Steel Growth Driven by Construction, Railroad Boom

Projects underway in Iran in the construction, automotive and railroad infrastructure sectors should provide a substantial boost to demand for steel in the country.

A fast-developing country, marked by a fast-growing population—80 million and rising—and a high level of urbanization, with 70% living in cities, the country has the potential to become one of the biggest construction markets in the Middle East, reads an article published in the latest edition of Metal Bulletin magazine based on Financial Tribune’s data. Below is the full text.

Annual demographic growth in Iran is estimated at 1.30% while housing demand in the country is around 1.5 million new units per year. But at present, only around 700,000 units per year are being completed due to a lack of financing, which is causing a significant housing shortage.

In the last Iranian year (ended March 19, 2016), the country’s approved construction budget was $13.4 billion.

But in reality, less than half of that was realized, which resulted in nearly 3,000 projects being abandoned and a significant drop in domestic demand for construction materials, including steel products.

Last year, the country’s official total apparent long steel consumption was around 8 million tons. Market participants, however, said “the real figure was far below this volume”.

Local rolling mills have been hit hard by the recession in the construction industry, working at reduced capacity utilization rates and sometimes almost idled.

  Growth in Demand Expected

However, the removal of international trading sanctions earlier this year is expected to lead to a gradual revival of the country’s construction industry and in turn to a growth in demand for steel.

“Now we are going to see a phase of new investment and greater demand for housing units. Construction materials will be more easily available and potentially a bit cheaper,” according to Bijan Khajehpour, managing partner at Austria-based consultancy Atieh International.

“There will be demand and a flow of both [the] Iranian diaspora and international companies back into Iran,” he added.

In 2016, the construction sector is projected to be worth $154.4 billion, and over the next five years, the industry is expected to see annual growth at a rate of 6.10%.

Considering the higher technological and energy-saving standards in the new Iranian Building Code, private investments are expected to turn to more lucrative real-estate sectors such as high-rise offices, shopping malls and hotels, as well as hospitality and tourism-related developments.

Government spending, meanwhile, will continue to tackle the low-income housing shortage and infrastructure development projects.

One of the largest social housing projects in the country is the Mehr Housing Scheme. Planned in 2007, it was meant to alleviate the housing shortage by building around 2 million units.

Under this scheme, real-estate developers are offered free land in return for building cheap residential units for first-time buyers on 99-year lease contracts.

The government commissioned banks to offer loans to real-estate developers to prepare the land and begin construction projects, in an attempt to increase production and create an equilibrium in the supply-demand curve.

As of December 2014, the scheme had advanced by 50-60%. In the current Iranian year, ending March 2017, the government plans to deliver 350,000 residential units, with a total of $870 million allocated to pay contractors.

  Railroad Expansion

One of the largest steel-intensive infrastructure projects in Iran is railroad expansion. The country plans to increase the length of its rail system from around 15,000 km to 25,000 km in less than a decade.

The project includes rails for new lines as well as the existing double-tracked ones.

The country’s railroad network mostly consists of non-electrified, single-track lines centered on Tehran. This means that many large cities are omitted, and slow, circuitous journeys are usually required to travel between neighboring urban areas.

But in addition to getting its own people and goods moving, Iran intends to become a bridge linking Europe, Asia and Africa.

The North-South Transport Corridor project is envisaged as enabling goods to travel from the port of Mumbai in India to Iran’s Persian Gulf coast–bypassing Pakistan–from where they will be able to reach Moscow and Europe in half the time taken to travel the sea route via the Suez Canal.

Together with the China-to-Europe “Silk Road”, this project could make Iran a major crossroads of the Pacific, Indian and Atlantic Oceans.

To connect all its major cities, industrial centers and ports, Iran needs around 3 million tons of steel rails, market participants estimate.

However, until this year, Iran did not have its own facilities for rail production and most of the required volumes were imported from China, India and Turkey, often via barter arrangements.

China and India are the largest buyers of Iranian oil. Since these countries could not transfer money to Iran due to the international sanctions, they were instead supplying Iran with services and goods, particularly steel.

In April 2016, Iran and India signed an agreement for the supply of 250,000 tons of rails.

“The Indian government will provide 95% of the funds, while the remaining 5% will be allocated by the Iranian government,” said Mohsen Pourseyyed-Aqaei, former managing director of the Islamic Republic of Iran Railways.

A similar agreement worth $86 million was reached with Turkey this June.

This year, however, one of Iran’s largest steelmakers, Esfahan Steel Company, started the production of rails at its modernized 650,000-ton per year rolling mill. The unit has the capacity to produce around 400,000 tons per year of rails.

However, because of the slow pace at which the railroad projects are being realized, the company plans to produce only around 100,000 tons of rails this year and around 150,000 tons next year.

To speed up railroad construction, Iran is seeking the cooperation of foreign investors, and in July, the country’s Minister of Roads and Urban Development Abbas Akhoundi and his Italian counterpart, Graziano Delrio, signed a cooperation deal on high-speed railroad projects in Iran.

The two sides signed a joint statement to begin a 146-km high-speed train project between Qom and Arak in March 2017, and a 260-km high-speed project between Tehran and Hamedan in May 2017.

In May this year, during a visit to Tehran by South Korean President Park Geun-hye, Iran agreed a number of projects with South Korea that will cover rail and road construction, oil and gas, the medical sector and other fields.

The two parties signed a provisional engineering, procurement and construction contract for a 541-km rail link between the central Iranian cities of Isfahan and Ahvaz, with the deal likely to include South Korean rolling stock and defense equipment manufacturer Hyundai Rotem.

To achieve the final goal of its rail network expansion, Iran needs an annual investment of $1.5 billion over the next six years, according to Minister of Industries, Mining and Trade Mohammad Reza Netmatzadeh.

Auto Sector: Major Consumer of Flat Steel

Besides the construction, pipe and profiles sectors, the automotive industry is one of the most important consumers of flat steel products in Iran.

In the last Iranian year, total flat-rolled steel consumption in the country was around 7 million tons.

The automotive industry consumed around 10% of this volume, according to estimates by market insiders.

The material was both imported (predominantly from South Korea) as well as sourced from leading local flat-rolled steel producer Mobarakeh Steel Company.

Despite a significant drop in production over the past few years, Iran remains the region’s largest car producer.

In 2011, the country’s production figure was 1.6 million units, while in 2015 a total of 976,840 units were made.

This year, the automotive industry is expected to see 15% growth. In the first half of 2016, Iran produced 562,374 units, more than 90% of which were light vehicles, according to the International Organization of Motor Vehicle Manufacturers.

  Renewed Cooperation

Following the removal of sanctions, the country plans to expand production facilities with the help of foreign partners which have hastened to renew cooperation with Iran.

This should have a positive effect on flat steel consumption. By 2025, the country plans to increase vehicle output to 3 million units, 50% of which are planned to be domestic brands.

Of the total volume, around 65% of the vehicles are expected to be sold in the domestic market, with the remaining 35% exported.

The Iranian car market is dominated by Iran Khodro and SAIPA, which are subsidiaries of the state-owned Industrial Development and Renovation Organization.

Both companies assemble their own brands as well as vehicles developed by European and Asian car manufacturers, under license. However, over the period of sanctions, most foreign car manufacturers had to stop their cooperation with Iran.

French carmakers PSA-Peugeot-Citroen and Renault had some of the strongest positions in Iran in the pre-sanctions period and now they would like to return to the country and regain market share.

But Iran has changed the rules for cooperation. According to the government’s plan, Iran is expected to limit the import volumes of completely built vehicles while pushing for higher localization.

“The best way to enter the Iranian automotive market now is to form supplier and original equipment manufacturer partnerships,” an industry specialist said.

In late June, Peugeot-Citroen announced the formation of a 50:50 joint-venture worth $430 million with IKCO to produce Peugeot 208 and 301 models in the next five years.

The agreement would see the partners build 200,000 Peugeots per year by 2018.

Then in July, Peugeot-Citroen signed a similar joint-venture agreement with SAIPA, under which it will invest more than $322 million to manufacture 150,000 cars per year in five years.  PSA will make the cars at a plant in Kashan, south of Tehran, and hopes to have the first batch of Citroens finished by 2018.

Besides that agreement, IKCO is considering the possibility of cooperating with Mercedes-Benz of Germany and Italy’s Fiat.

SAIPA is considering other potential partners such as France’s Renault, Japan’s Nissan and South Korea’s Kia.

Some other foreign brands are eager to return to Iran, but are still cautious about the legacy effects of sanctions.

“We’re ready to go, but we want to go in a way which is sustainable,” Carlos Ghosn, chairman, president and CEO of Renault-Nissan, said at the North American International Auto Show in Detroit, US, in January 2016.

“We don’t want to go too precipitously and create for ourselves a bigger problem than we need,” he added. “So I think, yes, there is lots of potential in Iran, but still the timing will need to be politically correct, and completely clear from a legal point of view.”