Gov’t Moves to Slap Tariffs on Unprocessed Mineral Exports

EghtesadOnline: There seems to be no end in sight to the showdown between the government and miners over unprocessed mineral exports.

News ID: ۷۴۵۴۱۹

03 June 2018

The High Economic Council ratified the proposal to slap export duties on shipments of "all types of raw minerals" on Thursday, the head of Government-Parliament Mining Cooperation Committee announced.

"Exports of all raw minerals will be slapped with a 5% duty in the first year, 8% in the second and 10% in the third," Darioush Esmaeili also told Minews.

He noted that the export tariffs will come into effect later in the current fiscal year (started March 21), according to Financial Tribune.

Esmaeili did not elaborate on commodities included in the new tariff list, but iron ore and copper are the perennial suspects.

The initiative was first introduced by the Iranian Parliament in 2010 and included in the bill on the Fifth Five-Year Development Plan (2011-16). It set the target of ending the exports of raw materials in the final year of the plan (which ended March 19, 2016), which has not yet been achieved.

Miners have been told every year as of 2015 up to now to either prioritize the local market and create more value-added for the economy or face the consequences.

In July 2016, Mehdi Karbasian, the head of Iranian Mines and Mining Industries Development and Renovation Organization, said sales of unprocessed copper and iron ore would come to a halt in the first half of the last fiscal year (March 2017-18), as domestic demand for iron ore was expected to increase with the inauguration of several processing plant.

Things heated up in the closing days of 2016, as miners started intense lobbying efforts and launched an onslaught against the decision in the media. The government, however, seemed to be adamant on going ahead with the tariffs with the veteran deputy minister of industries, mining and trade, Jafar Sarqeyni, appearing as its most staunch defender.

The next fiscal came and nothing happened. The year was witness to the same narrative as the last, with arguments for or against export tariffs popping up in the papers.

What kept the decision from going forward? Some said it was the government failing to act on time, while others said the private sector's lobbying attempts turned out to be successful. Whichever the case, it mostly serves to increase the industry's investment risk as it keeps miners on their toes.

And even when the government does go through with its plans, it does not always turn out as successful as advertised.

For instance, decorative stone exports were banned in 2006 to force miners to create higher value-added products at home.

However, hampered by sanctions and financially restrained, the miners were unable to gain access to the required modern machinery and consequently lost their standing in international markets to competitors like Turkey. The measure was eventually revoked, but the sector has yet to regain the markets it lost.

> What Are the Implications?

One of the very first reactions to the announcement of new tariffs came interestingly from within the government.

"The purpose of these tariffs is to reduce exports. Yet in practice, considering the local market recession and lack of investment to stimulate demand, other implications await the mining sector," wrote Amir Sabbagh, IMIDRO's director for economic management and investment development, in his Telegram channel.

The implications, according to the official, are as follows:

1. A 5% drop in [local] prices and pressure on new investments;

2. Decline in production due to subdued local demand;

3. Limited exports and subsequent restricted access to foreign currency;

4. Rising unemployment, especially in eastern provinces;

5. Reduced rail and road cargo transfer and drop in mineral machinery manufacture;

6. Diminished profitability of mining compared to downstream industries, which drives investment away from exploration and mines to production of finished goods, such as Chadormalu and Golgohar industrial complexes' recent investments in steelmaking.

Sabbagh further argues that the proper way to deal with the sale of raw minerals is boosting investment and stimulating demand in the downstream industries.

"In fact, what has plunged cement, coal and iron ore industries into recession and made them increasingly turn toward exports is the lack of investment in construction, infrastructure development and steel industries. Slapping export duties on producers of primary materials will not only fail to be helpful, but will also increase unemployment."

> Boon to Steelmakers

The government's main target, whenever it brings up the narrative of "raw mineral" exports, has usually been iron ore, as the future of Iran's steel industry depends on it.

Iran's steel industry is planned to become the world's sixth largest as per the goals set in the 20-Year Vision Plan (2005-25). The plan stipulates reaching the production capacity of 55 million tons of crude steel per year. Reaching the figure requires over 150 million tons of iron ore.

The industry has so far attained just over 30 million tons of annual crude steel capacity, but there are new capacities coming up.

According to Foolad Technic International Engineering Company, Iran has 5 billion tons of estimated iron ore reserves and 3.1 billion tons of proven reserves.

The available amount will suffice for producing 55 million tons of crude steel per year. However, the main issue is sustaining the production figure post-2025.

FIECO's forecast holds that in the best-case scenario, Iran will need about 1.1 billion tons of ore in 2025, provided steelmakers utilize up to 85% of their capacity. The remaining reserves would be adequate for feeding the industry for only 15 years.

Whether setting up roadblocks on iron ore exports can help steelmakers remains to be seen, as FIECO data show that Iran could well become an ore importer down the road with even zero exports.