The two rounds of U.S. sanctions on Iran that were announced in
Aug’18 and later on in Nov’18 are having a very adverse impact on the economy
of the country. This is because these sanctions restrict any country or company
to have trade relations with Iran and if this happens that country or company
would be subject to secondary sanctions (won’t be allowed to do business with
U.S.).
Subsequent to this, one of the sectors that has been worried the
most is Iran’s steel sector as majority of steel production in Iran takes place
via EAF (Electric arc furnace) route and Iran’s requirement of Graphite
Electrodes (GE), a key raw material for electric furnaces, is majorly met via
imports.
Iran imports about 67% of its GE requirement from China and about
12% from India. However, post these sanctions both the countries have stopped
supplying the same to Iran since August month.
The present scenario
Giving some relief to the crude oil exports of Iran, U.S. has announced
temporary waivers in to eight countries including India and China in the first
week of Nov’18 on a condition to reduce their oil imports from Iran by a
certain percentage.
This means that these countries can carry out their crude oil trade
with Iran in their local-currency based payment system, making deposits into
local escrow accounts in their local government bank. For example in case of
India, a rupee-based system will be maintained and importers will make deposits
into local escrow accounts of IDBI or UCO Bank (as the two banks have no
exposure to the U.S. financial system). But the money won’t directly go to
Iran, and that it can only use it to buy food, medicine or other non-sanctioned
goods from its customers.
Will India and China carry out GE trade with Iran after crude oil
trade waiver?
With this system in place, steel mills in Iran were hoping that they can
continue their graphite electrodes imports in exchange for oil. However, our
sources have informed that India is currently not supplying GE to Iran as there
is no clarity on whether GE is included in the list of non-sanctioned goods
(that can be traded in exchange of crude oil).
Also, GE suppliers in India are avoiding trade with Iran because if
that happens, U.S. which is largest needle coke (raw material of GE) supplier
of India will stop its supplies to the country, thus disrupting entire supply
chain of Indian GE manufacturers.
It is being heard that in case of China, Iran is aggressively
exploring various options to continue its GE imports from the country but
Chinese suppliers are skeptical about the same and are avoiding GE trade with
Iran.
What about GE Supplies to Iran via Europe?
The market was abuzz that India and China may supply graphite
electrodes to Iran via Europe because European Union has been working on
setting up a payment mechanism called SPV (Special Purpose Vehicle) to avoid
U.S. retaliation measures and process trade and financial transactions with
Iran.
SPV is supposed to work as a barter exchange neither connected to
the U.S. dollar-denominated international financial system nor requiring
monetary transfers between EU countries and Iran. An Iranian firm selling into
Europe would accumulate credits that could be then used to buy a product from a
different European firm.However, as per the latest updates, EU still have to
finalise the details and so far, no European country has volunteered to host
the system fearing U.S. retaliation.
According to the Iranian sources, as the country had faced
sanctions earlier also, its steel sector has prepared itself this time by
purchasing graphite electrode stock for the period of one year and that they
have GE stocks that can suffice till April 2019. However, the problem is likely
to start post that and the steel mills in Iran are aggressively trying to find
a solution to this problem as early as possible.
Source: steel mint