“Small and medium-sized producers cannot compete on the IME”
Chairman of the Board of Parang Mes:

“Small and medium-sized producers cannot compete on the IME”

Most domestic producers have two copper alloys at the most. Given the wide variety of copper alloys, how is the rest of demand for alloys supplied? With the prices of copper, chrome, nickel, etc. are domestic operations and investments in the production of copper alloys economically justifiable? How do small and medium-sized businesses supply their raw materials? For this Insider Talk, we have interviewed Hamid Afkari, the chairman of the board of directors at Parang Mes, the only producer of special alloys in Iran, in order to investigate the effect of price fluctuations of copper and issues in the production of alloys.

Please give us an overview of your company’s products.

We have three casting plants to produce copper, brass, and aluminum RBS (rods, bars, and sections) called Parang Mes, Toos Berenj, and Aluminum Ring. Producing alloys requires technical knowledge; we produce a wide range of alloys in our three plants.

What copper alloys do you produce?

Most section producers have two alloys at the most. Our alloys are called aluminum bronze; we produce brass containing aluminum, manganese, nickel, and chrome. The process requires special knowledge and technology which is not available to many producers. These alloys are used in car parts. We are the only producer of these RBS in Iran, so our products are different from other companies. I am the first producer of brass RBS, and we produced copper alloys even before Bahonar. We have been producing brass, bronze, tin bronze, and aluminum bronze since 1981. We are also the only producer of copper-chrome-zirconium alloys, which is used in welding car body parts or barrels. Our alloys comply with global standards. In addition to brass, we produce bronze, which is used in manufacturing industrial machinery. We have about 15 types of alloys, each with their own unique applications.

There are different bronze alloys; the most common is called gunmetal, containing about 85% copper, 5% tin, 5% zinc, and 5% lead. Another type of bronze alloy used in machinery gears contains 90% copper and 10% lead. Bushings for pumps need good lubrication, so bronze alloy containing 15% lead, 10% tin, and 1%-2% phosphor and nickel is used. We produce bronze alloys based on customers’ orders and applications. Bronze has a wide range of alloys. Bronze alloys contain 6%-14% tin.

We are, in fact, producers of raw materials for other industries. Copper and zinc are the major raw materials used in our production; other raw materials such as copper-chrome-zirconium, copper-manganese, and copper-silicon alloys are not produced domestically. Not all countries have these alloys, so we rely on imports from Europe. Their prices are very high, further amplified by issues of foreign exchange rates. We don’t consume much, but even this little consumption requires massive capital. In addition to exchange rate issues, sanctions have an impact on prices; these alloys cannot be imported directly and have to go through a number of other countries before they can be imported to Iran. Thus, transportation costs are added to the already high prices.

Does Iran have the production technology for copper and alloy RBS?

Technical knowledge, special machinery, and equipped labs are required in the production of special alloys. Bronze RBS was imported from Italy and Japan before we started production, but since our first production in Mashhad, there is no demand for importing these products. To be fair, other companies have high-quality products as well. We were members of Germany’s Copper Institute and had educated friends and colleagues in Austria who kept up to date with the latest technology. Our production was professional right from the beginning. We reverse-engineered machinery for RBS production and built the continuous casting production line to produce billets; we offered all these technologies to other companies. We now have 10 major plants that produce high-quality spotless brass RBS.

Do you have any problems regarding raw materials?

Supply shortfall of raw materials is a serious issue for producers. Given the great competition on the IME, we can’t meet our demand for raw materials. Prices spiraled since March 2019. Even though we placed orders in the IME, we have not been able to buy one kilogram of copper. Last week three thousand tonnes of copper was supplied to the IME, all of which was bought by three companies. Smaller companies suffer losses or even face shutdowns when they can’t compete with large companies for their raw materials. We need about 20-40 tonnes of copper per week, which is nothing compared to demands by large companies. We are hardly making ends meet.

What are your challenges with shortfall of raw materials?

We are not the only company affected by raw materials shortage; companies that use our products will also suffer losses. If our production stops, so will the production of SAIPA and Iran Khodro. No other company makes our products. The two car companies have bought all our production since the start of raw materials issues. We will have to raise our prices to match the price of copper in the free market when raw materials are not available; car manufacturers will in turn raise their prices to offset their costs and survive. We are entitled to buy from the IME, but we can’t compete with large companies to buy cathode. There should be a plan to solve these problems.

Can automotive manufacturers import their raw materials?

Importing is not preferred for a number of reasons. Auto manufacturers prefer buying from domestic producers because they offer payment plans, while importing requires instant payment and imported goods can take three months to be delivered. Transportation costs further deter car manufacturers from importing. Moreover, the high quality of domestic products obviates the need for importing. In short, buying domestic products is better for automotive manufacturers in every regard.

What do you propose as a solution to raw materials problems?

I think the IME should allocate 200 tonnes out of the three thousand weekly supply to small and medium-sized companies so that they won’t have to buy their raw materials on the free market. If this goes on, more and more companies will face shutdown. Fluctuations in the price of copper are another problem; we are not expecting prices to ease, but we hope that fluctuations will be stopped by stabilizing the exchange rate. Our working capital requirement has tripled year on year, from three billion to nine billion tomans. We have transferred part of that capital burden to our customers and the other part to our shareholders. Private companies can cooperate to solve their own problems as long as the government does not interfere.

What can replace cathode as raw material?

We have to use wirerod as raw material, which is much more expensive and has been processed; it is not economical at all. It takes money, energy, and human resources to convert cathode into wirerod. When we use wirerod to replace cathode, all of that is wasted because of unsupervised distribution. The quality is not affected, but why should we let it all go to waste?

Can scrap be used to produce copper and alloy RBS?

Yes, we also use scrap in addition to wirerod to produce RBS. But acquiring scrap is rather difficult and we can’t use just any scrap because of the sensitivity of alloys. Only bare bright copper can be used. Availability of copper and scrap is the major problem in our field of industry. Most other companies can’t even participate in the IME and use only scrap as raw material.

Other than raw materials, what problems do producers have?

VAT is a problem that we are dealing with. Consumers should pay VAT and producers should then pay their share; but actually the reverse is done in Iran. When we calculate VAT on our invoice, customers cancel their order or refrain from divulging their personal identification details. With the current price of copper (87 thousand tomans per kg) and zinc (36 thousand tomans per kg), the price of brass is 65 thousand tomans; the 9% VAT equals six thousand tomans per kg, while producers earn three thousand tomans. This VAT method is far from practical. The Tax Administration levies VAT only on producers. Producers pay VAT when they buy raw materials, but they can’t charge their customers for VAT. But since we work with large companies, we declare VAT on official invoices and receive 9% from customers. Other producers, however, are under a lot of pressure. The government only considers its own interests in implementing tax laws. These administrative inefficiencies are killing the industries.

Could you briefly explain the production process of copper and alloy RBS?

Raw materials are melted in furnaces; samples of the molten material are analyzed to determine their composition. When the alloy chemistry is approved, it is transferred to a large container furnace and is converted to tubes or RBS through continuous casting. More common alloys such as bronze end here, while brass and aluminum brass will be transferred to extrusion mills.

How important is it to you to invest in personnel training?

Technical knowledge is particularly important in our business. We have training courses for our staff to keep them updated. To be fair, we have capable, qualified personnel who are so experienced they can visually estimate the temperature of molten material, which more often than not turns out to be correct after analysis; this is essential knowledge in alloy making. Moreover, we have received the ISO 2015 certificate.

What is the pricing basis for copper and alloy RBS?

Copper price is extremely high on the free market, because it is smuggled in a superficially legal way. Competition for buying copper has intensified due to the exchange rate differential between the NIMA rate and the free market rate. The brokers who are seeking to benefit from the rate differential will not be hurt by the high price of copper, while real producers are under a lot of pressure to keep their operations running. In fact, the price of copper is the basis for pricing our products, which is itself driven by smugglers. Copper was supplied to the IME at 59 thousand tomans per kg, but for no apparent reason it was traded at 73 thousand tomans. Price hikes are bad for producers as well as for the economy. After buying cathode from the IME, fake producers (read smugglers) convert it to low quality products such as billets and wirerods and export them, which are then re-melted to be used as raw materials. This is damaging the business of RBS producers by exporting raw materials.

Which industries are major consumers of your products?

Our products are mostly used in the automotive industry, pumps, steelmaking, and industrial machinery. We usually produce on order. Automotive manufacturers buy 60% of our products. Since the automotive industry will never stop, I expect demands to continue growing.

Given the high quality of your products, do you also export?

All our products are sold in the domestic market; nothing is left for exporting. Sometimes we barely manage to meet domestic demand, much less export anything.

Does the government have any incentives for the industry?

We have never expected any support from the government, nor have we ever sought after incentive plans. We have always tried to be independent and rely on our own resources.

What is your production capacity?

We have an annual capacity of two thousand tonnes, but our production never exceeds 800 tonnes due to the shortage of raw materials; our utilization rate is 40% at best. Thus we are aiming to produce special alloys to make production economically justifiable and we have been workings towards this goal for a few years. Of course, we can also produce brass RBS that are used in faucets, but the competition and the market are tight.

Is yours a polluting industry?

Furnaces used to cause a lot of pollution because they used oil, but now all equipment and furnaces are powered by electricity. We also have a pollutant absorbent system that prevents production pollutants from entering the environment. We collect melting fumes in order to keep the air clean.

How effective are producers in improving the economy?

The only way to save the country from the current economic conditions is to support production. Unfortunately, our politicians are not in the least concerned about production; supporting producers is nothing more than a slogan used by politicians on TV and in the parliament. No government officials are from the manufacturing sector and they obviously are not aware of the effect of production on the economy. The private sector is dealing with a lot of problems that will lead to its destruction, which will engulf the whole country.

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