US sanctions slam door on steel trade with Iran, but not completely
On Tuesday August 7, the government of the United States reimposed its economic sanctions against Iran, with the steel trade being one of the industry sectors to be directly affected.
The sanctions are intended to prohibit states and companies which deal with the US from trading with Iran in any steel products, including semi-finished and finished steel.
They are also intended to prevent Iran from using the US currency, and to throttle the trade of such metals and minerals as gold, aluminium, coal and graphite to the Middle Eastern country, and to prohibit sales of cars and aircraft.
The US has also imposed secondary sanctions that affect other countries that deal with Iran.
These restrictions bring into question Iran’s status as one of the world’s largest steel exporters, as well as the further development of the country’s steel industry.
Export will fall, but not be eliminated
The lifting of an earlier regime of similar international sanctions in 2015 allowed Iran to become one of the world’s major steel exporters.
In the latest Iranian year, which ended on March 20, the country exported 7.4 million tonnes of semi-finished and finished steel products, and registered 39% growth year-on-year, according to the Iranian Mines & Mining Industries Development & Renovation Organization (Imidro).
Within this total, exports of semi-finished steel products such as billet and slab accounted for 6.87 million tonnes, an increase of 84% year-on-year.
Southeast Asia (Thailand, Taiwan, Indonesia and the Philippines) and the Middle East-North Africa region (the United Arab Emirates, Oman and Egypt), were the major outlets for Iranian steel.
Market participants varied in their forecasts for the future of Iran’s steel exports after the reintroduction of sanctions. Some believed that the overall volume may be reduced by more than half, while others believed that there would be no significant drop. What has become clear so far is that Iranian exports will not be entirely eliminated.
“Iran was purchasing steel through the UAE when it was under sanctions in 2015, and I believe it will find a way to re-establish trade when the new sanctions are imposed,” a Middle East-based buyer of Iranian billet told Metal Bulletin.
“All in all, the UAE needs Iranian billet as much as Iran needs the UAE market to sell it,” he added.
“When people realize that Iranian material is much more profitable to buy than material from other origins, they will find a way to arrange payment,” a producing source told Metal Bulletin.
Last week, Iranian billet offers were heard at $530-545 per tonne cfr Southeast Asia.
This compared with offers from the CIS region at $545-555 per tonne cfr, from Turkey at $550-565 per tonne cfr, and from China at $565-590 per tonne cfr.
But although the prices for Iranian material were attractive, Asian customers preferred to refrain from bookings.
“Buying interest for Iranian semi-finished steel is still there due to the price being very competitive, but I do not think that many will dare to buy because the sanctions will make the procurement process much longer and will probably increase the cost eventually,” an Indonesian source told Metal Bulletin.
Some trading companies in Asia, however, were ready to continue to trade with Iran, considering that they do not have connections with US-related banks and that they trade with Iran in currencies other than US dollars.
Still, many customers in the region were refraining from bookings of Iranian material several months before the sanctions were reimposed.
During the third month of the current Iranian year, from May 22 to June 21, the country exported 627,875 tonnes of steel. This was an 11% drop year-on-year, after two months of regular growth.
Over the first quarter of the current Iranian year, March 21 to June 21, major Iranian steelmakers exported a total of 1.9 million tonnes of semi-finished and finished steel, which was 10% growth year-on-year, according to Imidro.
Exports curbed by weakening rial
But customers’ caution was not the only reason for the decrease in steel export volumes from Iran.
In July, Iranian authorities instructed local steelmakers to allocate at least 50% of their output to the domestic market through the Iran Mercantile Exchange (IME) due to increasing domestic demand.
Market participants, however, described this demand as “artificial” because it was not spurred by real consumption, but instead by a loss in the value of the national currency, the rial.
“The [Iranian] rial is losing value very quickly due to the [imminent application of] US sanctions, so people involved in trade prefer to buy commodities rather than to keep money in their hands,” a source familiar with the situation told Metal Bulletin in July.
Besides that, Iranian steelmakers were forced to exchange their revenues from export sales according to the official rial-dollar rate, which is two or three times lower than in the open market.
On July 1, the official exchange rate was IRR42,722 to $1, according to exchange rate website Oanda.com. But the rate on the open market at the same time was IRR83,000 to $1, market sources said.
By July 31, the rial was trading at IRR44,145 to $1 according to the official rate, while the open market rate was IRR106,000 to $1.
Market participants believed, however, that active steel trading in the domestic market would not last long because, on August 6, a day before the US sanctions were reimposed, Iran’s central bank scrapped most of the currency controls that had been introduced this year in an attempt to halt the tumbling value of the rial.
On August 8, Oanda showed the official exchage rate as IRR42,982 to $1, while the open market rate was IRR96,500 to $1.
“Local steel demand will stop soon because the Iranian government now allows normal foreign currency transactions and the [value of the] rial is already [moving] up,” a Middle East source told Metal Bulletin.
Lower domestic consumption, along with reduced export volumes, may lead to a decrease in steel production, some market participants believed.
“If Iran has to cut its steel export volumes, it will have to reduce steel output, because the domestic market will not be able to consume it,” a Middle Eastern source told Metal Bulletin.
But Iranian producers do not seem likely to reduce their steel output in the near term. On August 4, the Iranian government restricted exports of direct-reduced iron (DRI) with immediate effect, according to an announcement from the Ministry of Industries, Mining & Trade.
Under the new regulation, only producers can export DRI, provided they first offer it via the IME to domestic buyers, and only the unsold quantities can be exported and, even then, only after gaining a permit from the government.
Iran’s major producers exported 186,360 tonnes of DRI during the first three months of the current Iranian year (March 21-June 21), down by 17% year-on-year, according to Imidro.
In 2017, Iran produced 21.24 million tonnes of steel, according to a World Steel Association report. This was when the country had capacity to produce 32 million tonnes per year of steel. Around 85-90% of Iranian steel is produced from DRI.
Expansion projects in question
In these conditions of uncertainty about steel consumption and trade, as well as restricted investment inflows due to the reimposed sanctions, the country’s plan for further expansion of the steelmaking industry is in question.
Iran targeted an increase in its overall steelmaking capacity to 55 million tpy by 2025, from 32 million tpy, by acting in cooperation with such European plantmakers as Danieli, SMS and Outotec. But many such projects have already been put on hold because of the uncertainties created by the US policy.
“With the withdrawal of the US from the treaty [that governed Iran’s nuclear program], the banks are no longer ready to fund Iranian projects for fear of secondary sanctions,” Alessandro Trivillin, chief executive officer of Italy’s Danieli, said in May.
But at the same time as the US sanctions came into force early on August 7, the EU, which from the outset did not support the US decision to quit the nuclear deal, applied an updated Blocking Statute to mitigate the effects of the US sanctions on the interests of EU companies that do legitimate business in Iran.
The blocking regulation allows EU companies to recover damages arising from the sanctions, and nullifies the effect in the EU of any foreign court rulings based on them.
It also forbids EU persons from complying with those sanctions, unless exceptionally authorized to do so by the European Commission, in cases where non-compliance would seriously damage their interests or the interests of the European Union.
Fiona Lam in Singapore contributed to this report.The Middle East Iron & Steel Conference (MEIS) brings together every influential company in the steel ecosystem, creating unequalled opportunities for meeting existing and future clients, making deals and gaining crucial information to capitalize on market opportunities. Join us in Dubai this December to be a part of the single largest gathering of iron and steel decision makers in the Middle East.
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