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Controversial instruction to regulate steel market
Minister of Industries, Mines and Trade Mohammad Shariatmadari has communicated controversial new instructions to regulate the steel market.
The new instructions that come in 11 points, 10 clauses and 22 notes center on 14 issues based on decisions taken by the Market Regulation Working Group and have drawn protest from steelmakers and steel industry experts.
The president of the Iranian Steelmakers Association, in a letter to the Ministry of Industries, Mines and Trade, has described the new instructions as flawed and said compliance with the new instructions will create a dual market system.
In the letter, the president of the Iranian Steelmakers Association has asked the minister to halt the passage and implementation of the instructions until they are reviewed and reformed and an expert meeting has been held between members of the association and ministry departments that oversee the industry. In another interview, he urged the government to forget about setting prices for steel products.
In a separate interview, Khalifeh Soltani, the secretary of the same association, criticized what he called government “interference through orders” and “wrong strategies” for market regulation and said unfortunately recent weeks have seen government officials hold meetings with middlemen rather than with producers to create palpable results in the steel market. That means middlemen have had a bigger role than producers in the recent faulty decisions which have disrupted the market and resulted in strange developments in the Commodity Exchange.
He then urged the Ministry of Industries, Mines and Trade to hold consultative meetings with the managers of steelmaking plants “before it’s too late”.
The first clause of the instructions requires all steel producers to sell all their products on the Commodity Exchange. Given the upstream documents of the establishment, experts believe such a decision is undoable both legally and conventionally. The new instructions also view any offering of steel products outside the Commodity Exchange as unlawful, thus subject to punitive measures.
The second clause says the minimum amount of steel products to be sold on the Commodity Exchange should be 20 percent more than the country’s real demand last year. Given that last year the growth in per capita steel consumption was no more than 1 percent and apparent consumption fell by 7 percent in the first quarter of the current year, why should the minimum supply be 20 percent more than demand? Besides, doesn’t such a practice cast doubt on the philosophy behind the existence of the Commodity Exchange, i.e. striking a balance between supply and demand?
The third clause of the new instructions suggests the base price of steel products should be in line with the following formula: global steel prices multiplied by the forex-rate determined by the Central Bank with a competitive margin cap of 5 percent. With that formula, even a 10 percent competitive margin would see a huge gap between prices on the Commodity Exchange and market prices, something which would create unreal demand and channel money into the pockets of middlemen. The same formula created a heated market in which there was demand on the market for 500,000 tons of Khuzestan steel ingots and competition for hot-rolled sheets of MSC at a price 31 percent above the base price. Of course, in a rare move the Commodity Exchange was forced to annul those transactions.
What is going on in the Commodity Exchange?   
According to the same clause any change in base prices and global estimates would be possible through reviews by the specialized market regulation committee, a condition that bears testimony to claims by steelmakers that the formula put forth by the ministry is not driven by expert feedback.
Point Nine of the instructions states that the buyers of steel products from the Commodity Exchange who do not sell their own products on the exchange, including producers of pipes and profiles, should let the government decide their prices and profit margins. Besides all purchasers of steel sheets on the Commodity Exchange are required to sell at least 75 percent of their products on the local market and, in case of exports, present the forex they earn at the Integrated System for Hard Currency Transactions known by its Farsi acronym NIMA (Note 1).    
Another important issue about the instructions lies in Note 5 of Point 2 which limits matching platforms. It fails to make it clear how the downstream industry production units – especially those involved in production of pipes and profiles, which have been procuring their raw materials through order matching as well as MSC capacity surveys and technical assessments – should adjust themselves to the new order. Have they thought about the survival of these plants or officials have found it sufficient to listen to the voices of a handful of people who identify themselves as representatives of the guild?
There are other flaws in the new instructions. Under the current circumstances, unilateral decisions will do nothing to improve the conditions of the market or the steel industry, for that matter; rather, they render the market more heated and jittery. A case in point was the nullification of the transaction involving Khuzestan Steel ingots and formulation of new requirements to tamp down demand. In practice, though, the move carved only 70,000 tons off a record 468,000 ton demand. The esteemed government is expected to consult with steelmakers and related guilds to work out better solutions that could restore calm to the steel market.

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5.5/10 (Votes 10 People )