On May 8th,
2018, the USA announced its withdrawal from the 2015 Joint Comprehensive Plan
of Action (JCPOA, better known as Iran Deal).
This deal, meant to ease economic sanctions on
Iran in exchange for restrictions and monitoring of the country’s nuclear
programme, was entered between P5+1 nations (China, France, Germany, Russia,
the United Kingdom and the USA), the European Union and Iran. Withdrawal
of the USA from this deal means that they will re-impose secondary sanctions on
Iran in a phased manner starting August 6th,
2018, thereby exposing any businesses with an American affiliation or ownership
interest undertaking a deal with Iran to enforcement actions. More importantly,
these sanctions will restrict access of Iranian businesses (or people dealing
with Iran) to the US financial system.
Re-imposition of economic sanctions by the USA
are likely to have major repercussions on the country’s steel industry.
In particular, it will impact on Iran’s booming international steel trade, even
though there are certain trade arrangements in place without US links. In
this insight, CRU assesses the potential impact of this development on Iranian
steel trade and the country’s ongoing steel capacity expansion plan (which aims
to increase the country’s crude steel capacity to 55 Mt/ y from current
capacity of 32 Mt /y).
Iranian steel industry
performance – post the Iran Deal
As soon as the historic Iran Deal was struck between world powers and Iran, the
country pushed forward with a Comprehensive Steel Plan; which aimed at
increasing the country’s crude steel production capacity to 55 Mt by
2025. Investments in this plan were spearheaded by state-owned steelmaker
Mobarakeh Steel Company (MSC) and Iranian Mines & Mining Industries
Development & Renovation Organisation (IMIDRO). Both these
organisations formed joint partnerships with various public/private sector
players to invest in the steel value chain, ranging from DRI production to
downstream steel products.
Although foreign investment remained limited,
except for a few Chinese investors, the plan translated into sharp growth in
the country’s crude steel production. Between 2014 and2017, Iranian crude
steel production saw an impressive CAGR of 9.1% (see chart), making Iran the
world’s 13th largest steel producer in
2017 with an output of over 21 Mt. Looking at March 2018 data alone, Iran
was the world’s 10th largest crude steel
producer. This sharp growth was a consequence of:
·
Robust
local demand for finished flat products from key end users in energy
infrastructure, automotive and appliances sectors;
·
Strong
export demand, particularly for semi-finished steel products (slabs, billets
and blooms);
·
Higher
capacity utilisation at existing units (Esfahan Steel, Khouzestan Steel etc.)
in response to demand, plus;
·
Commissioning
of greenfield steel plants mostly integrated with captive DRI units.
Lifting of restrictive sanctions from Q4 2015
opened a variety of avenues for Iranian businesses, most of whom started off by
swiftly building relationships, primarily with European businesses.
Iranian Automakers, led by Iran Khodro (IKCO), entered into a strategic
contract partnership with European carmakers to manufacture and sell in the
Middle East market. This, eventually, increased demand for finished steel
sheet products in the Iranian market which was catered to, especially by the
state-owned MSC which expanded output accordingly.
Meanwhile, the Chinese retrenchment from
international merchant semi-finished steel markets from 2016 onwards increased
the prices of semis in the Asian export market, thereby making it a lucrative
target for Iranian steelmakers. Iranian semis exports to countries such
as UAE, Thailand, Oman, Indonesia, Taiwan and Egypt therefore grew many fold in
2016 and 2017 (see chart). Such was the growth in export market sales
that MSC set up a 1.5 Mt/y export-oriented slab production unit by the name of
Hormozgan Steel Company. Meanwhile, the country’s oldest (and the only
blast furnace-based) steelmaker, Esfahan Steel, was able to operate at over 70%
capacity utilisation as its exports became economically viable. The
largest gainer in the export market has, nevertheless, been Khouzestan Steel
Company, a producer of slabs, billets and blooms; which displaced MSC as the
country’s largest steel exporter.
Strong domestic and export sales have allowed
Iranian steelmakers to invest in capacity expansion, to capitalise from their
low energy costs and consequent competitive DRI and crude steel production
costs. CRU, in its April 2018 edition of Crude Steel Market
Outlook, had forecasted Iranian crude steel production to rise to 26.1 Mt in
2018, a 22% y/y increase. CRU’s latest interactions with key market
contacts suggest that major Iranian steelmakers, particularly the ones with
high exposure to the export market, are in the process of revising down their
production targets significantly for H2 2018, in response to the US action.
Outlook: Impact on Iranian
steel trade to be limited to imports, while pressure builds on local demand
As US sanctions come into effect from August 2018, the most immediate impact
will be on Iranian steel trade with the European Union (EU), the Gulf
Cooperative Council (GCC) and South East Asian (SEA) nations; and on the
country’s capacity expansion plan. Related implications are detailed as
follows:
Impact on Iranian exports
The country’s steel transactions with buyers in the GCC and SEA nations (mostly
exports of semis) do not involve the use of letters of credit and have been
developed to not be linked to the US, as we understand from our local trader
contacts. Thus, such transactions are likely to continue post
re-imposition of sanctions with limited impact. CRU understands that
Iranian exporters may face certain difficulties in realising their payments,
particularly when selling to buyers in SEA countries of Thailand and
Indonesia. Their transactions with buyers within the MENA region are
likely to be facilitated through a variety of counter-trade arrangements,
limiting the requirement of a monetary payment.
Another factor that needs to be highlighted
here is the latest decree (announced on April 10th,
2018) from the Central Bank of Iran, which unifies official and open market
exchange rate to IRR42,000 per USD. This rate has been set far below the
open market rate of IRR60,000 per USD on 9th April
2018. Iranian steel exporters, who were benefiting from devaluation of
Iranian Rial (which has lost over 50% of its value in the past year) are likely
to be strongly impacted by this government intervention. CRU’s contacts
report that steel trading has come to a halt in Iran following this directive,
as there is a lot of confusion in the market.
Impact on Iranian imports
Iranian carbon steel imports are mostly sourced from Asia (China and South
Korea) and the CIS countries; while the country imports significant amount of
downstream steel products (coated and pre-painted sheets) from the UAE. These
transactions are likely to continue being facilitated by various counter trade
arrangements. CRU expects an interruption in Iranian steel transactions
with the EU (mostly import of less than 2mm HR coils) which are denominated in
Euros. CRU understands from leading Iranian importers that EU based exporters
have started showing reluctance in selling to Iran; as they fear levy of
secondary sanctions by the US, a far more lucrative market.
Nevertheless, the next couple of months are
likely to see several transactions (distressed selling and buying) from Iranian
market participants, while the government negotiates alternate trading
arrangements with EU partners. A silver lining is, nevertheless, the
counter trade arrangement that Iran has already set up with countries including
China, Russia and India; which may allow Iranian businesses to keep interacting
with the global trading community.
Impact on Iranian steel
production expansion plans
As has been highlighted earlier in the text, rapid growth observed in Iranian
steel production and capacity expansion has been a result of strong demand,
both from the local and the export market. After the re-imposition of US
sanctions, we expect major local end users in the automotive and energy
infrastructure sector to reduce activity and hence steel procurement.
Meanwhile, Iranian carbon steel exports (of semi-finished steel) are likely to
be rangebound due to apprehensions in the seaborne market.
Cumulatively, these factors will put downward
pressure on the country’s steel output growth. Low output growth coupled
with lack of financing for new/ongoing steel projects would mean that the “55
Mt/ y by 2025” target may face substantial delays.
CRU team continues to monitor related
developments and has initiated modelling of the impact in its demand, supply
and trade forecasts for the country. Once complete, we will release a
detailed analysis of medium term outlook for the Iranian steel industry to CRU’s
market outlook subscribers.
Source: crugroup