Steel Industry Challenges

EghtesadOnline: The Iranian steel industry is arguably the main driver of the country’s mining sector, taking the top spot among all metal products with the highest output and overseas sales.

News ID: ۷۴۴۰۲۸

09 October 2017

Consequently, its crucial role in the development of the industry is constantly under the spotlight of media and research firms.

Over a century has passed since the inception of the steel industry in Iran. Throughout this period, the government has turned to various experts for assessing the industry’s impediments to expansion and measures needed to overcome them. The latest is Iron & Steel Society of Iran, an assembly of industry experts, managers and academia.

ISS recently published a comprehensive report titled “Analyzing the Current Condition of Iran’s Steel Industry and Future Outlook” and presented it to the government. This is the report’s fourth edit released in July and recently publicized, according to Financial Tribune.

The report presents data on the industry while focusing on each shortcoming in detail and finally posits prioritized issues to address the same.

Iran is currently the world’s 14th largest steelmaker, having produced 13.44 million tons of steel from January to August 2017. The country’s output for 2016 stood at 17.89 million tons, the World Steel Association reported.

By 2025, Iran aims to become the world’s sixth largest steelmaker by attaining a 55-million-ton crude steel production capacity, as part of the goals set in the 20-Year National Vision Plan.

ISS points to a number of challenges currently obstructing the steel industry’s expansionary ambitions.

Steel Production Chain Imbalance

The prime limitation is the lack of balance between upstream and downstream steel sectors, which impede raw material supply to the industry.

ISS points to lackluster iron ore supply to concentrate plants and infrastructural shortcomings such as lack of access to water resources as the main factors limiting production which, being one of the earliest steps in the production chain, will accordingly affect steel output.

According to the report, there is at least a 2-3 million-ton imbalance between the nominal capacities of different links of steel production chain, and an even greater disparity in output.

This disrupts the delicate balance that is a prerequisite for the realization of a uniform expansion program.

Underdeveloped Transportation

The underdeveloped transportation sector is the second roadblock on the way. Currently, only about 28 million tons of steel products are transported using rail annually–which accounts for 68% of Iran’s total railroad transportation capacity–while more than 57 million tons are shipped via land.

Road transportation uses more energy compared to rail, is considerably more pollutant and always prone to accidents and human casualties. However, those are not the primary points pushing steelmakers toward railroads. Rail transportation is simply cheaper, faster and safer for the cargo–all indispensable factors for expanding and competing with global rivals.

Water Crisis, Potential Energy Shortage

The water crisis in Iran is the next thing to worry about. Studies on meteorological drought over a one-year period ending August 22, based on the Standardized Precipitation Evapotranspiration Index, show that 88% of the country’s area grappled with different levels of short-term drought. This is while only 10% had a normal status and 2% experienced precipitation.

Water usage is also divided disproportionately between different sectors. Agriculture, households and industries annually use 88.9%, 8.3% and 2.8% of the available water resources respectively. The highly water-intensive yet low value-added agricultural sector deprives other sectors, such as the steel industry, to embark on new expansion projects that need significant water resources. Realizing the 55-million-ton target actually requires allocation of 294 million cubic meters of water to the industry.

Electricity and gas shortages are also causes for concern. According to ISS, 32% of Iran’s total generated electricity are used in industries, with 31% of that going to steel plants. By 2025, steel producers require 9,400 megawatts of electricity each year, a threefold rise compared to their current usage. Meeting this demand requires 5% growth in national electricity output capacity each year up to 2025, while the average rise has hovered around 1.5% in the last decade.

Gas is the last but not least of steelmakers’ worries in the energy department. Iran is home to the world’s largest gas reserves, and currently supplies close to 570 million cubic meters on a daily basis using more than 34,000 kilometers of pipelines across the country.

Steelmakers annually use a total of 8.84 million cubic meters of gas, equaling 3.4% of Iran’s total usage. The figure is expected to more than double by 2025 to 18.32 million cubic meters.

Coupled with the everyday growth in petrochemical plants’ output and energy usage, gas shortage could loom large for steel plants, especially in the colder seasons of the year.

Workforce Overabundance

The overabundance of underperforming workforce in the steel industry is another factor negatively affecting operational costs.

According to ISS, the Iranian steel industry employs a considerably higher number of workers compared to the efficient global standards.

For instance, the South Korean Hyundai Steel employs a total of 2,000 workers to produce 24 million tons of steel per year. This is while a large-scale semi-privatized steel company in Iran producing less than 3 million tons each year employs about 16,500 workers.

Experts believe the technology utilized in Iran’s production lines require a maximum of 4,000 workers for such a capacity.

This is while Iranian plants lack skilled workers due to the retirement of experienced operators.

Coupled with the geographical spread of steel plants, employers, and especially newly-established plants, have a hard time finding well-educated and expert workers.

Economies of Scale

Iranian steelmakers have proven to be highly vulnerable to market fluctuations due to their small-scale production and investment.

Economies of scale is the cost advantage that arises with increased output of a product. It arises because of the inverse relationship between the quantity produced and per-unit fixed costs; the greater the quantity of a good produced, the lower the per-unit fixed cost, because these costs are spread out over a larger number of goods.

In crude steel production, five steel plants account for more than 57% of total production, while the other 60 companies account for the rest, with capacities ranging between 60,000-750,000 tons. In other words, some 92% of Iranian crude steel producers operate on uneconomical scales.

The situation is worse for long products. Only two plants are currently operational with a higher than 1-million-ton capacity. This is mostly due to the boom in long steel demand in the previous decade, which prompted the establishment of low-capacity plants with no chances of survival in a less than ideal market condition.

Steelmakers Vs. Miners

The government’s static and sector-centered policymaking has brought about a conflict of interest between steel producers and iron ore miners.

For instance, new legislations have recently allowed miners to make forays into setting up steel plants of their own, which is quite feasible given the miners’ significant profit margins, but threatens the steelmakers’ raw material supply in the long run.

Escalating iron ore product exports over the past decade gave steel plants a taste of this growing danger, as they were forced to turn to costly imports of pellets for a year or two.

Steelmakers have also used leverages of their own through state-enforced pricing of certain products. Iron ore concentrate and pellet prices are determined as a percentage of Khouzestan Steel Company’s base ingot price.

By capping ingot prices, the large-scale producer can effectively prevent global ore fluctuations to affect prices inside the country.

Experts have long called for the government to adopt a dynamic policymaking to stop pitting the two sides against each other.

Demand, Output Disparity

Steelmakers have grappled with a deep dive in demand for certain products for the past few years. Basically, there is too much long steel output capacity in Iran, too little production due to limited demand and even less exports.

The scenario is the opposite for flats, which is testament to Iran’s unbalanced and asymmetric steel sector.

The industry has a long output capacity of 30 million tons per year, while the average output in the last three years (March 2014-17) stood at 8 million tons.

In the last 15 years, Iran has used an average of 9.3 million tons of longs per year. A large part of this usage pertained to the ill-famed Mehr Housing Plan, initiated in 2007 with the aim of providing two million low-income people with housing units through free land and cheap credit. However, as the project’s funding trickled down, a construction market glut and cooling demand for longs followed.

Considering the government’s tight fiscal policies and lack of funding in construction projects, the sector is unlikely to get off the ground anytime soon.

Accordingly, long usage is expected to stay at the sticky range of 8-10 million tons for at least the next five years.

Financing

Producing 55 million tons of steel by 2025 is a costly endeavor, needing close to $30 billion of investment, the realization of which seems impossible without attracting foreign investors.

However, the investment climate in Iran is less than ideal due to heavy bureaucracy, high political risks, numerous legal loopholes and the ever-present shadow of an interventionist government.

Coupled with a limited debt market, the sizable gap between banks’ assets and debts, and lack of credit rating agencies, financing Iran’s ambitious steel expansion plans will be a tall order.