Experts believe that although Iranian steel plants have been long in the game, they have never grown large enough to realize the industry’s true potential, as there are too many steel factories with small production capacity and limited infrastructure.
However, a recent plan is aimed at correcting this anomaly.
According to Bahram Sobhani, CEO of Mobarakeh Steel Company and chairman of Iran Steel Producers Association, the proposed plan will lead to the merger of six companies operating in the Persian Gulf Special Economic Zone with the aim of producing 10 million tons of steel per year.
“The merger means sharing the infrastructure by all the companies: one railroad, one electricity source, one water treatment plant, and overall much lower cost,” he said.
The PGSEZ offers considerable advantages to steelmakers, such as its strategic location near free waters, which not only drastically reduces transportation costs and facilitates exports, but is also a boon to the plants’ water-intensive production process.
Based on the 20-Year Vision Plan (2005-25), the steel industry is expected to manufacture 55 million tons of crude steel per annum by 2025, 20 to 25 million tons of which are to be exported amid dwindling domestic demand.
Sobhani believes that the industry’s largest obstacle to growth is the “myriad of steel plants operating at low, uneconomical production capacities”, the continuation of which means a “waste of time, energy and resources”.
“The implementation of the proposed plan will be the sign of Iran steel industry’s maturity,” he said.
Reza Zaerheydari, a steel market analyst, believes whatever operation an industry undertakes on a larger scale can be done cheaper and the merger of steel factories will cut down on production costs and make them more competitive.
A growing number of proposals by steelmakers have pointed to the need to establish a steel consortium in the Persian Gulf Special Economic Zone, by merging the six firms operating there.
Hormozgan Steel Company, Maad Koush Iron Ore Pelletizing Company, Maad Chemie Iron Ore Concentration Plant, Saba Steel Company, South Kaveh Steel Company and Pars Mining Industries Development Company are the six firms.
Their merger would mark the industry’s first step toward integration of steel operations for boosting productivity and exports.
Status Quo
Iran’s steel industry is nearly half a century old and through these years a host of steelmaking plants were established across the country. With the removal of sanctions imposed on Iran over its nuclear program, new blood was injected into the economy’s veins and the rush of several foreign companies to tap into Iranian industries, steelmakers and experts indicate it is time for a major overhaul.
Iran has 250 steel factories with production capacities ranging from 30,000 to 6 million tons. As these are scattered across the country, these plants grapple with financial difficulties and high costs of production, transportation and infrastructure development.
Industry players are pushing for the consolidation of these plants—a move they deem necessary to bring about a renaissance in the Iranian steel industry.
Successful Precedents
A notable instance of successful mergers in the steel industry is South Korea that annually produces close to 70 million tons of steel, 90% of which are manufactured only by POSCO, Hyundai and Dongkuk Steel Mill Company–all three formed through either merger or acquisition of other steel companies.
“Mergers, acquisitions and consolidations are a common thing in the global steel industry and have been going on for more than 20 years,” Zaerheydari said, predicting that steel companies in Iran will follow the same route in the near future, as the necessity of cutting down on production costs gains importance.
According to Zaerheydari, experts believe the path towards development, however, is riddled with challenges.
Consolidation is a complicated process and that is why various global firms offer merger management and risk control services–what Iran has been doing without so far.
“The proposed plan still lacks details concerning ownership, organizational structure and the amount of capital expenditure of the final company,” said Mohammad Reza Daneshgar, an industry expert.
Daneshgar believes the main challenge that needs to be addressed first is “balancing the production capacity of each of the merging companies”.
