Iran Gov’t Prepares to Cushion Effect of Sanctions on Metals, Minerals Market

EghtesadOnline: Iran’s steel, metals and minerals trade with the world could be seriously hampered and limited to the local market, as the United States’ sanctions against the Islamic Republic are reimposed on Monday.

News ID: ۷۴۵۷۹۱

05 August 2018

The administration of US President Donald Trump decided to reintroduce sanctions on Iran’s metals and minerals trade as well as other commodities after he pulled out of the 2015 Iran nuclear deal, otherwise known as the Joint Comprehensive Plan of Action.

This is set to hit Iran’s metals and minerals trade worldwide, as the US is also imposing secondary sanctions involving penalties on countries trading these products with Iran, including in the European Union where some countries have become increasingly important business partners of Iran since sanctions were lifted after the nuclear deal became effective in early 2016, S&P Global Platts reported.

European plantmakers and steelmakers, including Danieli, SMS, Fives, Sarralle, Outotec and voestalpine, boosted their involvement in Iranian steel production projects since then, Financial Tribune reported.

Trade to and from Iran in steel and aluminum products, gold and precious metals, graphite and coal will now be subject to the secondary sanctions.

Iran has become a major steel exporter in recent years. Total exports of steel and direct reduced iron, exceeded a record high of 9 million tons in the previous Iranian year (March 2017-18) according to the Iranian Steel Producers Association.

For this total, the export of semi-finished steel products such as billets and slabs accounted for 6.87 million tons, registering an 84% jump on the previous year.

Carbon steel imports into the EU from Iran reached 1.1 million tons in 2016, before falling back to 103,400 tons in the first five months of this year following the imposition by EU of anti-dumping duties on Iranian hot-rolled coil in October 2017.

Even though Iran’s steel traders have in the past lived with sanctions and do not typically use letters of credit, a London-based trader indicated in early August he was not optimistic about the new Iran steel trade scenario and said he would monitor the situation in the coming months.

“The impact of new sanctions on different aspects such as shipping and payment terms is not clear. It could be difficult, especially because “any direct and indirect trade of steel is under the secondary sanctions of the United States and some importers may prefer to switch to other suppliers to avoid this risk”, he said.

Importing products into Iran has also become more difficult since the announcement that sanctions would be reinstated, according to local sources.

Steel imports into Iran in early August were reported to have slowed sharply.

Iran has recently been importing mainly flat steel products, mostly from CIS, but this trade has now virtually come to a halt due to the devaluation of Iranian rial, which slumped to a record low against the US dollar in the last week of July and the impending sanctions, local sources said.

In addition, Iran has banned any import of billet and some steel long products, the sources said.

The final outcome of European Commission attempts to introduce blocking action against the secondary sanctions was not immediately clear.

According to media reports, the blocking regulation will prohibit EU entities from complying with US extraterritorial sanctions and allow companies to recover damages from such sanctions.

The blocking regulation will reportedly come into force on Sunday unless more than half of the members of European Parliament or the EU Foreign Affairs Council object prior to that date.

Iron ore has not been included in the list of products liable to US sanctions. As virtually all Iran’s iron ore exports are destined for China, this trade is not expected to suffer any immediate impact from US sanctions.

Nevertheless, iron ore exports have dwindled in recent years due to the need to keep more at home to feed the nation’s growing steel production.

Iran exported 20 million tons of iron ore in the last fiscal year, down from a peak of 25 million tons per year reached several years ago.

IME Price Controls

It appears that Iranian authorities are preparing themselves for the steel industry’s gaze turning inwards toward the local market.

The Ministry of Industries, Mining and Trade ordered Iran Mercantile Exchange last Sunday to start enforcing fixed base prices for steel products.

The mandate, seen in a letter signed by Deputy Minister Jafar Sarqeyni and sent to IME chief, Hamed Soltani-Nejad, puts the base price for slab at $550, billet at $520, hot-rolled coil at $580, cold-rolled coil at $645 and long products at $555. All prices are also set to be converted to rial using official rates set way below market rates (around 4,400 rials for each dollar)

Two days later, the ministry published a letter addressing all steelmakers to offer the bulk of their commodities on IME at government-enforced prices or face penalties.

The letter goes on to list steel commodities’ price for this week’s sales at IME. It puts slab prices at 24.2 million rials per ton, billet at 22.9 million rials, HRC at 25.5 million rials, CRC at 28.4 million rials and long products at 23.4 million rials.

As for slabs and other semis, all producers are mandated to offer at least 75% of their output on IME at the enforced prices and can sell the rest using IME matching mechanics or export them. Selling at any other prices or outside of IME will result in penalization.

Furthermore, all HRC buyers are mandated to sell their pipes and profiles or other products on IME based on the raw materials’ prices set by the ministry. Sales reports alongside buyers’ names must be reported to Consumers and Producers Protection Organization. Again, the letter emphasizes that wrongdoers will be penalized.

It appears that the IME enforcement is primarily meant to tighten the government’s grips on the market before sanctions kick in, especially considering that shipments could flood the local market as exports are curbed. Without proper supervision, however, the measure could have drastic effects on the market.

Producers are certainly not happy, with semis producer Khouzestan Steel Company’s Managing Director Mohammad Keshani saying that battering their products into scraps will be more profitable than selling at IME.

IME demand nowadays is considerably high for metals, mostly due to rial’s significant devaluation against the US dollar and euro, and the buyers’ penchant for exporting at market rates and reaping exorbitant profits.

The government’s reaction to any recent market anomaly has been enforcing controls, as seen in its intervention in foreign currency market in April and enforcing the 42,000 USD/IRR rate.

However, such measures have so far only played into the hands of certain middlemen and kept the market from its normal function which is price discovery based on supply and demand. In short, without more rigorous supervision, the government seems ill-equipped to handle the post-sanctions market chaos.