Author Archives: Stuart Burns

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On Thursday, two tankers carrying petrochemicals, one of which was a Japanese-owned ship, came under suspected attack in the Gulf of Oman. The incidents compounded the already simmering hostilities in what’s possibly the world’s most pivotal maritime corridor and spurred a significant 4% spike in the oil price, the Washington Post reported.

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The phrase “suspected attack” takes the limits of objective reporting to an extreme — there is no doubt these incidents were attacks, particularly coming hot on the heels of four previous such incidents last month.

The question is: who was behind them?

The U.S. administration is clearly of the opinion it is Iran, by which they mean the Iranian state, the proposition being the Iranian authorities are trying to show they consider the economic pressure the U.S. is exerting to be a form of economic warfare intended to bring about regime change. That is a high-risk game with the most powerful navy in the world floating off your shores, but what is less clear is whether this is the Iranian government or a hard-line faction authorizing actions by the Iranian Revolutionary Guards, or possibly another agency at work.

Iran has denied it is behind the tanker attacks.

The U.S. argues that footage of what appears to be an IRG patrol boat removing an unexploded magnetic mine from the hull of one of the stricken tankers, the Japanese Kokuka Courageous vessel, supports the U.S.’s assertion that the IRG behind this. However, the owner of the vessel contradicted the U.S. account of how the attack occurred, the Washington Post reported.

But there are even veiled suggestions it could be Saudi Arabia trying to prompt the U.S. into an armed conflict with the Saudis’ biggest rival.

In practice, though, neither side has presented any proof as to who exactly ordered these attacks or who carried them out. There has been lots of finger pointing but no proof – yet.

Does it matter, from a metals market perspective, who is behind the attacks? Well, yes. The more likely these incidents are the direct action of the Iranian state, the more likely the U.S. will reciprocate with force, and the greater the chance of further increases in the oil price.

The IMF calculates that for every 10% increase in the oil price, advanced economies suffer a 0.4% increase in inflation and a corresponding impact on the balance of payments, as most advanced economies are net importers.

Source: The Times

As the above graph from The Times shows, Brent crude had been moderating nicely, from a consumer’s point of view, since April.

Due to headwinds from rising U.S. oil inventories, moderating demand expectations in Asia, and uncertainty as to how robustly OPEC+ would be willing and able to continue oil output constraints, the oil price had been declining steadily. That trend, however, has reversed this week; a further escalation of tensions could see the price heading back toward $70 per barrel.

Oil analysts had expected prices to remain between $60 and $70 for the rest of the year according to a report by The Guardian, but further attacks could force prices back over $70. The Strait of Hormuz handles about one-third of global seaborne oil shipments, so any disruption there will have an impact on prices. The global economy will continue to turn, even if tensions escalate further and with non-OPEC supply likely to grow from 1.9 million barrels a day to 2.3 million next year, barring an all-out war.

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The price will likely fall back sharply when this current situation is resolved – quite when and how that will be, though, remains to be seen.

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Every set of data in the U.K. prompts a surge of reports from two groups.

On the one hard, there are those inclined to stay in the E.U. who assert the very prospect of Brexit is damaging the economy. On the other, there are those inclined to leave, stating it is the delay that is causing uncertainty and the sooner Britain leaves, the sooner the economy will recover.

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What neither side argues about is that the economy is slowing.

Coupled with that, foreign direct investment (FDI) is collapsing at a time when, due to the weak exchange rate, British assets must represent a cheap bargain to foreign buyers.

Yet, according to the Financial Times, cross-border data shows capital entering the U.K. has fallen by 30% since the Brexit referendum, while investment into the E.U.’s other 27 countries in the three years since the referendum has surged 43% up to the first quarter of 2019.

About $340 billion of capital has been invested in the 27 remaining E.U. states in that period, up from $237 billion in the previous three years, according to the Financial Times. Yet, over the same period, the capital invested by foreign firms in greenfield projects in the U.K. dropped by $36 billion to $85 billion. The data tracked greenfield investments and did not include mergers and acquisitions  — which are also down, as it happens — because greenfield investments tend to drive greater productivity gains and contribute to national GDP growth.

Job creation has also grown in the E.U., the paper reports, with more than 1.2 million jobs created in the EU27 in the past three years as a result of new FDI — 474,000 more than the number of jobs created in the previous three years, according to the FT. About 53,000 of the rise in jobs was the result of U.K. companies creating operations in the rest of the E.U., particularly in information and communications technology and the electronics sectors, with about 150,000 jobs created in the EU27 in the three-year period, marking a 30% increase. By contrast, the U.K.’s job growth in such sectors has dropped by 28% during the period.

Maybe not surprisingly, GDP growth has slowed in the U.K. over recent months, in part as a result of low investment. The bigger reasons, it would seem, is uncertainty among U.K. exporters’ European clients — witness British Steel’s demise, which it blamed on a falloff in European orders.

GDP growth in Britain contracted by 0.4% in April, mostly as a result of the dramatic fall in car production from planned pre-Brexit shutdowns. Manufacturers had announced temporary shutdowns in expectation of disruption after the planned March 29 exit date from the E.U. However, by the time Britain’s departure from the E.U. was delayed in March it was too late to reverse the plans.

Car production fell by 24% in April, the biggest drop since records began in 1995. While some pundits are predicting it will bounce back, closures by Honda, JaguarLandRover, Nissan, Ford and others suggest a new normal has been reached, making production unlikely to recover if European supply chains are ruptured by a no-deal, hard Brexit.

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If a deal is struck and there is some certainty that just-in-time supply chains can continue to function much as before, it is possible some recovery may occur. Nonetheless, some of these plant closures are permanent and, deal or no deal, suggest carmaking in Britain may struggle to ever recover to previous levels.

Some commentators were all over the gold price this week, with Kitco News writing gold “took off like a rocket this week.

“The last three days in the metals have been strong, with both gold and silver exploding higher,” the Kitco News report said.

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Emotive language like “exploding” and “taking off like a rocket” reinforce the impression gold is on a tear; indeed, its rise has been significant.

The price of gold hit a three-month high Tuesday, at $1,327.9 per troy ounce as investors continued to buy into exchange-traded and physical gold. Inflows into the world’s largest gold ETF, the SPDR Gold Trust, rose by 2% Monday. That marked its biggest one-day gain since 2016, the Financial Times reported, part of a wider inflow that bought holdings in gold-backed ETFs to their highest in a year.

Investors are motivated by a desire to hedge against weakness in global equity markets and uncertainty about the future of trade relations between the U.S. and China, the article suggests.

Certainly, growth is slowing. The DailyFX reports May’s U.S. service-sector ISM and PMI reports, as well as the Fed’s Beige Book survey of regional economic conditions, are coming into alignment, suggesting the U.S. economy is belatedly reflecting signs of a now 15-month slowdown in global growth.

There are suggestions the Fed’s next move will be a rate reduction, with markets predicting the probability of two 25-bps cuts before the end of the year at 87.8%. Interest-rate-induced dollar weakening, with the accompanying possibility of higher inflation, would be a boost to gold — but some caution is needed before we accept Kitco’s $1,400 per troy ounce target for gold.

The Fed monetary easing has already been factored into the market and, in part, gold’s rise has reflected that.

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Global political and economic developments would have to take a dire turning for the worse to stimulate a rise above the mid $1,300s. That’s not impossible, but at some point sanity has to prevail and progress made in trade negotiations – or am I missing the intended outcome?

Oil prices are on track for their largest monthly decline in six months, the online trade journal writes.

The Trump administration exacerbated the selloff with another threat of tariffs, this time against its southern neighbor Mexico if it does not stem the flow of immigrants across the border. President Donald Trump threatened to apply a gradually rising tariff, starting at 5%, on goods imported from Mexico beginning June 10.

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The threat was seen by investors as a negative move for both U.S. and wider region growth. The move was also seen as evidence, as if any were needed, that the president will continue to use his weapon of choice, tariffs, as a means to achieve his political ends — with negative consequences for growth.

Meanwhile, OPEC as a group and Saudi Arabia as its spokesman has reacted with assurance that the cartel will continue to limit output to further deplete inventories and keep the market in balance.

OPEC is desperate for oil prices to maintain the gains it has made this year and, if possible, reverse the decline seen during the last 30-40 days.


OPEC sees itself in a fight with the U.S. shale industry, worried that it is losing share with limited power to substantially support the market as it was once able.

Some consumers are hoping rising U.S. shale output will permanently consign OPEC to history — at least in terms of engineering higher pricing.

The expectation is rising U.S. output has more than made up for the loss of Libyan, Iranian, and Venezuelan output. However, according to JP Morgan Chase, the market is finely balanced with robust demand, up 5-7% in China and Europe this first quarter, with increasingly constrained supply.

Maybe in recognition of that, Trump has so far exempted Iran from sanctions on its petrochemicals industry. OPEC’s output is currently running at 30.17 million barrels per day (bpd), its lowest level in four years. This comes despite Saudi Arabia increasing output by 200,000 bpd to partially compensate for the loss of some 400,000 bpd from Iran.

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Anyone holding off filling up their tanks in the hope prices will fall further may be disappointed.

Negative sentiment around trade is the order of the day, but supply is becoming tighter and demand has so far not reflected the wider slowing of global GDP.

The oil price is down, yes, but not out.

The planned merger of Chinese behemoth Baowu Steel Group with a smaller rival is painted in rather dramatic terms, as if it is to be something that is feared.

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In practice, we should see this as a positive move.

The Financial Times reported this week that Baowu Steel Group is to buy a majority stake in smaller domestic rival Magang Steel as part of the state’s wider drive to close outdated capacity and merge the country’s fragmented steel sector — all part of the move to improve efficiencies and control.

The two companies had combined crude steel output last year of 87 million metric tons, the Financial Times reports, surpassing total U.S. steel output of 86.6 million tons. The combined group is only slightly behind the world’s No. 1 steelmaker, ArcelorMittal, which produced 92.5 million tons of crude steel in 2018.

Capacity of the merged group would be in the region of 90 million tons, making it likely that further acquisitions will see Baowu exceed ArcelorMittal at some stage in the not-too-distant future.

Beijing is actively encouraging state champions to absorb smaller rivals, as its plan is for the top 10 producers to account for some 60% of steel production (up from 35% now). In the process, Beijing can exert better control over the industry than it has managed in the past.

Baowu itself is the product of an earlier merger between Baosteel Iron & Steel and Wuhan Iron & Steel Corporation in 2016.

Baowu has a production target of 100 million tons by 2021. With standing capacity in the Chinese market said to be some 928 million tons while output was only 828 million tons last year, there is room for Baowu to achieve its target through acquisition of underperforming rivals.

The Chinese steel market is facing slowing demand and margins are weak – down 46% at Baosteel Iron & Steel, the Financial Times states – and widely reported to have already surpassed peak steel output.

The path from here on out will be based on consolidation, rationalization and better environmental controls  — all of which would be good for the wider global community.

A fragmented steel industry is less disciplined and more likely to seek local state support to maintain employment (while simultaneously dumping excess production on the world market).

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Consolidation improves the chances of a managed rationalization of facilities and output. It’s not guaranteed, of course, but it’s more accountable, with politically appointed and controlled management in place — prospects are improved where policy directives have failed in the past.

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Cast your mind back nearly 10 years — for those of you in the metal business at that time, the market was briefly all about rare earths. For the first time in decades, all anyone could talk about was the West’s vulnerability to the supply of this misnamed group of highly important strategic metals and their salts.

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In fact, so excited did the manufacturing sector become that it spurred a whole raft of startup specialists as consultants, analysts and research bodies as metal prices peaked in the summer of 2011 and then gradually fell back.

Not wanting to sound like the harbinger of bad news, but we could be in for a repeat performance if the significance of President Xi Jinping’s visit last week to a Chinese rare earth magnet factory in the province of Jiangxi is looked at with the seriousness Beijing intends.

China is rattling the saber ever so softly to say that it may be more exposed to general trade on a balance of payments position – China exports more to the U.S. than the U.S. exports to China — but the U.S. (and the rest of the Western world, as it happens) is uniquely exposed to China’s control of not just rare earth elements, but the whole supply chain. That supply chain includes everything from mining through refining to manufacturing of myriad components used in high-tech applications including from electric vehicles, cellphones, laptops, missiles and fighter jets.

Source: The Telegraph

An intriguing article in the subscription-only section of The Telegraph newspaper detailed the long-term risk the West has been running for years on rare earths elements (REE) and how REE could be the next flashpoint in an escalating trade war between China and the U.S.

The U.S. is nowhere near self-sufficient in REE, with even ores mined at California’s Mountain Pass shipped to China for processing and Lynas Corp’s proposed U.S.-based processing plant in Texas still years away from shipping a kilogram of refined metal. The post suggests China does not even have to announce an embargo of exports — it could close down selected parts of the U.S. supply chain by restricting supply to any number of component suppliers in China or shutting down a supplier on “environmental grounds.”

With the U.S. reliant on Chinese REE for whole components of U.S. manufacturing (examples cited range from simple car starters to chunks of aircraft), which are pre-finished in China using rare earths before shipping to the U.S.

Arguably, the military-industrial complex is even more exposed than the private sector.

F-35 Joint Strike Fighters need the thermal protection of rare earth coatings. Hellfire missiles, the Aegis Spy-1 radar and the sights of Abrams M1 tank all rely on rare earths. So do precision-guided weapons, the post’s list goes on, yet the White House and, indeed, successive U.S. administrations have been strangely sanguine about this vulnerability that covers not just the processing of ore to refined metals, but the infrastructure to use those refined metals and salts in a wide range of applications in the early stages of multiple supply chains.

Many, if not all, of those roads lead to China.

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Maybe President Donald Trump should have used some of his brief time in Japan devising solutions to this shared problem with Prime Minister Shinzō Abe rather than watching Sumo wrestling and playing golf.

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It almost sounds like an oxymoron, doesn’t it: how can an event be good for the economy but bad for the country?

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As former President Bill Clinton’s campaign strategist James Carville quipped, “it’s the economy, stupid,” meaning if the country is doing well then everyone benefits, and that that’s all voters care about.

Where better to focus solely on the economy than the second-most populous country in the world that is still ranked only No. 124 on the list of wealthiest countries by Global Finance?

Narendra Modi’s Bharatiya Janata Party (BJP) has its critics, even regarding the economy. While there have been failings, there have also been significant gains, some of them not so readily reflected in GDP figures.

Anyone accustomed to dealing in India will attest to the transformation in business attitudes and practices over Modi’s first term. Corruption has been tackled head-on; further work needs to be done, but the landscape is changing fast to the benefit of both domestic consumers and foreign firms trying to do business there.

Decision-making in a notoriously bureaucratic country has also significantly improved. Middle-ranking officials still prevaricate, a national pastime only exacerbated by the clampdown on corruption as lesser officials fear to make decisions on their own. But the more dynamic individuals, both in private and public office, have risen faster and meritocracy is overtaking political connections, with the cream rising to the top as a result.

So, more of the same should be good, right?

Well, India still faces considerable challenges, as Edward Luce recently wrote in his Financial Times Swamp Notes.

India is facing serious economic challenges, including slowing growth, a persistently high fiscal deficit, tepid private investment, and weakness and instability in the financial system.

Modi achieved some gains in his first term, such as introducing universal GST in place of state taxes and the aforementioned clampdown on corruption. However, he remains widely criticized for not doing more to tackle long-standing challenges, such as selling unprofitable state enterprises, relaxing restrictive labour laws, modernizing the land market or tackling the state-dominated banking system.

Such moves, if he had the courage to tackle them, could begin to unlock long-term growth in an economy that has brief spurts of growth, but in the medium to longer term disappoints repeatedly.

It remains to be seen, with a single-party majority, if Modi has the vision and courage to effect real change in these areas.

He has a mandate for change — even 15% of Muslims are said to have voted for the BJP despite its overtly Hindu overtones.

What is worrying is that running as an undercurrent, not just to the election but increasingly throughout the first term, is a progressively more nationalistic, Hindu- centered philosophy that, according to the Financial Times, breaks ranks with the vision laid out by anti-colonial leader Mahatma Gandhi and his political heir Jawaharlal Nehru, the country’s first post-independence prime minister. They believed India’s interests were best secured by a secular state, governing a religiously and linguistically diverse society whose members all had an equal claim as citizens.

The BJP and its close cousin, the right-wing Rashtriya Swayamsewak Sangh, clearly stand for something different.

The RSS was founded in 1925 and is based on the belief India should primarily be a Hindu nation, where the rights of the Hindu majority should trump those of Muslims and Christians, seen as alien religions that pose existential threats to Hindu society, the Financial Times asserts. Modi himself may not be a signed-up member, but BJP President Amit Shah is — and so are many other party leaders.

Much like populist parties elsewhere, the BJP is not averse to bending the truth to present the message it would like its voters to hear.

India’s swift and decisive response to Pakistan’s killing of scores of Indian military personnel earlier this year clearly contributed to Modi’s popularity at the polls, despite the fabrication of the news to suggest terrorist camps had been struck when in reality all the air force managed was to lose a plane and leave two craters in a field.

To be fair to the BJP, such tactics are regularly used, even in the U.S., with “fake news” fighting real news for credibility. However, the extensive use of social media to spread influence has sinister undertones, particularly as it is used as much for promoting a Hindu nationalist agenda as it is simply boosting the party’s standing.

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Modi’s majority could be either a great opportunity to force through real economic and structural change, or it could allow the BJP/RSS to push society further toward nationalism and the ostracization of minorities.

Let’s hope common sense prevails. Despite — or rather, because of — the landslide victory, the country has testing times ahead, in more ways than one.

According to the Financial Times, Norsk Hydro’s giant Alunorte refinery in Brazil has been given approval to restart production by the Brazilian authorities.

The announcement caught the market by surprise, coming some months earlier than had been expected.

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The restart is a boost for Hydro, whose Brazilian operations, which form bauxite for primary aluminum, have had a slow go of things for the last year. The firm has been forced to run its 6.3 million ton refinery at half its normal capacity following a 2018 dam tailings spillage.

The Financial Times reports production at Alunorte would hit 75-85% of its 6.3 million ton capacity within two months, adding some 2 million tons per annum to the market.

“Production at Hydro’s Paragominas bauxite mine will be increased in line with the ramp-up speed at Alunorte,” the company is quoted as saying. “A decision to increase production at Hydro’s part-owned Albras primary aluminium plant is also expected shortly.”

Alumina prices had been supported by Alunorte’s slowdown and further buoyed by environmental pressure on refineries in China. However, this month authorities ordered the closure of a major refinery in Shanxi province following spillage of red mud waste tailings.

But overall, China’s exports have been at a record high and new alumina refineries are coming on stream.

AluminiumInsider reports Emirates Global Aluminium’s Al Taweelah refinery will, at full capacity, produce 2 million tons per year, with output for 2019 expected to be around 0.7 million tons.

Other projects expected to restart or increase production in 2019 include: the Alpart Alumina refinery in Jamaica, India Vedanta’s Lanjigarh refinery and Friguia refinery in Guinea, the article notes.

Global alumina production (excluding China) is expected to increase by nearly 4 million tons this year compared to 2018, with further capacity coming on stream in 2020. All this new supply will undermine price support for spot alumina and, in turn, the primary aluminum price.

Many aluminum smelters caught between relatively high spot alumina prices and an already weak aluminum price have had their margins squeezed.

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To the extent that alumina prices ease this year, that pressure could ease — but so will support for the primary ingot price as smelters are allowed to adjust prices to the market.

The British government did not find common ground with private equity owners Greybull Capital and Britain’s second-biggest steelmaker, British Steel, went into insolvency this week.

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As we wrote earlier this week, Greybull has blamed Brexit uncertainty for the double whammy of falling sales to the firms’ European clients, who are nervous about what kind of relationship the U.K. will have with the E.U. post-Brexit and by the E.U.’s withdrawal of carbon credits (forcing the company to go cap in hand to the British government last month for a loan).

Greybull has some merit in their claim; Brexit is causing the firm problems. A combination of elevated iron ore prices — exacerbated by the weakness of sterling since the June 2016 referendum — and high energy costs have been squeezing margins at the same time as manufacturing sectors, like oil and gas and the automotive industry, have been facing headwinds in the U.K.

But does that, as many claim, mean the British government should step in and either nationalize or otherwise financially support the company?

Ministers claim they are prevented by E.U. rules from providing state aid in such circumstances and that to extend aid would be illegal. While direct state aid is against E.U. rules, a point I will come back to, there is nothing to stop the British government offering loans on commercial terms, as it did with £120 million provided last month to fund the carbon tax credit shortfall.

The reality is the British government can probably see little chance of ever getting its money back.  Indeed, last month’s loan will only be recoverable in the autumn if the company is still running and gets its carbon credit back.

Not surprisingly those with an adverse view towards the European Union stridently point out that if the U.K. were not in the E.U., it could simply bail out British Steel (much as previous governments did with Rolls-Royce, British Leyland and various other large industries considered at the time too big to fail).

But such arguments miss the point about why E.U. state subsidy rules — which were brought in with firm support from the British, it has to be said — precisely to counter European governments bailing out failing industries.

The U.K. was far from alone in lavishing state funds on propping up dead ducks and, in the process, delaying the restructuring of industries suffering from chronic underinvestment and overcapacity. Nor is the argument that British Steel should be kept alive on the basis that it plays a crucial role in the production of steel for defense and domestic infrastructure.

It’s true the company is a major supplier of rails to the British rail industry, but much of the company’s output is exported and the U.K. imports most of the specialist steel it needs for critical defense applications. Notoriously, Britain’s nuclear submarines rely on high-strength French steel for their hulls.

A more deep-rooted problem challenging British Steel is the need for a strategic shakeup.

The company runs two blast furnaces at the Scunthorpe plant, but according to the Financial Times, it does not have enough capacity for all their output at its downstream processing plants. One senior employee is quoted as saying “we produce 2.8 million metric tons of steel, which is too much for our profitable accessible market, so half of our products don’t make money.”

Greybull promised to spend £400 million investing in British Steel when it purchased the company for £1 in 2016 from previous owners Tata Steel. However, it’s unclear how much, if any, of this money has been forthcoming.

The accounts show that Greybull’s investment vehicle, Olympus Steel Ltd, has loaned British Steel £154 million. Although the accounts provided for over £17m of interest, both profits for 2016 and 2017 and the interest have been left in the company to provide cash flow, the BBC reports.

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It is estimated any new owner will need to spend at least £250 million investing in plant upgrades.  Although prospective buyers such as Liberty Steel have been mooted as potential new owners, in today’s pre-Brexit uncertainty it would be a brave investor who would take on a business like British Steel, with all its incumbent challenges, without a blank check from the U.K. government in some form or another.

Not content with putting the squeeze on Iran’s oil industry, President Donald Trump signed a new executive order last week extending existing sanctions to include Iran’s metal industry.

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According to the Financial Times, much of Iran’s non-oil income comes from metal exports, including $4.2 billion from the sale of steel and a further $917 million from copper and its downstream products.

Much of Iran’s metals industry is in the hands of its Revolutionary Guards — not ones to miss a profit, the country has ambitious plans to grow its steel and aluminum manufacturing capacity.

The country’s 2025 vision plan seeks to make Iran the world’s sixth-largest steelmaker by increasing production capacity from 31 million metric tons in 2017 to 55 million metric tons by 2025. The Financial Times goes on to say Iran has three greenfield primary aluminum smelters either under construction or recently completed.

The Salco smelter in Asaluyeh is due to come on stream this year with a capacity of 300,000 tons and is being funded by the China Nonferrous Metal Industry’s Foreign Engineering and Construction Company, a state enterprise.

Historically, Iran has not been a net exporter of aluminum, but the new smelters will change all that. Currently, the lion’s share of industrial metal exports come from the steel industry, with almost 79% total exports by value. Copper is second with 12%, but aluminum is set to grow dramatically from the turn of the decade.

Some immediate sources explain the enhanced sanctions in connection with steel, aluminum and copper used in the production of ballistic missiles and uranium enrichment centrifuges. In reality, the sanctions are all about squeezing Iran financially in an attempt to drive it to the negotiating table with a view to curtailing the country’s regional role in fermenting unrest. According to, the sanctions have thrown Iran back into recession while causing a collapse in the value of the Iranian rial and driving up inflation.

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How successful this latest escalation of sanctions proves to be remains to be seen, but the results could be a long time coming. Previous sanctions took years to drive Iran to the negotiating table and were better supported by the global community.