“Obtaining scrap and sponge iron is a challenge”
CEO of Arfa Iron & Steel in an Interview with FelezatOnline:

“Obtaining scrap and sponge iron is a challenge”

With two DRI plants, Arfa Iron & Steel has been among the leading companies in the industry over the past few years. The company’s steelmaking plant produced over 800 thousand tonnes of steel blooms to exceed its nameplate capacity. Obtaining raw materials, especially ferrous scrap, has been a major concern for domestic steelmakers for years. We have interviewed Alireza Khayat, CEO of Afra Iron & Steel, for this Insider Talk to get more information about the management of raw materials in the production line.

While most steelmakers cannot reach full capacity due to the weak availability of raw materials, Arfa Iron & Steel has even surpassed its nameplate capacity. Can it be concluded that your company does not have problems regarding raw materials?

As a matter of fact, our problems started after we reached full capacity. We have to production lines. One is the DRI plant with Mirex technology; with a capacity of 800 thousand tonnes, the plant was launched in 1391 (2012) to supply raw materials for the steelmaking plant. The other one is a steelmaking plant launched in 2013, with a capacity of 800 thousand tonnes. The main raw material we need for the plant is pellets. Chadormalu, a major shareholder owning 43% of the company’s shares, has supplied 800 thousand tonnes of pellets per year for our DRI plant.

The steelmaking plant exceeded its nameplate capacity last year by 6%, producing 853 thousand tonnes. To operate at full capacity or even go beyond it, we need about 1.2 million tonnes of pellets per year, 400 thousand tonnes more than Chadormalu’s commitment. We have not been able to fill this gap for raw materials yet.

How have you tried to get around this problem?

Like many other industry participants, we resorted to buying raw materials from brokers and traders when producers failed to supply us.

Are there any government incentives or loans to help you with buying so much pellets?

No, unfortunately. The economic and manufacturing system is neither completely based on supply and demand, nor completely official. The ministry interferes in parts of the production chain given its responsibilities; for instance, they require us to supply 20 thousand tonnes of ingots to the IME so that the demand of rolling mills will be met. But the problem is that when steelmakers like us don’t have enough raw materials for production, the ministry is not held responsible and leaves us to our devices to deal with the issues on ourselves. Meanwhile, imports of pellets are not possible due to the factory’s location. When such a leading company cannot get raw materials from producers, what choice does it have other than contacting brokers and middlemen?

We expect the ministry, relevant organizations, and the officials to consider the whole steel industry when interfering in the market. Rules cannot be devised for some parts of the industry while others are ignored. If they can’t have such a comprehensive approach, they should just leave the market as it is so that supply and demand will reach a balance. Moreover, directives and rules should be guaranteed to be implemented and the officials should supervise their implementation; tariffs were supposed to be placed on exports of pellets and sponge iron since the start of Mehr, but the month is almost over now with no result from the decision. If the exports of pellets and sponge iron are not stopped, we might see output decline this year.

Can you use scrap to make up for the shortfall of sponge iron in your steelmaking plant?

We always use an average of 5% scrap at best in our production. Induction furnaces can use scrap as the main raw material in smaller volumes, but the basic raw material for Arfa is sponge iron. We produce our own sponge iron, so we use scrap only in production. Using scrap is just as challenging as obtaining it. The scrap feed for the furnaces can occasionally be increased by 2-3%, but that is not enough to meet our need for sponge iron.

Why is there a shortfall of scrap supply?

Consumer industries are not very active in Iran. The production of scrap depends on industrial activity and construction. Industrial development has been under further pressure due to the sanctions. Even vehicle scrapping that used to meet part of the demand for ferrous scrap has recently been stopped. Admittedly, getting scrap as the main raw material for large furnaces is almost impossible.

How do you obtain your scrap?

We use an average of 5% scrap in our furnaces; given the one-million-tonne annual production, that means about 50 thousand tonnes of scrap per year, which is not very significant and can be obtained from multiple sources. Car scrap, scrap from rebar mills, and any other scrap suitable for steelmaking is used after being processed.

How is scrap processed?

Scrap on the market cannot be expected to be of standard quality; there are impurities that need to be removed. The processing involves the removal of polluting and dangerous materials as well as the enhancement of quality. Steelmaking plants usually consider processing scrap before using it.

Is scrap processed in a special part of the factory?

No, we work with a company that supplies scrap. The company has been established near our factory with personal investment by its owners; it buys scrap from small sellers, which it processes and sells to us with the quality approved by us.

Can scrap be imported to cover the shortfall?

That can be a good idea, but everything must be taken into account, including its economic feasibility. If we are to make up for the shortfall of raw materials by ramping up the consumption of scrap in furnaces, scrap needs to be imported from countries such as Pakistan, which supplies industrial scrap. Meanwhile, we should bear in mind that for companies like Arfa that are located in the center of the country, it costs a lot to transport imported scrap; it is practically not economical.

Having reached full capacity, what are your future plans?

Filling the gap for sponge iron will definitely be one of our major plans. We are also ramping up the capacity of the sponge iron plant from 800 thousand tonnes to 1.1-1.2 million tonnes per year. Regarding steelmaking, we are making some relatively low-cost changes to the plant, which we hope will result in a capacity of one million tonnes. Naturally, when production grows 25%, the 1,300 staff will also increase by 10% to make a contribution to domestic employment as well.

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