is to end on March 20, over 1.3 million metric tons have been imported. Compared to the same period last year, that figure indicates an increase of 1,345 percent.
If trends continue this way next year, Iranian iron ore production might soon be forced to rely increasingly on supplying domestic needs.
Iron ore exports are already at record lows. While they averaged 1.1 million metric tons every month between May and September, they dropped to less than 200,000 tons in October and decreased further to a bare 15,000 tons in November, according to ISNA.
Total iron ore production amounted to 44.5 million tons in the year 1392, which ended last March. Iran is among the top 13 producers globally. However, government predictions and efforts to bring this number to 92 million ton this year are overestimated and possibly affected by lower-than-expected exports.
Too Little, Too Late?
Steel production has also suffered and exports could be the victim soon if appropriate action is not taken. Steel production has suffered in particular because of enormous Chinese steel production and the tendency of this country to ‘dump’ the commodity at extremely low prices in other countries. Until the 10th of January, Chinese steel was imported using the official dollar to rial exchange rate, which is much lower than the market rate and thus provided a virtual subsidy for importers. Now “steel products can only be imported using the market exchange rate,” said Mehdi Karbasian, the deputy minister of industry.
However, this recent government decision, although a step in the right direction, might still not be enough to create a viable security net for domestic steel producers. Many of Iran’s neighbors have taken the decision to impose high import tariffs on Chinese steel in order to bring its price to domestic production levels. For example, Turkey operates a 30 percent tariff on Chinese steel. Even the US has imposed a tariff of 40 percent, according to Reza[WU4] Shahrestani, a member of the Iranian Steel Producers Association. Iran should follow these initiatives and impose higher tariffs to protect its own industry.
The 2025 Vision Plan realization of its production goal of more than 50 million tons in ten years, as opposed to the 15.6 million ton produced in the last Iranian year, might hinge on its ability to withstand cheap Chinese imports. Apart from the government’s ability to protect the industry from Chinese dumping practices, another important factor in its success will be the ownership structure of the industry’s major conglomerates. Unfortunately, ownership structures remain rather vague, as is the case with Mobarakeh Steel Company (MSC).
MSC is a major player, exporting about 1 million tons annually or 77 percent of total steel, according to a report by IRNA. Hormozgan Steel Company is a far second with 230,000 tons. MSC has only been slowly privatized and a large amount of its shares is still directly held by the government. Provincial shareholders account for over 30 percent, while the governmental mines holding, IMIDRO, controls 17.20 percent of its shares. A large part of the remaining ownership is held by semi-governmental institutions. Such a semi-private ownership structure, often seen in recently privatized Iranian firms, might scare potential investors.
Nevertheless, foreign investors, and whether they can be convinced in the upcoming conference, will be the key to attract the necessary capital to expand production and make the Iranian steel industry more robust against price fluctuations.
