Mining and Metals E1:R1
◢ Iran plans to become one of the world's top 5 iron ore producers with 180 million metric tons produced each year.
◢ The coal industry is set for consolidation as struggling coal producers lose domestic market share to cheaper imports.
The Importance of Nonfuel Minerals
The focus on Iran’s natural resources often falls to its immense oil and gas reserves. But the country’s greatest wealth may be located not in hydrocarbons, but in minerals. In total, Iran is estimated to have significant volumes of 68 different mineral resources, in reserves totaling 37 billion tons. These minerals include iron, copper, gold, silver, zinc, chromite, manganese, titanium, uranium, coal, tin, gems, and salt. This places Iran among the world’s top 15 countries for mineral resources, yet the output of mineral products accounts for less than 1% of Iran’s GDP.
Following the removal of sanctions on Iran, the mining industry is being positioned as a key area for foreign investment. But, the industry is in poor shape. Years of deferred investment due to sanctions and the related economic weakness have left Iran’s mines and metals production facilities operating with aged and inefficient machinery, which is expensive to maintain and operate. Aside from extraction, the lack of best-in-class technology also limits the range of mines that can be exploited. Low-grade reserves are too costly to extract, and high-grade reserves do not provide the ideal yields as processing and separation methods lag behind global best practices.
While the near-term focus of new investment will be to deliver new machinery and facility upgrades, there is also a clear requirement for Iran’s mining sector to adopt better management practices and to follow-through on plans for much promising privatization. Reform in this direction will be critical to securing the cooperation of foreign mining and metals enterprises as investors, strategic partners, or suppliers. However, Iran’s natural resource industries are regarded as the country’s “mother industries” and high degrees of state involvement will make the move to privatization and a more nimble management structure a complicated process.
Ambitious Plans at Sangan
The Sangan Iron Ore Complex is the biggest industrial project in eastern Iran. It sits on a reserve of 1.2 billion metric tons. At full capacity, the Sangan complex is expected to produce 17.5 million metric tons of iron ore concentrates and 15 million tons of pellets per year. But further investment is needed to reach this capacity, which measured at just 7.7 million tons of iron ore in 2015.
IMIDRO, the Iranian Mines and Mining Industries Development and Renovation Organization, has made development of Sangan a priority, and has instituted a phased investment plan totaling IRR 150 trillion over the last few years. Importantly, Iran is the largest producer of steel in the Middle East and Sangan is directly owned by Mobarakeh Steel Company (MSC), Iran’s largest producer with 50% of the national capacity. IMIDRO’s investment in Sangan is part of the vertical integration of the mining and metals industries in Iran through its holdings. As steel production capacity is increased through investments in the related companies, the input demand is intended to be met from within Iran.
With commodity prices still depressed globally, it behooves Iran to use its ores to achieve production higher up the value chain. The unit price for high-grade ore for free on board (FOB) delivery at Bandar Abbas port is currently around USD $29 dollars. Transport, warehousing, and onboarding costs from Sangan to Bandar Abbas, covering a distance of nearly 1500km, is roughly USD $24 dollars per ton, leaving a margin of about USD $5 dollars per ton. For Iran’s mining industry, better margins are achievable by selling to domestic metals manufacturers.
The plans at Sangan are part of a wider effort to boost Iran’s iron or production from the currently levels of about 30 million metric tons annually to as high as 180 million metric tons a year. This would see Iran become the 4th or 5th top iron ore producer worldwide based on 2015 production levels.
However, the mining industry will have to face key limitations effecting economic prospects in Iran more broadly. Sangan is located in the underdeveloped Khaf County of the western province of Khorasan Razavi, near the border with Afghanistan. Low-grade transport links pose logistical challenges, but more troubling is the low water supply in the area. With a average annual rainfall of just 145mm per year, access to water supplies to support mining activities is already strained. IMIDRO has worked in the spirit of “socially responsible mining” to develop a water use plan that helps mitigate the potential for conflict with local stakeholders. It has also invested in a new water treatment facility for the country as part of a larger USD $1.3 million package to build schools, residences, and other facilities for the community.
However, a larger portion of overall capital costs will need to be devoted to water management at Sangan and similar sites to ensure the sustainability of mining operations both from an industrial perspective and also from the perspective of the mine’s impact on the local community and environment.
NICICO Achieves Greater Efficiency
The National Iranian Copper Industries Company (NICICO) has announced that it has reduced the production cost of copper per metric ton to below USD $4,000 as measured in the second quarter of 2016. New management practices and cost-cutting measures took effect over the past 12 months enabled a significant year-on-year improvement with the cost per ton having measured at $5,000 in 2016. The current price for copper on the London Mercantile Exchange is hovering around USD $4,900. NICICO is therefore positioned to compete profitably at global market prices, currently on an upward trend.
Crisis in Coal
The coal industry has had a poor year globally, and in Iran the industry is also suffering. This is not due to global market forces, but rather internal issues stemming from sanctions and mismanagement. Iran’s coal production is used for domestic consumption, tracking iron ore, and remains small by global standards at around 1.5 million metric tons per year. Exports are minimal at around 388,000 tons per year as Iran cannot compete on price in global markets.
The largest coal consumer in the country is Iran’s steel industry. Financial hardship among steel producers has left the coal mining companies exposed. For example, Iran’s third-largest steel procuer, Esfahan Steel Company (ESC) is estimated to owe IRR 1.2-1.5 trillion (USD $34-$43 million) to coal suppliers. Meanwhile the Rouhani administration of has opted to reduce protectionism in the Iranian economy. The coal industry is set to see a spate of closures and consolidations as policymakers refuse to support fee increases in the guaranteed buying program that has propped up many domestic coal mines. Minister of Industry, Mining and Trade Mohammad Reza Nematzadeh has also authorized Iran’s steel industry to purchase 30% of its required coal inputs through imports. Iranian companies that cannot compete with global prices are likely to seek bankruptcy, opening the door to acquisitions and consolidation in the industry.
Iran’s aluminum industry has a less robust supply chain than that of the steel industry. Iran Alumina Company (IAC) is currently the only producer of alumnia, the key raw material for the production of Aluminum. IAC supplies the Iran Aluminum Company or IRALCO among other smaller producers, but is only able to supply about 30% of the domestic demand. This forced companies such as IRALCO to purchase alumina on international markets. During the sanctions period, financial limitations and general uncertainty prevented Iranian companies from signing long-term supplier contracts with foreign alumina exporters. Iran often had to rely on cumbersome swap deals in which Iran would promise aluminum ingots in return for key raw materials such as alumina. As a result, the final price of Iranian aluminum was higher than normal market forces would have dictated.
Obstacles to Foreign Investment
Iran’s mining and metals industry is undercapitalized and undervalued. While key mining companies have spent much of the last year touting investment opportunities, foreign mining companies remain hesitant to engage. The global downturn in commodities has reduced the appetite for risk, even in the traditionally brave and emerging-markets friendly mining industry. Yet, the clear and active role of the Iranian political establishment in the operation of the mining industry at large, going beyond mere government ownership, remains a major barrier to investment.
At the present time, the highly politicized nature of the sector means that no cohesive national development plan can be devised to organize and simply the financial and operational relationships between Iran’s mining and metals companies for the benefit of international investors. It is certainly a government priority to attract foreign investment. However, policymakers have not appreciated the complexity of their investment proposition and the persistent opacity of data, activities, and ownership. As such, most mining investments, as currently presented, are not “bankable.” They do not have independent and robust feasibility studies attached to them.
Yet, even if an investment was deemed suitably attractive and feasible, the political nature of the sector exacerbates an already low level of investor confidence in the legal protections available, particularly in situations of arbitration of disputes.
Finally, the execution of a successful mining project in Iran requires the buy-in of a wide range of stakeholders, ranging from the Ministry of Industry, Mining and Trade as the key authority, to other consultative agencies such as the Department of the Environment, the Natural Resources Organization, and even the Cultural Heritage Organization. Coordination among these groups remains limited, and for especially large investment projects new decision-making mechanisms will need to be developed. The environment may require a single coordinating body with a sole mandate around investment facilitation which can weigh the competing priorities of other government stakeholders and ensure the investor’s needs are met.