Bridging the Gulf

By IM Staff
Published: Monday, 18 July 2016

As the US Geological Survey prepares to issue a special publication on the mineral resources of Iran, the international business community is kicking its heels in frustration about the snail’s pace of progress towards establishing trade links with the Islamic Republic, Rose Pengelly, IM Correspondent, writes.

Iran1 

The ancient Bistoon (or Bisotun) statues and inscriptions in Iran are symbolic of a time when Persia was at the heart of an international trading system, controlled by Greece. (Source: hapal, via Flickr)

Iran is better known for its oil reserves and internationally-reproved uranium enrichment programme than its mining industry. But having watched many of its OPEC neighbours learn the hard way about the perils of depending too heavily on hydrocarbons revenue and having been forced to relinquish its nuclear ambitions in order to regain its place in international trading circles, the country is attempting to lay foundations for a more diverse economy.

Iran forms part of the Iranian Plateau, a 2.6m km2 oil and mineral-rich triangle of elevated terrain between the Caspian Sea in the north and the Gulf of Oman in the south. 

According to figures recently published by London-based merchant bank, Hannam and Partners, Iran holds 7% of the world’s mineral deposits and is home to around 5,000 active mines. Officially, there are 48 minerals currently being commercially exploited in Iran, 36 of which are non-metallic.  

Geological data clearly outlines the potential to broaden Iran’s mineral production portfolio, but further exploration and significant investment is needed before new mines and downstream value-adding capacity can be built.

The removal of international trade sanctions following the Joint Comprehensive Plan of Action (JCPOA) agreement, struck in July 2015 and put into effect in January this year, focused the world’s attention on Iran as a large but as yet undefined commercial opportunity. 

Under the terms of the deal, brokered between Iran, France, Germany, the UK, the US, Russia and China, together with the governments of the European Union (EU), Iran agreed to eliminate or destroy its various stockpiles of uranium. For the next 15 years, Iran will only enrich uranium up to 3.67%. The country has also agreed to other restrictions on gas centrifuges and heavy water facilities and to having its compliance with these terms monitored by the International Atomic Energy Agency (IAEA).

A number of foreign mining and steel businesses have already expressed an interest in developing trade relationships with Iran and lawyers all over the world have been instructed to assess how these connections can be legally and efficiently established.

"The easing of the Iranian sanctions regime in the EU has enabled a lot of new business discussions to take place and contacts to be made," said Jeremy Robinson, a partner at London-based law firm, Watson Farley and Williams LLP.

As well as energy and consumer goods, these discussions have also centred on mining. Despite having a sophisticated higher education system and a majority (55%, according to Hannam and Partners) skilled workforce, the former embargo on commercial dealings with European and US companies left Iran with limited options when it came to procuring or developing mining technology.

According to Dr Nima Nezafati, assistant professor of economic geology at the Islamic Azad University in Tehran, Iran’s mining sector is eager to engage international expertise in order to fill in the gaps in its technological capabilities.

"The sanctions of recent years have heavily harmed Iran in several directions of research, including state-of-the-art exploration equipment. Nevertheless, Iran has tried to keep itself – to some extent – up-to-date," he said.

Iranian engineers have designed some exploration technology domestically, with the help of non-western companies and institutions, including Chinese and Russian partners. 

Global energy, metals and mining research group, Wood Mackenzie, sees the void created by the lack of foreign direct investment in Iran, which fell to $2.1bn, or 0.5% of GDP between 2011 and 2014, as an opportunity for foreign businesses.

"With years of underinvestment in the sector and large numbers of projects stalled, there still remains huge potential upside," Wood Mackenzie said in a report on Iran’s mining industry in March this year.

The company highlighted Iran’s aluminium segment as being particularly ripe for expansion, with the caveat that the lack of scale and modern downstream technology will delay any significant development in semi-finished aluminium output for at least three years. Primary smelting capacity is in a better position to be jump-started, however, and, if realised, could offer a new market for the flagging global fluorspar industry, which in the last three years has suffered from the downturn in Chinese aluminium fluoride demand.

At present, Iran produces around 350,000 tpa aluminium (see below), well below its estimated 470,000 tonne capacity, owing to a lack of appropriate bauxite resources, Mehdi Karbasian, managing director of the state-owned Iranian Mines and Mining Industries Development and Renovation Organization (IMIDRO), said at a conference in Tehran in May.

He said that Iranian miners are seeking $10bn in investment to expand the aluminium industry to 1.5m tonnes by 2025, explaining that some of the funds are needed to improve electricity supply for smelters.

With domestic fluorspar production of 90,000 tonnes in 2015, the seventh-largest volume in the world according to the US Geological Survey (USGS), Iran has the ability to meet much of its own fluorspar requirement at present, but it remains to be seen whether any expansion in fluorite and bauxite mining can keep pace with the forecast growth in the Iranian aluminium sector.

Non-metallic minerals with identified economic
deposits in Iran

Mineral

World ranking

Gypsum

2

Barite

6

Fluorite

7

Feldspar

8

Clays (including kaolin, bentonite and ball clay)

8

Lime

13

Source: USGS Mineral Commodity Summaries 2016 

Post-sanction struggles

While the JCPOA deal fired the starting gun on new trade negotiations with European businesses, anxiety about misinterpreting the new legal framework has so far choked the anticipated flood of new transactions between Western companies and Iran to a mere trickle.

"Actual business dealings of any scale are still impeded by the ability to finance transactions, since banks, notably in the EU, remain very cautious – having been penalised heavily in the past for infringements of US sanctions," explains Robinson. "This is a cause of frustration in the business community, but it may be the case that businesses need to remain patient a while longer."

Lingering political obstacles have also proved a stumbling block for some would-be Iranian trade partners. 

Germany, one of the world’s leading suppliers of engineering services and steelmaking technology, has had its Iranian trade ambitions waylaid by a row over unpaid export guarantees. Iran owes Germany about €500m ($556.9m*) under so-called "Hermes covers", a German government scheme that protects German companies from non-payment by foreign debtors.

In June this year, Iran’s industry minister, Mohammad Reza Nematzadeh, told Germany’s Handelsblatt newspaper he hoped the dispute would soon be resolved – potentially by October – and that Iran’s mining sector was a priority for cooperation with Germany, as well as projects in the oil and gas industry, transport and food sectors. 

The German government acknowledged Nematzadeh’s remarks and has said that it may shortly offer fresh state export guarantees to companies that plan to do business with Iran.

Car makers Volkswagen and Daimler, technology firm Siemens, industrial gases and engineering group, Linde, chemicals producer BASF and aeroplane manufacturer Airbus are among those said to be in talks to enter the country. 

There are also some internal barriers to investing in Iran which have yet to be broken down or negotiated around. 

Hannam and Partners calculates that 90% of Iran’s mines are owned by the state, predominantly through IMIDRO. Last year, however, the Iranian government indicated that it wants more of its mining sector to be transferred into private hands as a catalyst for development.

In order to tempt investors, the Iranian government needs to place attractive incentives on the table, including accurate numbers illustrating the potential return on investment offered by mineral deposits.

Various surveys of Iran’s mineral deposits have been conducted simultaneously by different institutions, including IMIDRO and the Geological Survey of Iran. Nezafati said that these studies are ongoing and that the data they have compiled are reliable "in most cases", but for definitive statistics, he recommends referring to the USGS. 

The USGS National Minerals Information Center will soon release a special publication on the minerals industry of Iran, containing what it says is the latest available information on Iran’s metallic and non-metallic mineral resources. The body has declined to offer any preview of the information or opinions on Iran’s prospects for becoming a significant mineral producer, but the fact that the USGS felt that such an undertaking was worthwhile is encouraging.

In the meantime, although it seems largely meaningless to assess existing data – particularly given that many of the mine output estimates for Iranian minerals have remained unchanged for a number of years – some general conclusions can be made about where Iran ranks on the global scale of mineral producers.

According to the USGS’ 2016 Mineral Commodity Summaries, Iran ranked second in the world for gypsum production last year with mine output of 22m tonnes and supplied most of the gypsum used by the Middle East’s construction industry. The country was the joint sixth-biggest producer of barite (barytes) last year along with Kazakhstan, at 300,000 tonnes; the eighth-largest miner of feldspar, at 550m tonnes, and the same rank for clays (including kaolin, bentonite and ball clay), at 430,000 tonnes; and the thirteenth most significant producer of lime, at 2.8m tonnes.

Iranian output of cement, which is classified as a value-added mineral-based commodity, was 65m tonnes in 2016, equal with Indonesia as the sixth-largest manufacturer of the material globally.

Although the mineral resource information collected by Iranian institutions has been regularly updated, according to Nezafati, some practical difficulties present themselves in increasing the visibility of the country’s mineral potential to the rest of the world. "There are some useful statistical data from the Iranian National Organization of Statistics, but they are all in Persian," Nezafati said. 

Another dampener for Iran’s mining aspirations is the fact that these resources are set to become accessible at a time when the rest of the world is less in need of new sources of raw materials than it was a decade ago.

Iran currently exports iron ore for steelmaking to a handful of neighbouring countries, but a glut of iron ore in the global seaborne market has sent prices for the steel feedstock down since 2012 and they remain weak. Towards the end of last year, when iron ore prices hit all-time lows of around $35/tonne, many of Iran’s iron ore miners were forced to close because of margin pressures. 

A China-led revival in iron ore demand and prices in March-April of this year has allowed some mines to reopen, although their position is precarious since they cannot match the low costs and immense tonnages of large Australian and Brazilian suppliers. 

Iran’s government recently announced plans to restrict exports of unprocessed iron ore in favour of increasing domestic pellet capacity for the local steel industry. This is positive news for suppliers of iron ore pelletisation minerals such as bentonite and chromite, although no reliable figures on their consumption in Iran are currently available and the pressing need to generate export revenues means that this policy has yet to be put into effect.

Steel production is already well established in Iran and Iranian steel companies have been among the first industrial ambassadors to start touring international conference circuits to promote their sector to the rest of the world. 

According to Dr Ehsan Dashtianeh, deputy sales and marketing manager at Esfahan Steel Co. (ESCO), Iran exported a total of 21m tonnes of products in 2015, of which steel accounted for just 3% – a fraction of the 16.1m tonnes crude steel the World Steel Association (worldsteel) calculates it produced last year. In tandem with its policy to curb iron ore exports, the Iranian government has announced plans to expand its domestic steel capacity to 55m tpa by 2025. This will represent significant opportunities for refractories consumption, as well as fluorspar, limestone and other industrial minerals used in the steelmaking supply chain.

Dashtianeh believes the government’s steel target to be "ambitious" at best, and "unrealistic" at worst, but nevertheless insists that Iran’s steel sector is well placed to expand. 

"Iran is a good opportunity for steel – it has plentiful raw materials, cheap energy and cheap labour," he points out. "Iran is also a paradox, because it is both a rich country and a developing country – at present, its finished steel consumption per capita is around 200kg [compared to around 258kg in the US] and is generally low across our region [of the Middle East], so there is plenty of room for growth."

Main civil and criminal penalties for violating US sanctions against Iran**

Civil penalties

Criminal penalties

Sanctions enacted pursuant to the Trading with the Enemy Act (TWEA)

Fines of $65,000-1.08m per violation

Fine of up to $1m and/or imprisonment for up to 10 years.

Sanctions pursuant to the International Emergency Economic Powers Act (IEEPA)

Fine of up to $250,000 or twice the 

amount of the transaction

Fine of up to $1m per violation and imprisonment for up to 20 years.

**It is a criminal offence to export strategic or controlled goods that are subject to sanction and embargo regimes without a specific licence issued by the Export Control Organisation. Penalties can vary depending on the nature of the offence, and they include: revocation of a licence; seizure of goods; issuing of a compound penalty fine; and imprisonment for up to ten years.

Opportunities and opposition

With a population of 81.2m, according to 2014 census data, it is assumed that the cancellation of trade sanctions will enable Iran’s economy to grow and create an internal market for domestic businesses, as well as foreign exporters.

The most obvious near term area of potential growth is construction and infrastructure which, given the necessary investment, will generate demand for large volumes of steel and cement, as well as glass, ceramics, plastics and paints. 

Any surplus production of these materials can probably be exported to other countries in the Middle East, North Africa and Central Asia, markets which Nezafati believes will be receptive to Iranian raw materials supply, based on the trading success of the mining industry in neighbouring Turkey.

"Looking at a country like Turkey, which is less than half the size of Iran and has less diverse mineral resources and yet receives a much higher contribution from its mining sector to its national GDP, this suggests that Iran’s mining industry can be a major source of revenue in the future," Nezafati said.

But while there is no shortage of optimistic forecasts, the excitement surrounding the removal of economic sanctions against Iran has been outweighed by frustration both inside and outside the country at the slow pace of progress.

"The lifting of the sanctions, to my knowledge, has not yet shown considerable effects on the mining industry of Iran," said Nezafati.

"Sanctions against Iran" is generally used as a broad-brush term and implies that the country is subject to a single set of trade restrictions, but the reality is considerably more complicated.

Iran’s economy has been buckling under a broad range of restrictions introduced in separate tranches by the UN, the EU and the US. The UN sanctions have now largely been unwound, as has the EU embargo on oil imports. Some of the toughest US sanctions, such as the law that penalises international banks for doing business with Iran, have also been lifted with JCPOA.

But even once US nuclear sanctions against Iran have been removed, a series of restrictions will remain in place relating to Iran’s perceived support of terrorism and human rights abuses. In practice, this means that most countries will now be allowed to transact business with Iran, but US entities will still be barred from doing so. 

Doing business with any companies linked to the Iranian Revolutionary Guards (IRGC), a branch of the Iranian military formed after the country’s 1979 revolution and reputedly tasked with protecting Iran’s Islamic belief system, will also remain prohibited and the onus is on firms looking to deal with Iran to check that their proposed partners are not connected with the IRGC. This limits the field of possible deals, since the IRGC controls a considerable swathe of the Iranian economy.

The hesitancy of European banks, law firms and governments to make any bold moves into Iran is understandable, given the severity of the consequences for breaking the sanctions legislation. 

Penalties for infringement derive from national laws and can vary across various regimes, but as Robinson outlined, in general terms, "it boils down to the fact that any individual or corporate entity can be found criminally liable for violating sanctions legislation". 

This can mean jail terms of up to two years for individuals and unlimited fines for companies and people found guilty of sanctions-related offences. In corporate cases, company executives found to have authorised or neglectfully allowed the breach can expect to carry the can (see table).

Generally speaking, the remaining sanctions and licencing requirements for trading with Iran cover missile and nuclear power-related technology, components and materials. One restriction worth noting from an industrial minerals point of view is that the sale of graphite to Iran requires pre-authorisation. This is because graphite can be used in the nuclear industry to moderate reactors and presumably the legislation covers both the natural mineral and synthetic material, although there is nothing in the legal text to confirm this.

Iran2 

The skeleton of a commercial centre being built on the outskirts of Yazd, in central Iran,
in 2007. Construction is expected to be one of the first sectors to pick up following the
lifting of international sanctions against Iran. (Paul Keller, via Flickr)

The future of Iran

Nezafati remains hopeful that ongoing negotiations between trade ambassadors will eventually lead to investment in the Iranian minerals sector, but a lack of transparency makes it difficult to guess, and more importantly plan for, the outcome of these discussions.

Others are more upbeat. ESCO’s Dashtianeh said that following the removal of sanctions, companies like his are already starting to return to their old markets and trading partners.

"We are negotiating to sell beams and billets to European customers," he said, but admits that Iran’s industrial ambassadors still have to get up to speed with international business culture. "Iranian steel producers need to train professional marketing teams to develop new sales opportunities all over the world." 

Dashtianeh also stressed that more action is needed from European banks to facilitate this expansion. Since the lifting of sanctions, companies including the European arm of Tata Steel have said that they have so far been unable to get payments signed off for buying steel products from Iran.

"With respect to relations between the international business community and Iran, then there are several imponderables," said Robinson. "These include whether Iran continues to comply with its obligations or whether there will be a snap-back to full sanctions; whether the next US President takes a more hawkish view on Iran; and of course, how long the financial services industry’s nervousness about Iran business continues."

Robinson believes that in order for there to be a significant step forward in business between Iran, the EU and US, there will need to be a benign environment where businesses in each region can do business with confidence about which laws apply to them and certainty that this legislative regime will endure.

Nezafati is enthusiastic that once clarity and confidence in how the international community can do business with Iran has been established, foreign investors will recognise the opportunities latent in Iran’s resource sector.

"Being large – the seventeenth biggest country of the world – with diverse geology and mineral resources, huge amounts of cheap energy and human resources, as well as excellent global access infrastructure, which offers the potential for Iran to become a hub between three continents [Asia, Europe and Africa], and shipping routes via the Persian Gulf, Oman Sea, Indian Ocean and Caspian Sea, Iran is an attractive place for investment in the mineral resources industry," he said.

Aluminium in Iran

Iran currently operates three aluminium rolling mills: Aluminium Pars, Navard Aluminium and Hezar Aluminium, with a combined capacity of just over 100,000 tpa. Product mix at the mills is dominated by less complex alloys such as building sheet, standards and foil with operating rates of 40-60%. There are three primary aluminium smelters in operation at Arak, Bandar Abbas and Hormozgan with a combined capacity of approximately 387,000 tpa.

Source: Wood Mackenzie (estimate is slightly higher than IMIDRO’s)

*Conversion made July 2016