Iran Commits to First Steel Deals, More of a Glut Coming Soon?

As sanctions against Iran came down this week, a flurry of business deals were announced by the Islamic Republic and steel production was a major beneficiary of Iran being welcomed into the world community.

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Iran is the largest steel producer in the Middle East and Northern Africa and is among the 15 largest producers in the world. Even with significant domestic production capacity, Iran remains a net steel importer. Over 50% of downstream industries are currently non-operational or unable to operate at optimal capacity. This has led to a high demand, low supply situation. It is estimated that the country imports around 8 million metric tons of steel every year, mainly from China and Turkey.

Steel Deals

That all could change, though, as Iran is in the mood to make a deal and South Korea’s Pohang Iron & Steel Co. (POSCO) and Italy’s Danieli both made announcements that they will go into business with Iran this week.

Steelmakers are eager to make deals with Iran but can new demand outstrip new supply? Source: AdobeStock/icarmen3.
Steelmakers are eager to make deals with Iran but can new demand outstrip new supply? Source: AdobeStock/icarmen3.

POSCO plans to sign a preliminary agreement with Iranian steelmaker PKP in March to buy a stake in a $1.6 billion steel mill project in the Middle Eastern country.

Danieli has said it will sign about $5.7 billion in commercial agreements with Iran during President Hassan Rouhani’s visit to Rome this week. A government source told Reuters earlier that the contracts were worth about $4 billion, but a company spokesman later said the total value of the agreements was higher and included a joint venture with other international investors, including Iranians.

The Robust Iranian Market

These are likely the first of many steel deals for Iran as it rejoins the international business community and its unfrozen billions flood into the coffers of companies such as POSCO and Danieli. The deals also include contracts for rail networks, factories and other infrastructure improvements. Iran is a major automotive consumer and needs massive infrastructure for its oil and gas industry, consuming about 20 million tons a year of the metal, most of it homemade. Fiat-Chrysler was reported to be interested in setting up automotive factories there last year.

About 45 producers sent representatives to a 2014 steel conference in Tehran to study export opportunities and investing in Iran’s domestic industry, Bloomberg reported. And that was before the sanctions were dropped.

More of a Glut?

As some of these deals are for new and expanded mills, could Iran ramping up production actually exacerbate steel’s oversupply problem and contribute to the glut that’s driving down global prices? It’s a real concern. Iran’s entrance to the world stage is already being blamed for increasing the glut of crude oil on international markets and steel could suffer the same fate if exports significantly rise.

Iran plans to more than triple steel capacity to 55 million mt in the next 10 years, potentially helping consume 120 mmt of domestic ore, according to Keyvan Jafari Tehrani, head of international affairs at the Iranian Iron Ore Producers and Exporters Association. That’s certainly bad news for miners and steel companies. Unfortunately, it’s difficult to come by accurate figures for just how much demand the Islamic Republic will add to the equation.

What Iran Wants… And Needs

Iran literally needs to build just about everything modern countries have to drag its unsanctioned economy into the 21st century, including new airports, car factories, public transportation systems, oil refineries, ships, aircraft of all types and medical equipment. There is no doubt that Iranian consumption will be strong with an educated and generally capable workforce clamoring for the industrialization and innovation. But will it be enough to offset massive oil and steel exports? It’s hard to tell.

Part of western companies’ attraction to Iran is its sheer size and consumer potential. Previously hot emerging markets such as China, Brazil and Russia are all losing momentum or have fallen into outright recession. Iran has a population of 80 million, a low average age, a large and growing middle class, and an extensive (free) education system.

Theoretically, it represents the equivalent of a Group of Seven country and has huge pent-up demand. A Boston Consulting Group study placed Iran third in automotive market potential among developing economies, with expected car sales of one and a half million in 2020.

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The other motivation is western companies have — and it’s a strong one —  is to prevent China from locking up the Iranian market. As the sanctions bit into the economy, Iran turned to China for investments in everything from steel mills to public-transportation systems. Now, multinationals see an opportunity to take that market back.

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