Iron ore industry in Iran faces three major problems; royalty payment, governmental controls on pricing and export duty.
Royalty payment for new Persian year (started 20th March 2017) is unchanged in comparing to prior year according to proposed budget for this year which government has provided to the parliament. Royalty payment`s formula contains different features as below: (It has been determined by IMIDRO as we discussed it in royalty patent in Iran article)
- 20% of sale of raw and granulated iron ore
- 16.5% of sale of concentrate
- 13% of consumed concentrate for producing Pelletizing
- 10% of consumed concentrate for producing Spongy Iron
Obviously, miners who have development plans in order to complete production chain could pay less royalty payment according to lower coefficients. In order to use these advantages, big iron ore miners like Chadormalu designed to augment its facilities to produce 300,000 tons more of steel in this year. In 2016, Chadormalu and Golgohar companies (two biggest iron ore companies in Iran) pay 62.5 and 28.8 million Dollars respectively as royalty payment and their difference is mostly because of their different amount of products. Main products of Golgohar and Chadormalu are pelletizing and iron ore concentrate respectively, by this way, Chadormalu has to pay more royalty payment according to higher coefficients. It is highly comparable to 500 million Dollars total sales for Chadormalu and 675 million Dollars for Golgohar. Royalty could be determined outrageous when counted on net profit of these companies, 163 million Dollars for Chadormalu and 230 million Dollars for Golgohar in 2016.
The second predicament of iron ore miners is governmental interference in pricing. In my opinion, the government is not enough impartial in treat of miners and steel makers by this pricing strategy because the price of iron ore depends on the price of traded billet of Khouzestan Steel Company on the Iran Mercantile Exchange rather than the international iron ore prices. The price of Pellet and iron ore concentrate are 21.5% and 13% of billet respectively, which is generally much lower than traded prices in international markets.
The table below shows the iron ore prices in China and traded iron ore concentrate in Iran. It shows the price is mostly constant in Iran comparing to international market according to the price determined by IMIDRO.
In recent months, iron ore prices were surged and reached around 90 Dollars per ton in the international market and exported iron ore concentrate was trading at $81/ton for Bandar Abbas FOB while it traded almost 40$ per Metric Tons in domestic market according to Financial Tribune News. This kind of pricing do not consider all economic aspects. Although iron ore is one of materials in steel production process but these two industries have lots of incompatibility in terms of facilities, technology, capital structure, capital requirement and mostly in their different kinds of risks which they are exposing to. Mining encounter many risks that threaten the entire profit. Risk in exploration and depleting of natural resources could load big costs that make the whole plans unprofitable. Consequently, correlating pricing of iron ore to steel is not logical.
The last problem is export duty. Government has a plan to set a duty on iron ore export to prevent it from its dumping to Europe because of highly growing of steel exported to European Union recently and they accused Iran of dumping in steel industry. Government has announced that they will abolish duty export this year because Iranian steel makers do not want to lose their potential customers after lifting of sanctions. Setting export duty on iron ore concentrates is not a fair decision because of the way of estimation of iron ore prices in Iran.
To recapitulation, royalty payment, governmental pricing and export duty are most concerned matters in iron ore industry. Newly, Securities and Exchange Organization of Iran plans to provide new formula for iron ore pricing that take into account all economic factors related to iron ore pricing and determine rational profit margin for relevant industries. Without this new formula, eliminating of the gap between international iron ore price and Iran’s would not be possible, by this way, Ministry of Industry, Mine and Trade declared implicitly approval about this plan that could attract foreign investment in iron ore mining which has very low risk considering the current condition in Iran.
