Sanctions and scandal hit Iranian steel

FT -- In the production hall of the Khouzestan Steel company near Ahvaz in south-western Iran, workers in orange helmets and khaki uniform contend with broiling heat and stifling humidity as they turn molten steel into finished billets.

Nearby, a sign points to happier days of international investment and co-operation. The sign, showing long bars of steel moving slowly on rollers, belongs to Danieli, a leading Italian supplier of industrial technology and equipment.

Workers at the plant – Iran’s biggest producer of steel billet and one of the three largest in the country in terms of crude output – say the other production lines were supplied by German, US and Japanese companies over more than three decades. But they say the Italian group was the last on site – back in 2007.

International sanctions imposed because of Iran’s nuclear programme do not directly target the industrial sector but have affected many industries, such as steel, by imposing financial restrictions.

Abdol-Majid Sharifi, managing director of Khouzestan Steel, says circumventing the sanctions and “turning threats into opportunities” is one of his top priorities.

“We are localising the steel industry,” he tells reporters during a tour. Self-sufficiency in steel production is a goal that must be achieved regardless of costs, he says.

Khouzestan Steel claims its dependence on foreign parts is now only about 20 per cent, after replacing about 7,000 foreign spare parts with Iranian-made pieces including furnaces. Mr Sharifi predicts that crude steel production at the plant will hit 3.3m tons this Iranian year (beginning on March 21), up from 3m tons last year.

Iran’s rulers deem the steel industry a strategic sector. As a result the country is the leading producer of steel in the Middle East, according to the World Steel Association. Its iron ore mines provide sufficient raw materials for steel production at home while the mineral is also exported to other countries, such as China.

But, despite the potential, crude steel production was only 11.9m tons in 2010, according to the WSA. The output not only keeps the country dependent on imports from Russia and Central Asian states to meet domestic needs of about 18m tons, but is also far from the government’s target of 50m tons by 2015.

Analysts warn that international sanctions are not the only reason for missing development plans and failing to attract investment.

“Mismanagement is more to be blamed than sanctions when you see how slow the progress was even before the sanctions,” says one steel market analyst, who asked not to be named.

Observers point to the disparity with neighbouring Turkey, which produces about 30m tons a year, while private steel producers and traders say state-owned factories are struggling with high debts to the banking system because of high feedstock prices.

Crude steel production in Iran is largely a monopoly of three state-owned companies: Mobarakeh Steel Company, Esfahan Steel Company and Khouzestan Steel. Iran’s private sector is involved only in steel trading and downstream projects such as production of rolling mills.

Khouzestan Steel is on course to sell 50.5 per cent of its shares to the private sector this year, even though its privatisation has been controversial.

In 2007, Mohammad Jaberian, a businessman, bought 30.5 per cent of the company’s shares for about $1.3bn. But Mr Jaberian suddenly changed his mind and tried to withdraw from the deal.

Now, the company is linked to Iran’s biggest financial scandal amounting to IR30,000bn ($2.8bn). This centres on Mah-Afarid Khosravi, a businessman who is reportedly in jail and has had his assets frozen. Mr Khosravi’s central office in Tehran refused to comment.

Last month, Iran’s conservative media, which is mainly opposed to the government of President Mahmoud Ahmadi-Nejad, published a letter in which the president’s office apparently urged two ministers to sell half of the Khouzestan Steel’s shares to Mr Khosravi under a national privatisation plan. The government has denied any links to the alleged fraud.

The ownership of Khouzestan Steel remains opaque. Mr Sharifi, the company’s managing director, denies any “legal link” between his company and Mr Khosravi and stresses that the controversial shares remain in the government’s hands. But he admits there was co-operation with a steel rolling mill plant owned by Mr Khosravi.

Mr Sharifi refuses to give any figures on his company’s production costs but admits they have increased by 15 to 20 per cent this year compared with a year ago, mainly because of cuts in state subsidies on basic commodities.

Despite the problems, Khouzestan Steel says it is ready to export its products even though the government has largely restricted local producers to meeting demands at home.

Mr Sharifi says: “If we are allowed to export, we can easily be present in world markets thanks to the high and sustainable quality of our steel.”