IRANIAN STEEL INDUSTRY ACCORDING TO AN INSIDER

C O N F I D E N T I A L SECTION 01 OF 02 IRAN RPO DUBAI 000006

SIPDIS

SIPDIS

E.O. 12958: DECL: 2/14/2018
TAGS: ECON EIND EMIN PGOV IR
SUBJECT: IRANIAN STEEL INDUSTRY ACCORDING TO AN INSIDER

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CLASSIFIED BY: Ramin Asgard, Acting Director, Iran Regional
Presence Office, Department of State.
REASON: 1.4 (d)

1.(C) Summary. Iran currently produces 7 million tons of steel
annually which is enough to meet 50% of its domestic needs, said
an Iranian steel insider 13 February. There are three main
government production facilities and ten large private
companies, he said, adding that government facilities have a
competitive advantage as they do not pay taxes and their fuel
and raw material costs are subsidized. Until two years ago,
said the insider, Iran imported the rest of its steel needs from
Russia, Ukraine and Kazakhstan; now he said 70% of Iran's steel
imports come from China. He said that the government has
artificially deflated steel prices in the run-up to the
elections and that he expects to see price hikes after Nowruz.
In general, the insider said, the demand for steel has decreased
as the construction boom has slowed due to skyrocketing material
and labor costs. End Summary

Domestic steel production

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2.(C) IRPoff met an Iranian steel insider February 13. The
insider reportedly has a steel import-export business in Dubai
and he works as a steel broker in the Tehran bazaar. He said
that Iran currently needs 14 million tons of steel a year; half
of which is produced domestically and half of which is imported.
The insider said that there are three main government steel
production facilities which convert iron ore to pig iron and on
to finished steel. Reportedly there are ten main private
facilities; two of which produce finished steel, while the other
eight produce pig iron - which is then turned to steel in other
smaller facilities, he said.

3.(C) The insider said that subsidized government factories pay
below cost prices for raw iron ore and fuel. He also said that
the government companies do not have to pay tax, while the
private facilities do. The steel trader said that all ten of
the private facilities were started under the former Khatami
administration when start-up industrial factories were granted
business loans with 4% interest. Now, said the insider, it is
virtually impossible to start a new factory - unless you have
insider connections - as loan interest rates run at about 24%.

4.(C) When asked about privatization plans of the three
government facilities, the steel insider said the Mobarakeh
Steel Company in Esfahan just floated 5% of its shares on the
Tehran Stock Exchange the morning of February 13. The shares
are worth a total of roughly $500 million said the trader.
While the insider would like to purchase the shares, it is
impossible for him to do so, he said. The trader claimed that
private sector investors lacking strong links to key government
officials remain reluctant to invest large sums in public
transactions. According to the insider, such a display would
invite unwanted attention to the sources and the use of their
wealth. "Once you start spending hundreds of millions of
dollars, people notice...Wealthy Iranians without appropriate
government connections invest overseas as it is just easier," he
claimed.

Steel imports

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5.(C) Iran imports 7 million tons of steel annually, or half of
its steel needs, said the steel trader. Until 2006, Iran
imported steel from Russia, Ukraine and Kazakhstan, he said.
Now, claimed the trader, 70% of Iran's steel imports come from
China; with Russia and the Ukraine accounting for the other 30%.
"Under pressure from the US," bemoaned the trader, "China's
prices have doubled in the last two years."

6.(C) The trader said that while there are most likely close to
500 Iranians who have licenses to import steel, there are only
20 main players. One individual named Sinaiyan (NFI) controls
20% of the import trade, claimed the trader, adding that
according to rumors, Sinaiyan does not pay customs duties. The
trader does not know who Sinaiyan is connected to, but surmised
it has to be "someone important."

Prices

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7.(C) Government production facilities are forced to sell their
steel at a predetermined price, claimed the trader. While
domestic producers are not obligated to sell steel at the same
government price, they usually can not charge much more as it is
all traded together on the Tehran Stock Exchange, said the
insider. The trader said that in the run-up to the March
parliamentary elections, government authorities are keeping the
price of steel artificially low; he expects to see a major spike
in the cost after the Iranian New Year.

8.(C) While steel needs are holding steady, said the insider,
demand has not grown as the construction boom has slowed. The
insider said that while there is a great demand for residential
dwellings, not everyone can afford to buy due to increased labor
and raw material costs. The insider claimed that up until last
year, construction companies could hire "good" Afghan workers
for about $2 a day. Now, he said, the government has sent all
the illegal Afghans home, which has pushed labor costs up for
the remaining Afghans to about $20 a day.

9.(C) Comment. IRPoff met the steel insider for the first time,
upon the recommendation of a long-time contact. The steel
trader splits his time evenly between Iran and Dubai and said he
would be happy to answer any specific questions IRPO has on the
steel business.

10.(C) Comment continued. This account demonstrates that
challenges facing private sector investors in Iran appear almost
insurmountable at times. Not only are the odds stacked against
them in the predominantly government controlled economy, it is a
virtual necessity to bring in a government partner for access to
investment opportunities -- further concentrating economic power
in the hands of a privileged few.
ASGARD