Aluminium in Iran – can the potential be realised?
18 November 2016 by Ken Stanford
Following the relaxation of sanctions, Iran, which has for many years been marred by political issues and civil unrest now has plans for fresh development of its infrastructure and industry – and the country’s aluminium sector in particular has been targeted for key support. However, the prospects for realising the considerable potential will be impacted by various challenges.
Aluminium is the world’s fastest growing industrial metal and Iran has the potential to be a major player in this accelerating, profitable sector, according to a recent presentation made in Iran by the London-based Commodities Research Unit Group (CRU). CRU’s raw materials expert, Michael Insulan, was speaking at a seminar staged at the Iranian Mines and Mining Industries Development and Renovation Organisation (IMIDRO), headquartered in Tehran.
According to Insulan, demand for aluminium has been growing at a fast pace. In order to consider Iran’s potential, it is useful to take a look at the regional and global context. The metal recorded a nearly 6% compound annual demand growth rate for the 2000-15 period – even topping iron ore, the global commodity market’s most sought-after material. Insulan believes aluminium will continue this global trend up until 2020, with the transportation sector acting as the main driver for growth for the metal. Iran is well positioned to capitalise of this development.
As far as the Middle East region is concerned, its aluminium producers have grown from minor players to global majors in less than 15 years. The United Arab Emirates, Bahrain, Saudi Arabia, Qatar, Oman, Iran and Turkey combined, currently account for close to 22% of the world aluminium output, spiralling up from less than 6% in 2000.
The regional producers enjoy lower energy costs compared to the global average, further supporting their competitive advantage.
Insulan believes that Iran has virtually all the essential factors needed to build a successful aluminium sector, such as access to cheap power, a qualified yet cheap labour force, required production technology and a growing domestic market.
As a great advantage, Iran benefits hugely from immense natural gas reserves and the increasing importance of indigenous gas as a key power source for the aluminium industry presents a great opportunity for the country.
It enjoys the cheapest gas prices in region – lower costs than for example, Saudi Arabia, Qatar, Bahrain and Egypt.
Iran also has one of the lowest electricity costs of all world aluminium producers, with cheaper power than China, India, Brazil, USA or rest of the Middle East and Gulf Region.
End user sectors growing
In addition to Iran’s great energy advantage, IMIDRO points out that development plans for increasing aluminium production up to 2025 are coupled with and driven by the rapid expansion and increasing demand of major end user industries. This is supported by Iran’s complementary partner organisations working together to drive sector advances and growth, including the Ministry of Energy, Ports & Maritime Organisation and Iran Railways Company.
In particular, the automotive and other transportation areas are targets for significant investment and restructuring. The national demand for cars is projected to reach 2.3 million units by 2025 and car production capacity is forecast to expand from the current 1.65 million units to 3 million over the same time frame.
In the construction market – including commercial projects, domestic housing, general urban development, and the country’s infrastructure – there is a huge and growing demand for buildings. Iran’s annual housing demand alone, currently around 1.2 million units, is forecast to reach 12-14 million by 2025. Some 20-50% of total private investment in Iran is dedicated to the housing market.
Similarly, the electronics market, currently worth over 10 billion dollars, is forecast to grow at a parallel rate, along with other key aluminium end use sectors such as packaging, beverage cans and general engineering.
Most of Iran’s downstream aluminium manufacturing industries – including sheet, profiles, castings, domestic utensils and so forth – at present operate at their minimum capacity and at less than 30% of their potential. One reason is due to the shortage of indigenous aluminium as the main material for production. According to IMIDRO, for Iran to satisfy growing domestic demand and retain or increase its share of international trade, which is currently less than 1%, it must commence new projects, in particular adding substantial primary aluminium production capacity.
As another pivotal supporting factor for overall industry development, following the relaxation of sanctions in January, the country is gradually regaining its position in international markets.
Bauxite and alumina considerations
But there are still some challenges to overcome. According to Insulan, energy and alumina procurement accounts for about 70% of total aluminium production costs and Iran, like other Middle Eastern producers, manages only a sparse bauxite and alumina output due to limited domestic reserves. This means a consequent dependence on alumina imports, for which Iran is in fact paying a premium compared to international market prices. According to CRU, the average price that Iran paid for alumina in July was close to $280 per tonne, while the global average aluminium price index stood at around $240.
However, imports are still less costly compared to Iran’s domestic alumina production. Each tonne of alumina costs $295 to manufacture at Jajarm Alumina Plant: The country’s only source of bauxite is the Jajarm Mine in the North Khorasan Province, with reserves estimated at less than 20 million tonnes.
According to CRU, Iran’s route to gain access to a cheap and sustainable bauxite supply would depend on economies of scale, and the country’s lack in this respect is the main cause of high Iranian alumina costs. While Iran enjoys the same cheap energy and labour advantages as its Middle East neighbours, its site operation costs in alumina production disadvantage competitiveness. On the plus side, the easing of sanctions has made it easier for Iran to develop its industrial infrastructure and seek access to modern, more efficient international production technology to boost efficiency, quality and margins.
Another route that could be taken is importing bauxite and processing it into alumina in domestic plants.
The country already has a deal with Guinea for bauxite procurement. Iran signed a 25-year agreement with the African country in 1992 to explore and extract 600 million tonnes of bauxite from its 13 deposit sites at Dabola and 12 at Tougue, both in central Guinea. The 50-50 partnership with the Guinean government was recently renewed for another 25 years, and the exploitation of the mine is set to begin by the end of this year.
Echoing Insulan’s overall views, Mehdi Karbasian – Chairman of IMIDRO and Iran’s Deputy Minister for Industry, Mines and Trade – has announced on several occasions earlier this year that Iran plans to invest some $11.4 billion on its aluminium industry to support increased production over the next 10 years.
Iran is currently the 20th largest aluminium producer in the world, he claimed, with its main smelters being the Iranian Aluminium Company (Iralco), Almahdi Aluminium Complex and the Hormosal Aluminium Company. But, the country needs greater output to meet growing national demand that is increasing by 10% annually, and its plans are aimed at lifting aluminium production to 770,000 tonnes this year and up to 5 million tonnes by 2025.
Independently, Iran’s great promise for the future was endorsed at a forum staged earlier this year in Tehran. Representatives from some of the world’s largest aluminium companies spoke at the Iran International Aluminium Conference (IIAC) conference with a sharp focus on the national industry’s potential for growth and investment opportunities.
Ralf Ohrrndorf, SMS Group’s technical sales manager, described Iran as the world’s “new aluminium market” and said: “Considering Iran’s long-term plans for aluminium, we will soon witness increased demand for aluminium in downstream industries.”
The SMS Group is internationally active in plant construction and equipment engineering for the steel, aluminium and non-ferrous metal industry.
“The auto and aviation industries’ demand for aluminium is on the rise and aluminium producers are competing to cut down production costs and win a bigger share of the market,” said Roman Berstenev, a spokesman from Rusal, the world’s second largest aluminium company. “Energy prices are the main determinant in this race, and Iran’s large energy reserves provide a considerable advantage,” he added.
Giovanni Nigris, deputy manager of Italy based Danieli, an international plant and equipment provider, stressed that a strategic geographic location, abundant reserves of energy, access to seaports and a talented workforce would doubtless help to realise the growth potential of the aluminium industry in Iran.