Industry Trend Analysis - Foreign Players To Lead Upcoming Mining Boom - MAY 2016

BMI View: The removal of UN sanctions on Iran and the country's re-entry into the global banking system will boost foreign investment inflows into the mining industry. Nevertheless, while government incentives for foreign investment and low input costs will support investor confidence, possibilities of worsening international relations, bureaucracy and low global mineral prices will drag growth.

We expect the removal of United Nations (UN) sanctions on Iran in January 2016 to attract mining investors from Europe and Asia into the country. As such, Iran's mining industry will be one of the global growth bright spots over the next three-to-five years. In February 2016, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, where transactions are made in US dollars, reconnected a number of Iranian banks to its system, although links to U.S. banks have not been restored as the country retains sanctions that predate the nuclear crisis. This system - which provides the network for the majority of global bank-to-bank transactions - had isolated the Iranian economy during the sanctions regime, leaving the banking sector virtually cut off from the global financial system. We expect Iran's reconnection to SWIFT, especially to banks in the European Union, to boost foreign investment in the mining industry, while efforts are ongoing to eliminate U.S. banking sanctions as well.

Iran is home to some 68 minerals, with more than 37 billion tonnes (bnt) of proven reserves and 57bnt of potential reserves. These include considerable deposits in coal, iron ore, copper, lead, zinc, chromium, uranium and gold, most of which are underdeveloped. According to the US Geological Survey, Iran holds the world's largest zinc reserves, the ninth largest copper, 12th largest iron ore and 10th largest uranium reserves. We expect Iran's revenues from the mineral industry to surpass that of crude oil in a few years as mining deposits are increasingly tapped and developed, either through foreign investment or private players.

Mining Recovery Ahead
Iran - Mining Industry Value (USDbn) & Growth
e/f= BMI estimate/forecast. Source: National Sources/BMI

Iran To Be Hot Topic Among Foreign Miners

We expect investors from Europe and Asia to increasingly look to Iran for mining opportunities now that sanctions have been lifted, as the government has opened up USD29bn of mining projects to foreign investors since talks of lifting sanctions commenced. We expect the upcoming mining boom in Iran to pose upside risks to our mineral production forecasts, especially for iron ore, steel and aluminium, as most of the deals signed recently involve these metals. The Iranian government aims to produce 55 million tonnes (mnt) of steel per annum by 2025. Additionally, an increasing likelihood of more such ventures poses downside risks to our aluminium price forecasts as additional aluminium production from Iran will weigh on our initial expectation of the market surplus to be wiped out by 2018. We expect Iran's incursion into the mining industry to materialise completely in the next few years, eventually exacerbating oversupply in an already struggling sector hit by a sustained rout in commodity prices. However, we note that the country's rising domestic appetite for commodities will work to mitigate excess supply.

Infrastructure Growth To Boost Steel And Aluminium Demand
Iran - Construction Industry Growth
e/f= BMI estimate/forecast. Source: Bank Markasi (CR)

The recent foreign deals in the mining and metals sector in Iran are listed below:

  • In January 2016, China and Iran agreed to increase bilateral trade by more than 10 times to USD600bn over the next decade, with a USD4.5bn package on zinc, aluminium and minerals underway.

  • In February 2016, South Korean steel maker POSCO entered a USD1.6bn agreement to build a steel mill in Iran in order to tap rising demand from the infrastructure industry in Iran as demand slows in other markets. According to POSCO's research centre, South Korean steel makers controlled more than half of Iran's domestic market prior to the sanctions.

  • In the same month, Japan signed a USD10bn Memorandum of Understanding to develop mining projects in the country.

  • In March 2016, Dutch mining giant Mittal Steel Company N.V signed a EUR1bn deal along with Mahan Industries and Mines Development Company to establish iron ore mining and processing facilities in Iran.

  • Similarly, Italian metals and equipment manufacturer Danieli and France's Fives Group have also entered deals in aluminium and steel projects.

  • In April 2016, Indian state-owned aluminium maker National Aluminium Company Limited (NALCO) announced a joint venture with the Iranian Mines & Mining Industries Development & Renovation Organization (IMIDRO) to set up a 500 thousand tonnes per annum (ktpa) aluminium smelter plant in Iran, which will include a gas-based power plant . The result of the joint venture is expected to be highly cost-competitive aluminium, combining the advantages of low cost NALCO alumina and low cost Iranian energy. While India has continued trade links with Iran during the sanctions period through a rupee-denominated payment system, investment in the country will finally take hold now that sanctions have been lifted.

Iran Exports To Regain Some Market Share In China
China - Iron Ore Imports By Origin (tonnes)
Source: Trademap

Government Incentives Strong For Foreign Miners

Apart from the vast reserves of minerals and many unexplored deposits, we expect widespread electricity coverage and power costs amongst the lowest in the region to attract miners to Iran. Nevertheless, managed power outages from increasing domestic demand will cause ongoing hiccups. Miners will also benefit from the country's educated labour force and low labour costs. Moreover, a depreciating domestic currency against the U.S. dollar will continue to boost miner's returns as input costs become cheaper relative to revenues.

Lower Cost Of Labour Among Peers To Incentivise Investment
Global - Minimum Wages By Country (USD/month)
Source: World Bank, BMI

Government support for foreign investment will also attract miners. While Iran's mining sector has remained highly consolidated in the past and consists primarily of domestic and state-owned (90% of all mines are owned by the government) miners, the government is increasingly looking to invite foreign ownership. The government offers tax holidays and exemptions of 80-100% for new mining investments up to 20 years from inception. Cession of land in special mining zones, cession of mine royalty and extraction rights, insurance coverage during mine exploration, exploitation and mineral processing, infrastructure assistance (energy and water) and other benefits are also provided by the Iranian government to incentivise investment. Under the Foreign Investment Promotion and Protection Act (FIPPA) ratified in 2002, there are no restrictions on the percentage of foreign shareholding and ownership while companies are allowed to fully repatriate their principal capital, dividend and profits overseas. The act also grants equal rights and treatment to foreign investors as to local investors.

Depreciating Currency To Boost Mining Returns
Iran - Exchange Rate Against USD (Average Rate and Growth)
e/f=BMI estimate/forecast. Source: BMI

Limitations To Continue To Drag Growth

We expect after-effects of the sanctions to continue to drag on mining growth in Iran over the next two-to-three years. Due to the sanctions regime, the mining industry has seen severe underinvestment, with a crippling lack of updated equipment and machinery and most mining firms operating at 50-60% of capacity. Additionally, despite government support, inefficient bureaucracy and corruption will limit investor confidence, along with the possibility of worsening international relations. As the ultimate blow to significant and swift investment, low global mineral prices leading to declining profit margins will continue to pressurise both mining and metal companies.