Slashed Budget Spells Steel Overcapacity

EghtesadOnline: Iranian steelmakers are bracing for a year of overcapacity, as the government’s new budget bill is set to slash the development budget, negatively affecting steel usage in the next fiscal year (March 2018-19).

News ID: ۷۸۱۱۲۵

14 January 2018

Iranian construction material producers, such as those in steel and cement industries and their downstream plants, have traditionally depended on governmental financing of construction projects for stimulating demand.

The new budget bill proposes about 600 trillion rials ($14.28 billion) for development projects in the next year, showing a 110-trillion-rial ($2.61 billion) decline compared to what was allocated in the current fiscal year.

President Hassan Rouhani presented the budget bill in the parliament last week, according to Financial Tribune.

According to Reza Shahrestani, a member of Iran Steel Producers Association, the shrinking development budget is coupled with the steel industry lagging behind in attracting foreign investments required for realizing the 55-million-ton output capacity envisioned for 2025, Fars News Agency reported.

“We have to absorb $20 billion of foreign investments every year to reach the 2025 target. This is while only $7-10 billion have been absorbed so far,” he said.

Shahrestani emphasized that any investment in the sector will spur infrastructure development, increase construction and consequently steel usage.

“The reduced budget and the lackluster foreign investment will lead to overcapacity,” he said.

According to the official, Iran is forecast to produce 21 million tons, export 8 million and import 3 million of steel by the end of this year.

“The best-case scenario for usage will also be 16 million tons, which is unlikely to be realized,” he said.

Reinforcement bar producers are expected to be hit the hardest, as the commodity is the most directly consumed product in the construction market.

The logical solution to the upcoming conundrum is boosting exports, yet challenges loom.

“The primary issue with exports, and especially rebar shipments, is that we currently have a 24-million-ton output capacity but exports have never exceeded 7-8 million tons. Neighboring countries, which are more likely to import ingots, have levied heavy duties on rebar imports and impeded the sector’s growth,” he said.

Shahrestani believes that export incentives can boost Iranian rebar exporters’ competitiveness, but the budget bill shows that the government is unable or unwilling to do so.

Flat steel producers, however, are expected to do better in exports next year, he added, pointing to their better market situation and cost-cutting efforts.

Major Iranian steelmakers shipped 4.56 million tons of steel during the eight months of the current year (March 21-Nov. 21), registering a 27% growth year-on-year. Semi-finished output for the period stood at 11.2 million tons and finished steel production reached 7 million tons, according to statistics by Iranian Mines and Mining Industries Development and Renovation Organization.

The latest Central Bank of Iran report shows the government spent 141.2 trillion rials ($3.36 billion) on development projects during the seven months since the beginning of the current fiscal year (March 21-Oct. 22), 12.3% more than the similar period of last year but much lower than the projected 422.3 trillion rials ($10.05 billion).

According to Adel Azar, the director general of Supreme Audit Court of Iran, 27 development projects will take more than 41 years to complete, 44 projects would require between 31 and 40 years, 284 projects are to take between 21 and 30 years, 658 projects are expected to last for 11 to 20 years and 755 projects are without a timeline across the country.

“For these projects to become operational, as much as 5,080 trillion rials ($120 billion) are needed at the national level and 490 trillion rials ($11.6 billion) at the provincial level,” he said.

Statistics show the government only disbursed 58%, 68% and 39% of its projected development spending in the fiscal 2015-16, 2014-15 and 2013-14 respectively.