Steel sanctions cut deep into Iran's economy

Steel sanctions cut deep into Iran's economy

Iranian manufacturers and builders face serious shortages of steel and other metals as a new European Union export ban adds to troubles for an economy already reeling from sanctions on its finances and oil exports, Reuters reported.

Reliant on imports to make up a shortfall in its own steel production, data shows Iran's purchases of foreign steel already falling as buyers are being hit by EU and U.S. measures which hinder banks, insurers and others supporting trade with Tehran until Iran agrees to alter its nuclear program.

Short of major currencies, some Iranian steel buyers have resorted to barter deals. But explicit sanctions imposed by the European Union on October 15 on sales of steel, aluminum and other key materials have prompted some traders to halt all sales and Iranian businesses now face rising prices and scarce supply.

Given steel's central role in the economy, in the skeletons of new buildings or for constructing machinery, disruption to trade in the metal may cause far-reaching damage - exactly the aim of the Western powers who want to prevent Iran developing nuclear weapons and reject its denials that it has any such aim.

"The ban on metals like aluminum and steel recently imposed by the EU has a sort of 'multiplier' effect of pushing the Tehran regime into a new cycle of activities to dodge the effect of the sanction, a course which will end up creating new complications and pushing up costs," said J. Peter Pham, a director with U.S. think-tank the Atlantic Council.

"At the current pace, Iran's ... industrial base will be rendered a cripple."

Newly re-elected, President Barack Obama and his allies have resisted calls, notably in Israel, for military action against Iran's nuclear industry but have stepped up economic sanctions to press the clerical leadership into changing diplomatic tack.

SLOWING ACTIVITY

Iran has imported up to 10 million metric tons (11.02 million tons) of steel annually in recent years but data from the International Steel Statistics Bureau (ISSB) suggest a declining trend, even before the EU ban. Imports were about 4 million metric tons in the first nine months of 2012, almost a quarter down from the same period last year.

Builders across Iran are suspending construction projects and channeling any spare funds into land purchases or safe-haven assets like gold in a frantic bid to hold onto the value of their wealth rather than take a risk with long-term investments.

"Sanctions have completely crippled all civil projects. Now even the strongest contractors have stopped works," Farid, 49, who runs a major Tehran building firm, told Reuters by email.

Like many Iranians, he did not wish his full name to appear in international media to avoid difficulties with officials.

Another Tehran executive, a 42-year-old engineer, said his company had put off building a factory due to problems obtaining key materials from Europe and the poorer quality of Chinese and local substitutes: "Many projects have been stopped," he said by telephone. "Industry has become seriously weakened."

In a measure of official concern over supplies for industry as the value of its currency has slumped along with sanctions-hit oil exports, Iran has banned its firms from exporting steel. It is also trying to boost it domestic production but that will take years to end the need for imports.

While earlier sanctions have hampered trade, the EU measures on metals have further discouraged sellers: "Until a few months ago we were still trying to sell steel to Iran," a source at a British-based trading house told Reuters. "But now that these new sanctions have come up, we have stopped completely."

While there remain grey areas of law that foreign traders have been using to keep doing business with Iran, the new EU regulations have had a chilling effect: "Our lawyer says the new sanctions are ambiguous on purpose, to scare people off," the trading source said. "And they are succeeding in that."

The world's biggest steelmaker, ArcelorMittal, is based in Luxembourg, putting all of its global plants under EU sanctions rules. The firm said it complied with the new orders.

Its plant in Kazakhstan, ArcelorMittal Temirtau, has sent a substantial share of its output to Iran in the past. It said sales to the Middle East had declined "significantly" and it cut production by 17 percent in the nine months to September.

GREY AREAS

China, whose leaders have been cool to the Western push for sanctions, has increased steel exports to Iran slightly but volumes from other big suppliers South Korea and Russia have declined since the beginning of the year, ISSB data showed.

Not every supplier, however, has taken immediate steps to stop or reduce sales to Iran and some traders are taking advantage of the murky formulation of the latest EU ban.

"Our lawyers said it would be fine as long as contracts date before October 15," a European trader said, referring to the date when the EU regulations were implemented.

One trading source involved in cargo around the Black Sea said shipments of steel to Iran from western Europe had slowed considerably, but supplies were arriving in from elsewhere, via Turkey and across the Caspian Sea.

"Turkey looks increasingly like the major gateway these days," he said. "The Caspian Sea area has also provided exports - but bear in mind with colder weather the rivers will freeze up, so that route will not yield much for now."

Barter deals are taking place too in some case to avoid the currency and financing difficulties: "Korean trading companies bring in (steel) billet and the value of that billet gets paid in oil," a Swiss-based trader said. "It's some type of barter."

The steel sector could face more disruption if further U.S. measures under discussion emulate the EU targeting of the metal, said Mark Dubowitz of Washington's Foundation for the Defense of Democracies, who has advised the Obama administration.

"Iran is already experiencing an acute balance of payments crisis, a plummeting currency, and a sharp drop in oil sales," he said, noting that Tehran's steel export ban showed both its vulnerability and determination to try to ride out the crisis.

"The ban on steel exports is a sign that Iran is battening down the hatches, husbanding its foreign-exchange reserves and precious metals like steel, and preparing for a long ordeal."

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