Russia, Kazakhstan Slash HRC Exports to Iran

Russia and Kazakhstan are temporarily stepping back on sales of hot-rolled steel coils to Iran partly over the prospects United States reimposing sanctions on Tehran in August, steel traders said.

However, trade statistics show that local output can easily replace the CIS supply, already minimal to begin with.

The development indicates that despite protests from the Kremlin that unilateral US sanctions should not affect Russian companies, the firms are changing their behavior for fear of falling foul of US sanctions, Reuters reported.

Imports of Russian and Kazakh hot-rolled steel coils–used in industries from pipes to cars to agricultural equipment–make up only a small part of Iranian consumption, and can be replaced.

The imports were already slowing before sanctions, because of weak demand, but the US sanctions have accelerated the slowdown, traders said.

The coils are shipped to Iran by Russian steelmakers Severstal and MMK along with ArcelorMittal’s plant in Temirtau, Kazakhstan.

“I believe that Arcelor and the likes are cutting trade with Iran because of [US President] Donald Trump’s pressure on big companies,” an Iranian trader said.

Alex Agoureev, an adviser to Paramjit Kahlon—CEO of ArcelorMittal CIS, confirmed that the company plans to suspend supplies to Iran due to the US sanctions.

ArcelorMittal is the world’s top steel producer.

“Supplies to Iran will be temporarily suspended due to the sanctions. Once sanctions are lifted, the supplies will be resumed,” Agoureev said.

He did not say when the suspension would happen or provide further details.

 Fear of Reprisal

In May, Trump pulled the United States out of an international nuclear deal with Iran and promised to reimpose US economic sanctions on Iran.

As a result, a number of European energy and financial groups have said they will end projects in Iran or suspend dealings with the country.

US measures due to kick in after a 90-day “wind-down” period on Aug. 6 include sanctions on the purchase or acquisition of US dollars by the Iranian government, on Iran’s trade in gold and precious metals, and on the sale, supply and transfer to or from Iran of graphite, raw or semi-finished metals, coal and industrial-related software.

Russia and European Union states opposed the US withdrawal from the deal. Russian President Vladimir Putin and French President Emmanuel Macron have both said they will resist any move by the US authorities to punish Russian or French companies doing business with Iran.

In a speech in May, Putin referred to US laws being used to force non-US companies to pay fines.

“We need to put an end to this. It’s not acceptable,” he said.

However, business executives have to confront the reality that many of their transactions are in dollars, which means they are exposed to US jurisdiction. That makes it risky for them to ignore US sanctions.

Despite a promise by Macron to protect French business interests from any fallout from US sanctions on Iran, French oil major Total announced it may pull out of Iran unless it secures a waiver from the sanctions.

 Limited Impact

According to CRU, a market intelligence group specializing in metals, mining and fertilizers, Iran’s net hot-rolled coil consumption was 5.6 million tons in 2017, of which 0.8 million tons were imported.

Of that, Russia supplied a total of 410,000 tons and another 240,000 tons were shipped from Kazakhstan. Their sales mostly consisted of hot-rolled coil less than 2mm thick, which was not produced in Iran at a time, according to CRU.

Puneet Paliwal, a senior analyst with CRU, said the cut in imports should not have a big effect on Iran, where the less than 2 mm thick HR coil is used in the pipes and profiles segment, a large steel end-use sector in the country.

In June, Iran’s largest flat steel producer Mobarakeh Steel Company began commercial production of 1.8 mm HR coil, “which will substantially reduce import dependence of the country for the less than 2 mm thick HR coil”.

“The company claims that it will ramp up production to completely substitute imports within a year,” Paliwal said.

“Thus, imposition of trade barriers [both Iran import tariffs and US sanctions], alongside fresh domestic production in Iran, is likely to result in a sharp reduction in HR coil imports from the CIS nations.”

Bahadour Ahramian, a board member of the Iranian Steel Producers’ Association, said it was largely expected–even before the US decision to re-install the curbs–that Iran’s imports would fall this year thanks to the new MSC mill.

“Exports might be hit by the sanctions, perhaps that’s something to watch,” said Ahramian.

 Exports as Primary Concern

“Indigenization” is resurfacing in industry managers’ key talking points in Iran, as things return to the pre-nuclear deal situation. The new MSC mill, in fact, was set up as a means to reduce reliance on imports and burgeoning local demand at a time of looming crisis.

“Reducing reliance on foreign sources is an example of ‘Resistance Economy’ in action ...  Reverse engineering, indigenizing technologies and procuring primary materials from local suppliers are how [Resistance Economy] is functioning in steel industry,” said Bahram Sobhani, MSC CEO, in early July.

Resistance Economy is a set of principles outlined by the Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei aimed at bolstering domestic production and cutting dependence on oil revenues.

For steelmakers, shrinking imports are not as much of a concern–if any concern at all, as Iran’s steel trade balance is comfortably in positive territory–as the incoming limitations on exports. This is while local demand has not yet seen any significant growth in the main consuming sector, namely construction, which is still dormant following a years-long recession.

Latest data show major steelmakers’ overseas shipments during the third month of the current fiscal year, Khordad (May 22-June 21) dropped 11% year-on-year after two months of uninterrupted growth.

Shipments by Iran’s largest exporter, Khouzestan Steel Company, dropped 22% in Khordad to 273,000 tons. Sanctions on exports are expected to hit KSC the hardest, as over half of the company’s output is shipped overseas.

On top of all this, Iran plans to increase its steel output capacity to 55 million tons by 2025 and is already creating new capacities after achievig over 60% of the target.

Analysts say exports should reach at least 20 million tons, as domestic demand cannot stretch far enough to absorb all the capacity.