In May 2018, the U.S. government announced the imposition of economic sanctions on Iran with effect from 7 Aug’18 after U.S. opted out of Iran’s nuclear deal that was signed in 2015. These sanctions restrict any country or company to have trade relations with Iran and if this happens that country or company would be subject to secondary sanctions (won’t be allowed to do business with U.S.).
The economic sanctions target Iran’s purchases of U.S. dollars, its trade in gold and precious metals, and its dealings with metals, coal and industrial software. The sanctions will hurt the Iranian economy and further devalue the country’s currency, Rial (IRR).
The effect of U.S. sanctions can be easily seen as in the last week value of one Rial fell down to 110,000 per US Dollar in the black market. However, currently, the value of one Rial is around IRR 92,000/USD.
Now amid this dramatic currency depreciation, imports in Iran will become quite costlier which is going to adversely affect the country’s steel sector. This is because a majority of steel production in Iran takes place via EAF (Electric arc furnace) route and Iran’s requirement of Graphite Electrodes (GE), which is a key raw material for electric furnaces is majorly met via imports.
According to Iran’s customs data, in the Persian year 2017-18, Iran imports were recorded at 100,939 tonnes, a surge of about 52% against the previous year. China and India are the major exporters of GE for Iran. In last Persian year the country imported about 67,227 tonnes of GE from China and 11,878 tonnes from India.
Iranian government allocates USD 440 million for GE imports
In order to support the country’s steel sector amid drastic devaluation of currency, it was recently announced that the Iranian government will be allocating USD 440 million for the import of graphite electrode in the country.
According to Dr. Jafar Sarqini, Deputy Minister of Mining and Mineral industry, “Iranian government will offer USD 440 million to the steelmakers at official exchange rate of IRR 42,000 to import graphite electrode.”
“The USD 440 million which government allocated will be given at government exchange rates of IRR 42,000 to all the steel mills in Iran including both government and private mills. Also, the share from USD 440 million will be allocated to steel mills according to their crude steel production.
Now as the government exchange rate for Rial is IRR 42,000/USD and black market rate is IRR 92,000/USD, steel mills can buy USD at an average rate of IRR 60,000-65,000, which will not affect the steel prices to a major extent”, quoted Mr. Keyvan Jafari Tehrani a renowned consultant and trader from Iran.
What does this fund allocation mean for Iran’s GE industry?
In CY17, Iran produced about 22 MnT of crude steel out of which 85% was via electric arc furnace route. Now if Iran’s steel production grows at an average growth rate of about 10%, in CY18, Iran’s crude steel production will come to around 24 MnT (in first six months from Jan to Jun’18, Iran produced 12.5 MnT of crude steel).
Out of 24 MnT, 85% will be via EAF route which comes to around 20 MnT. Now suppose Iran’s GE annual GE requirement is about 115,000 tonnes how much graphite electrodes can be procured via the funds allocated.
As Iran majorly imports GE from China, we will consider the average import price of Chinese GE (in the spot market) for Iran at USD 15,000/MT. Thus, the total cost to procure Iran’s graphite electrodes requirement of 115,000 tonnes will be nearly USD 1,725 million. As the Iranian government has allocated USD 440 million for GE imports, it means that Iran will be able to procure 29,000 tonnes thus meeting its only next three months GE requirement.
India’s contractual graphite electrodes price for UHP grade is trending at USD 14,000-15,000/MT whereas its spot prices are heard at USD 25,000/MT.
Iran can continue its trade with China and India
As per SteelMint sources, in the wake of the trade war between China and U.S. and Iran being a major exporter of crude oil, both the countries, China and India are unlikely to stop trade with Iran.
As a solution to this, while Chinese companies are likely to make transactions in their local currency Yuan (RMB), India is also likely to follow Indian Rupee payment system. Moreover, only recently in order to facilitate bilateral trade between the two countries and to explore the possibility of reviving Rupee-Rial arrangement to continue trade, Indian government has approved a proposal from Iranian private lender Bank Pasargad to open a branch in Mumbai. The Rupee-Rial arrangement was used to buy crude oil from Iran before U.S. sanctions were lifted against it three years ago.
Apart from this, HEG Limited which is one of the leading graphite electrodes producers in India has mentioned in its Q1 FY19 quarterly result that as Iran has percentage contribution of about 6-7% in its revenues, the company needs to monitor the risk of recently announced U.S. sanctions on Iran. However, the company’s management is hopeful that current global trade diplomacy may not extend from oil to industrial products like graphite electrodes. Nevertheless, the company already has GE supply contracts with Iran until September 2018. This means that U.S. sanctions will have limited impact on Iran’s steel sector.
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