How Iran’s Steel Industry Will Fare Under Sanctions?

EghtesadOnline: The Iranian steel industry was one of the main winners of the lifting of sanctions against Tehran in 2016. Now, with sanctions back in place, the industry’s future is at stake.

News ID: ۷۴۵۸۵۳

12 August 2018

The nuclear deal, otherwise known as Joint Comprehensive Plan of Action, enabled Iran to accelerate its expansion plans and become a major exporting force.

However, the administration of US President Donald Trump reimposed sanctions on trade in metals and minerals (alongside some other products) with Iran on Monday, following Washington’s pullout in May from JCPOA.

In fact, not all Iranian industries won much when sanctions against the country were lifted. Some were simply late to the party and some did not get what they hoped for with secondary sanctions and banking limitations still in place, Financial Tribune reported.

Steelmakers, however, cashed in when they had the opportunity. European plantmakers and steelmakers, including Danieli, SMS, Fives, Sarralle, Outotec and voestalpine, boosted their involvement in Iranian steel projects post sanctions.

Iran, since 2015 when JCPOA was signed, has pushed forward with a national steel industry development program that targets increasing production capacity to 55 million tons by the end of 2025.

Many of the Europeans such as Danieli, SMS and Sarralle finished most of their projects before they were hit by financing difficulties due to renewed sanctions and helped Iran achieve the current nominal capacity of 32 million tons per year.

Expanding the capacity to 55 million tons is no mean feat and the process seems to be on track as 3 more million tons are set to be added to the current capacity by the end of this fiscal year (March 20, 2019), according to Mehdi Karbasian, the head of Iranian Mines and Mining Industries Development and Renovation Organization.

Yet even if realized, all that capacity must be used somewhere. And this is where sanctions could hurt.

Iran is planning to produce about 25 million tons of crude steel this year, up from last year’s 21.2 million tons.

According to IMIDRO’s forecasts, this year’s apparent use would only reach 14.7 million tons, leaving 12 million tons worth about $6 billion for export.

The issue is further complicated, as capacity and output grow. Exports could continue with heavy discounts to mitigate buyers’ risk, but that might come as a severe financial blow to the steelmakers in the long run.

“There must not be any obstacles to mineral exports and especially steel during sanctions,” said Karbasian, who also doubles as deputy industries minister on Tuesday.

“We must not give up on investing and developing now. Steel is one of the most important fields to support because it is a symbol of resistance economy.”

The expression ‘resistance economy’ refers to a set of principles outlined by the Leader of Islamic Revolution Ayatollah Seyyed Ali Khamenei, aimed at bolstering domestic production and cutting dependence on oil revenues. The concept was first introduced during the previous sanctions regime.

The capacity expansion plan was slammed more than a few times since its inception. Experts called the 55-million-ton target a “dream” and raised brows at the government’s optimism, as local demand remained limited.

Now, that was before anyone could imagine JCPOA’s demise and Trump’s tantrums. In fact, boosting exports was frequently brought up as a solution to the high capacity-low local demand conundrum.

A More Punishing Sanctions Regime

Officials have seemingly adopted a defensive position to face the new circumstances. But how ready are they in effect?

Iran’s major steel companies have yet to announce any measures to deal with the new export limitations. That can either mean that they’re helpless, or that they simply don’t want to show their hand yet.

Either way, they are going to face an unprecedented level of scrutiny this time, according to an IMIDRO official.

In a note published on his Telegram channel, Amir Sabbagh, IMIDRO’s investment development manager, said Iran is being advised on the issue by “an expert lawyer in London” going on to list the details of the new sanctions regime.

“OFAC’s surveillance is very different from four years ago. Today, they utilize [new] software, hardware and their experience to monitor companies and their staff activity online. They react before [companies] attempt anything. [OFAC’s] capabilities also include seizing assets and closing accounts of individuals in countries that work with Iran. Therefore, to circumvent sanctions, new and different measures are required,” he said.

According to Sabbagh, Iranian firms have already experienced the effect of sanctions.

For instance, during a recent graphite electrode purchase from India, OFAC intercepted the payment before it reached the producer’s account and ordered it return to Germany, where the Iranian company was seemingly located.

Sabbagh noted that at least two instances where both the buyer and seller’s gmail and WhatsApp accounts were “hacked”, during which the assailant used compromised data to access the victim’s bank accounts and redirect the cash to a third party.

It also seems that Iranian exporters’ usual method of reexporting commodities masked as Persian Gulf littoral countries’ via non-Iranian ships could be an option. However, Sabbagh warns that drones are now being utilized to monitor ships carrying Iranian commodities alongside online surveillance.

One could say that steelmakers have already retreated. Latest IMIDRO data that large steelmakers such as Mobarakeh and Esfahan steel companies have significantly slowed down shipments during the fourth month of the fiscal year (June 22-July 22) is a testament.

Both companies registered zero growth in exports, just half a month before sanctions kicked in.

A clearer picture can be seen when data for the fifth month (July 23-Aug. 22) come out so that changes in exports can be properly gauged with respect to the reimposition of sanctions.