Iranian Steel Industry: Domination of Dispersed Direct Reduction Plants in an Ine cient Value Chain and a Droughty Environment


 Iran has a great advantage in the development of the steel industry due to its access to mineral resources and energy, extensive consumer market, and low-cost labor. In this article, the Iranian steel value chain in 2014-2016 is studied using the value chain analysis and material flow analysis. Accordingly, based on the statistics related to the input and output of each echelon in the chain, the material flow is analyzed throughout the value chain. Then the total added value from the chain, the share of different stages, and the various costs in each echelon are calculated. According to the research findings, weakness in the development of transportation infrastructure and poor geographical distribution of value chain units has led to the deviation of production from nominal capacity and frequent imports/exports throughout the chain. On the other hand, the upstream industries have a permanent advantage that deeply roots in easy access to the minerals and lower costs in transportation and energy. Finally, the pricing of intermediate products based on the ratio of steel ingot prices is criticized, while wage conversion and commodity purification contracts are proposed as possible solutions for the reduction of overhead costs.


Introduction
As the steel industry plays an important role in economic development, its production and consumption are considered as one of the main indicators of the development of modern countries and societies (Azadeh et al, 2010;Jozi & Majd, 2014). According to its capital-intensive and high-tech nature, the steel industry not only had a direct impact on the industrialization of Western countries in the past but also has played a critical role in the development of East Asian countries in recent decades, whereas the steel industry lead has shifted from the U.S. to Japan and later to South Korea (Kumar & Chadha, 2009;Lee & Ki, 2017).
Due to the geopolitical position and the access to natural resources of Iran, there has been special attention to the steel industry in this country since the 1930s (Analoui et al., 2000). Iran has a comparative advantage over some industrialized countries in the industry according to its rich iron ore mines, energy resources, growing consumer market, and young labor force (Shakouri, 2017). Also, such countries (including the EU members) supply most of the iron ore and energy needed to produce steel through imports and therefore are more vulnerable to the uctuation of the global price of iron ore and coal comparing to Iran (Dudin, 2017). Accordingly, in the last ve years, Iran has been the rst producer of iron ore and the second-largest producer of steel (after Turkey) in the MENA region (Reichl et al., 2016;Hastorun et al., 2016). The steel industry in Iran is governed by the government as 96% and 70% of crude and nal steel is produced by state-owned companies, respectively (Ansari & Sei , 2012) and the largest steel producers in the country are the state-owned companies (Mobarakeh Steel, Khuzestan Steel and Isfahan Steel with a market share of 47%, 23%, and 20% respectively) ( Value chain analysis is a useful tool in policymaking as it demonstrates a continuous view of the entire chain, depicts the activities of the value chain, and separates the total revenue of each rm in the chain. There are numerous justi cations for the analysis and understanding the value chain, including the need for systematic competitiveness due to the dispersion of production in the global system, the importance of production productivity on the path to success in the global market, and nally the necessity to understand the dynamics of the critical factors in the value chain ( The holistic view of the value chain on the various rent-creator components, shows which activities in the value chain can generate high revenue.
Relying on the value chain, it is possible to identify overly competitive activities and bottleneck activities, and thus balance the chain in the long run.
Value chain attention to power relations and institutions explains which and whose behavior needs to change for the emergence of new outputs or different distribution of the outputs.
Value chain analysis does not end at the level of the rm or group of rms and also pays attention to national innovation systems.
The role of value chain imbalances is evident in the problems in the supply of raw materials in Iranian steel mills. Also as a result of the lack of su cient information and delay in the feedback mechanisms for the decision-making of investors and managers, the problem of raw material supply is displayed in different nodes throughout the years. For example, at present, based on the production capacity of Iran's factories in the top three links of the value chain, there is a shortage of 1 and 7.3 million tons per year in the production of sponge iron and iron pellets, respectively, and a surplus of about 2 million tons per year in the production of concentrate. Also, the actual production in each of these nodes is very different from the nominal capacity, and the imbalance in the various nodes of the chain has forced the country to import intermediate goods and sometimes export upstream goods of the industry, which yields the least added value. On the other hand, due to the geographical distribution of chain nodes in Iran and the unfavorable situation of the quantity and productivity of the road transport eet, the exchange of raw materials and intermediate goods leads to bottlenecks in chain linkages. Also, water consumption in the steel industry is one of the other challenges facing this production chain due to the placement of various iron ore extraction and processing units in water-scarce areas; which makes it impossible to achieve the target of 55 million tons given the ongoing water crisis in Iran and the need for 98 million square meters of water to achieve the target. (Shakouri, 2017). Accordingly, the need to upgrade the value chain of Iran's steel industry in interaction with the global value chain becomes more apparent due to the need to increase the country's foreign exchange earnings and export planning of 15 million tons of steel products in 2025. Therefore this article seeks to evaluate the status of different nodes of the value chain of the Iranian steel industry in 2014-2016 (due to the international sanctions of the country in the next years) using the value chain and the material ow analysis.

Value Chain
The origins of the value chain notion go back to earlier concepts such as ller approach and commodity chain in the 1960s and Superior Performance" (1985) (Dekker, 2003), whereas the value chain is a framework for identifying the key activities of the organization through which the organization can achieve competitive advantage. (Hartwich & Kormawa, 2009). Value chain represents a range of necessary activities for the transfer of a product or service from conceptual de nition and initial idea to different phases of production (including the procurement of raw materials needed for production and a combination of physical transformations) and then further to the delivery to the nal customer and nally post-consumption recycling.
However in the real world, the value chain is usually more complex than the simple model mentioned above, and the simplest extension of the model is obtained by adding different products along the value chain. Also, the producers of the intermediate goods may present their products in different value chains, which increases the complexity of value chain analysis (Kaplinsky & Morris, 2003). Accordingly, other researchers have further developed the value chain approach by shifting their focus from one rm to a group of partner rms in creating related value. This de nition of the value chain includes a range of core activities (production, sales, and distribution) and support (planning, research and development, and human resources) for the transferring of a product or service from conceptual de nition and initial idea to different phases of production toward the delivery to the nal customer ( (Savino et al., 2015), the concept of value chain spread in other research areas in the form of concepts such as knowledge value chain (Lee & Yang, 2000), innovation value chain (Hansen & Birkinshaw, 2007;Roper et al., 2008)

Steel Value Chain
Steel is produced mainly through 1) blast furnace converter and scrap smelting technology or 2)direct reduction technology and electric arc furnace, although the production via recycling of steel scrap can be considered as an alternative as well (Johansson & Soderstrum, 2011;Mahjouri et al, 2017) (Fig. 1). While in 2018, 70.7% of the world's crude steel was produced by blast furnace method, 28.9% by direct reduction method, and 0.5% by other methods, Iran produces 90.8% out of total 24.5 million tons production via direct reduction due to its access to natural gas instead of coal (World Steel Association, 2019). The only company active in the production of crude steel by blast furnace method is Isfahan Steel Company (Ansari & Sei , 2012; Arabzad et al., 2017) and only two projects with this technology will be inaugurated soon.

Previous Studies of Steel Value Chain
The study of the value chain of the steel industry in different countries can be classi ed into two main clusters. The rst group of studies used the material ow analysis to analyze the ow of raw materials and steel scrap, optimize energy consumption or calculate the amount of carbon production along the chain. According to the results of this study, the main producing countries of iron ore are not among the pioneer manufacturers of steel and vice versa; Brazil's iron ore production in 2005, for example, was 10 times of its steel production, while Japan was the world's second-largest producer of steel without much domestic iron ore production.
The second group of studies has calculated the added value of the whole chain and its links. Since a signi cant part of production costs in each chain is allocated to energy, some studies categorized under this group also aimed to optimize energy consumption. Johansson  European countries, based on earnings before interest, taxes, and depreciation in the period 2008 to 2012, the pro t margin of the entire chain in Brazil decreased from 49-34%, while rose from 27-5% Western European countries, largely due to Brazil's advantage in accessing mines and the development of upstream value plants. Dahlström et al. (2004) and Dahlström and Ekins (2006;2007) analyzed the material ow and its economic dimensions in the UK steel and aluminum industry but neglected direct reduction technology as it's not popular in the context of the study.
Therefore the necessity of the present study can be emphasized from four aspects. The rst aspect is the growing importance of the steel industry in the Iranian economy, based on which the economic analysis of the value chain of the steel industry is necessary due to the low performance and productivity of the value chain of this industry in this country. Secondly, the development pattern of the steel industry in Iran has led to various environmental crises, especially the water crisis in some provinces of the country, and this issue has even challenged the stability of the industry as well. aspect of research necessity is the relative reliance of Iran's steel industry on arc technology comparing to the rest of the world as most studies have analyzed the chain based on blast furnace technology (such as Dahlström & Ekins (2006)). Thus the present study analyzes the value chain in the steel industry based on electric arc technology for the rst time.

Research Methodology
As material ow analysis and economic value chain analysis have been used simultaneously in this article, each is brie y introduced to further explain the research method.

Material Flow Analysis
According to Brunner and Rechberger, material ow analysis systematically examines the ow and storage of materials in various industrial sectors or ecosystems (Brunner & Rechberger, 2004) and leads to a better understanding of industry metabolism (Michaelis & Jackson, 2000a;2000b)

The framework of Value Chain Analysis for Iran's steel industry
The rst step in material ow analysis is to precisely de ne the system and determine its boundaries. In this article, the steel industry includes the industries, factories, and sectors active in the process of converting mineral iron ore into steel sections and pro les. In other words, the system starts from iron ore mines and ends in rolling and pro ling units. Supply units of other materials and equipment of the main value chain, such as factories producing ferroalloys, lime, refractories, parts, accessories, etc., which are somehow related to the main value chain, are de ned outside the system. This is because these units often operate in more than one industry (for example, refractory plants are also in the supply chain of the cement industry and other smelting industries). This step is equivalent to drawing a value chain in the value chain analysis methodology.
Annual production and sales in each link of the value chain are the key system data used in material ow analysis. In this study, inventory in each scal year is assumed to be negligible, although this hypothesis is not very accurate in some cases.
Also, the existing coe cients between different links in the chain are selected based on the monitoring studies of the comprehensive plan of the Iran steel industry [1] and are de ned based on the amount of raw material used in each echelon. In material ow analysis, the output of one echelon is either consumed in other echelons or stored/exported as surplus goods. On the other hand, the input of an echelon may is provided either through the previous echelon or from imports. Therefore, the total output of an echelon (E T ) is de ned according to equation 1: In this equation ϵ n and ϵ n − 1 are the amounts of production of the existing and the previous echelon, that are directly consumed by the chain; ϵ e is the amount of production that leaves through exports; m is the conversion factor of the material from the previous echelon to The new one (Table 1); I is the supply of echelon material through imports and nally, O is the entry of raw materials into the echelon from other sources. It is worth mentioning that in some cases, there is a slight difference in the values of input and output of each echelon, which is due to the error of the ring coe cients, the use of stored raw materials, or the supply of raw materials from other sources. However, the error is insigni cant as the recorded statistics are relatively consistent in the boundaries of the system. Step 1 1.65 1 Step 2 1.07 1 Step 3 1.54 1 Step 4  Step 1 1.5 1 Step 2 1.33 1 Step 3  1  1 As previously mentioned, the value chain of crude steel production is analyzed based on the nancial statements of companies during the period of 2014-2016. Due to the di culty of accessing the nancial information of all active companies, the necessary information is extracted based on the annual nancial statements of 2 active companies. Also according to the public nature of the development of the steel industry chain in Iran, the differences in the productivity of various factories are negligible. Furthermore, the value-added calculations for selected companies in each link of the chain are generalized to the whole link given the relatively uniform behavior of the factories in a link chain which is approved by the experts. The cost of production or cost of P t is calculated according to equation 2, which includes all costs related to direct materials (P i ), direct labor, and overhead costs (C i ).
The most important point about the calculation of the overhead costs in production is the consideration of the cost of mining royalties or property rights, which is determined in the budget law each year. In the calculation of the overhead costs, all costs related to administrative, general, sales, operating, non-operating, and income tax are included. The net pro t or revenue from the nal sale is calculated by the deduction of nal and overhead costs from the total sale (Equation 3).
Financial costs, which are paid to provide the cash ow, are not included in the calculation of overhead costs and other items.
Also, operating and non-operating revenues are not included in the pro t calculation, because it is related to the pro t of each company and not the pro t of the whole value chain.  Accordingly, the material value chain of the steel industry of Iran in 2016 is presented in Figure 2.
Then, according to the capacity of the production chain (determined by sponge iron as the bottleneck), the actual production capacity of the chain (without using alternative methods of material supply) was calculated (Table 3 for 2016). Thus, the actual material chain in the steel industry (without the use of alternative methods of material supply) in 2016 is presented in Figure 3.
For the value chain analysis, the nal and overhead costs and the operating pro t and loss of various products in different factories are calculated. Accordingly, Table 4 presents the calculation procedure of the mentioned indexes for the products in Chadormalu Mining and Industrial Company [2] in 2016. Then, based on similar calculations in all factories, the average production price (with and without overhead costs), sales price, and sales pro t per ton of each product are calculated (Table 5 for 2016). The mentioned results are summarized in Table 6. Accordingly, the added value in the Iranian steel industry chain in 2016 is presented in Figure 4.
Also, the performance of each sector of the value chain is compared in Fig. 5.

Conclusions
In this article, the value of Iran's steel industry is examined from the perspective of economic and material ow analysis to provide a holistic and accurate view of the steel industry and its dynamic components. Accordingly, the policymakers can design appropriate policies and interventions to improve the chain by the recognition of production bottlenecks and consequently, the roots of chain ine ciency. In this regard, the inaccuracy of information in the material ow analysis is partially solved by the concurrent usage of value chain analysis as the data is collected by different organizations for diverse purposes. Thus the simultaneous use of the aforementioned information validates the research results; although the researchers have also attempted to use more than one source for the required data as well. According to the ndings of the research, the following results is inferred: 1) The production costs of the intermediate products before steel are all cheaper than their imported prices, and in this regard, Iran has a competitive advantage of cheaper raw materials in the upper chains of the value chain. According to the signi cant share of shipping in nal costs of the industry, the advantage is due to the easy access to the products. Despite Iran's advantage in the early stages of the chain, the nal price of domestic production of steel is higher than the price of the imported steel, which indicates an increase in the share of overhead costs due to the production in low-capacity. Surprisingly, the difference between nominal capacity and actual production in different links in the chain is not much dependent on market demand or the excess/lack of capacity of the link. For example, although there was a lack of pellet production capacity in the last three years, the actual production of the pelletizing plants was less than their nominal capacity.
2) Weakness in transportation as one of the reasons for deviating from the nominal capacity, especially in the upstream echelons of the industry is due to the ignorance of the geographical proximity of iron ore processing plants to consumer plants on one hand, and the high volume of company-to-company exchanges in upstream industries which is Noncompliance with the transportation capacity. Accordingly, as an example, part of the country's iron ore processing capacity in the Sangan region has remained unused as a result of the di culty in the transportation of its products.
3) The difference between nominal capacity and actual production in different echelons does not have a speci c dependence on the added value of production in that echelon. For example, between 2014 and 2015, although the difference in added value in the smelting sector was very high, the productivity of the smelters was not much different. Also in 2016, the added value in the smelting sector has almost quadrupled compared to 2015, but the actual production of crude steel in these two years was 11 and 7 million tons less than its nominal capacity, respectively. 4) Despite the reduction of production costs in 2015 compared to 2014, the pro t of the steel industry decreased in 2015. Also, the smelting sector went through a di cult scal year with a sharp decline in pro tability and probably relied on government support to cover its costs.

5)
Although the share of pro ts of the upstream links in the value chain has not uctuated much over time, the share of downstream pro ts is dependent on the nal price. Indeed, the uctuations in nal price may lead to a lack of advantage in downstream industries, but upstream industries have a permanent advantage. Therefore, easy access to the minerals, lower transportation costs, and national advantages in energy costs provide a competitive advantage in the upstream industries.
6) Due to the bottleneck of the pelletizing and the lack of capacity for the exploitation of surplus iron ore and production concentrate, miners and iron ore processing plants are forced to export iron ore and concentrate with the lowest added value. In other words, the low productivity and the gap between actual production and nominal capacity in pellet production have led to the reduction of the generated added value of 12, 30, and 240 million dollars in 2014-2016, respectively.
7) The pro t margin of iron ore processing companies is signi cantly higher comparing to the reduction and smelting sectors due to the export of granulated iron ore and low required investments. As a result, Iran has invested deeply in the sector without moving towards further exploitation of these mineral assets.
8) Given the vacant capacity in different links of the chain, there is a great opportunity for wage conversion or commodity puri cation contracts to reduce the share of overhead costs in production. Accordingly, the sponge iron factories for example could increase their average added up to 8% in 2016.

9)
Pricing of intermediate products based on a ratio of steel ingot prices seems to be a failed policy as the added value is not evenly distributed throughout the chain. For example, although the total pro t of the iron ore processing plants has been relatively constant in the last three years, the pro t in the smelting and reduction sectors has varied according to the nal price of steel.
10) Iran's steel industry has suffered from severe value chain imbalances in the past few years. Due to the difference in actual production and nominal capacity in each part of the value chain, the amount of need or surplus in each link of the chain is different from what is determined based on the nominal capacity, and this difference has led to frequent imports and exports throughout the value chain. For example, Iran has imported more than 1 million tons of pellets and exported more than 13 million tons of iron ore and iron concentrate in 2015.
As mentioned earlier, the study of Iran's steel industry in 2017 -2020 requires attention to the intensi cation of international sanctions on Iran. Therefore, for future research, it is suggested to analyze the value chain of Iran's steel industry in this period with a similar approach, and then compare the results with this research to evaluate the impact of the sanctions on this industry. Also, the ndings of the present study can be further investigated by the analysis of the effects of the identi ed challenges in the value chain of Iran's steel industry (such as the inappropriate geographical dispersion of the chain components, the deviation from nominal production capacity, and the imbalance in the development of industry value chain).
Finally, considering the use of alternative technologies in the steel industry of most countries, the scholars can analyze the steel value chain in other contexts and then compare the added value of different steel production technologies. Added value of the production of one ton of each steel products in 2016 (thousand dollars) Figure 5