The effect of fuel price increase in the budget bill on the profitability of steel companies / 54% profit margin of Mobarakeh Steel

According to Fars News Agency’s economic correspondent, according to paragraph “c” of Note 14 of the 1401 budget bill of the whole country, fuel for petrochemical complexes, refineries and downstream industries, steel recovery complexes and utility-related expenses including electricity, water and oxygen are equal to gas feed rates. Petrochemicals and cement units and other industries will be calculated at 10% of the said rate. About 944 thousand billion rials of revenue from the implementation of this line is projected.

* Last year, steelmakers consumed 11 billion cubic meters of gas

In a report entitled “The Impact of Rising Natural Gas Prices on the Profitability of the Steel Industry”, the Parliamentary Research Center stated: “A significant amount of the country’s gas is consumed in the steel production chain; This amount was more than 11 billion cubic meters in 1399, most of which is used in direct reduction units to produce sponge iron. Accordingly, the revenue from the reform of the price of natural gas in the steel recovery industry will be about 25,000 billion rials, which will be spent for the expenses envisaged in the table of Note 14 of the 1400 budget bill.

To study the effect of rising gas prices on the profitability of steel production units in the country, it is assumed that other costs as well as the price of the final product are constant. The price of gas in the steel industry increased in 1400 according to paragraph “i” of Note 1 of the Budget Law and was equal to 30% of the price of feed gas delivered to petrochemical complexes.

Thus, the average of this amount in the first 6 months of this year is about 7.928 Rials per cubic meter. This is while according to the proposal of the budget bill of 1401 and also the current price of natural gas (at least 10 cents per cubic meter) the price of gas for these units will reach about 30 thousand rials per cubic meter.

* The Impact of Budget Bill 1401 on the Profitability of Steel Complexes

The following table shows the change in the profit margins of the country’s large steel production units, based on the performance of the first six months of 1400, due to the increase in gas prices.

As can be seen in the table, the implementation of this clause has a significant impact on the profitability of these units, which play an important role in the country’s currency. Also, various factors such as the location of industrial units, the amount of having different links in the value chain, the type of product produced and the amount of product exports affect the reduction of profits of steel units.

Increasing other production costs next year, such as electricity, water, manpower salaries, maintenance costs, etc., will reduce the profit margin of the country’s steel units compared to the amount calculated in the table.

It is obvious that companies such as Isfahan Mobarakeh Steel Complex will have a higher profit margin than the general steel industrial units of the country due to having a major part of the production value chain and also the high added value of the product in this industrial unit (types of steel sheets).

* Parliamentary Research Center agrees to increase fuel prices for steel production units

The efforts of several generations of managers and industrial experts of the country have caused the value chain of the country’s steel to reach a level of industrial and managerial maturity today. Access to natural gas and electricity at subsidized rates has always been one of the incentives for investment in the country’s steel sector, but investment incentives in any part of the economy can not be without time and permanence, because it causes a continuous decline in productivity and thus reduces competitiveness. They become international level.

Considering the transition of the country’s steel sector from the initial growth period and achieving industrial and managerial maturity, it is expected that the continuation of development and production in this sector is possible without the need for government incentives and support, so the authors of this report suggest raising prices. Fuel of steel production units agrees with the 1401 budget bill. But the reform of energy carrier prices must also be done with a specific program and gradually and in advance so that manufacturers can increase the resilience of their industry to energy carrier price reform with managerial and technical measures.

Reforming the price of steel chain energy carriers is one of the steps that should be done in the comprehensive package of reforming the structure of the country’s steel chain. Reform of supply and demand system, liberalization of prices of whole chain products (through supply in commodity exchange and price discovery), reform of import and export tariffs and tariffs and support of export of steel chain products are other measures that must be implemented simultaneously to reduce vulnerability. The country’s steel industry is minimized. Without a comprehensive view of the need to regulate the country’s steel chain, cross-sectional and sectoral reforms of energy carriers will cause serious damage to the steel industry, affect exports, and disrupt the domestic market.

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