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Will Iran’s mining sector become key contributor to economic diversification?
Al-Monitor Pro Members
Dr. Bijan Khajehpour
Managing Partner, Eurasian Nexus Partners, Vienna, Austria
June 13, 2023
In early March, the Iranian government announced it had discovered its first-ever lithium deposits in the Western province of Hamedan, adding to its list of over 60 mineral and metal resources. The mining sector offers Iran significant opportunities to further consolidate an economic diversification process. The country has the needed natural and human resources, inexpensive energy and also access to regional and overseas markets through international waters. However, decades-long neglect and mismanagement have produced a deficient mining industry in need of a major overhaul. The motivation to develop this industry is high, as it would also reduce the country’s economic vulnerability to external sanctions, but many obstacles remain, especially the need for investment and technology.
- Iranian officials have repeatedly presented the mining sector as a significant source of export revenues in line with the process of reducing the economy’s dependency on petroleum exports.
- The potential is certainly high: Iran is among the top mineral reserve holders in the world, housing some 68 different types of minerals, 40 billion tons of proven reserves and more than 57 billion tons of potential reserves.
- There are close to 6,000 active mines in the country, producing 60 different types of minerals and metals. Iran holds the world's largest zinc and second largest copper deposits (more than 5% of the world’s total) and ranks ninth in iron reserves. It is also the largest producer of lead and zinc in the Middle East and the 14th largest producer of copper ore in the world.
- The recent lithium discovery underlined once more the significance of the country as a main source of strategic minerals. The new deposit is said to hold some 8.5 million tons of lithium.
- The key stakeholder in the sector is the government-owned Iran Mining and Metals Industrial Development Organization (IMMIDRO) that was established in 2002 — it is both the regulator and the umbrella organization of the main operating companies. As such, a very complex web of entities has been created undermining the interests of genuine private sector players.
- In 2004, the country's mining law was amended paving the way for private domestic and international investments in the mining sector. Furthermore, in February 2011 a number of detailed regulations and bylaws were passed to make the legal framework more investor-friendly, especially offering legal certainty with respect to licensing and equity ownership.
- Nonetheless, the industry remains dominated by the governmental and semi-state sectors and its development is heavily affected by external sanctions. Incidentally, on May 28 Iranian officials held the first meeting of a newly established “steering committee for transformation in the mining sector” which envisages promoting the expansion of the sector. Among its key goals is to “determine strategies needed to promote the role of mining in the national economy, complete the missing links of mining activities ... and create synergy between all public and private sectors to realize the goals.”
- There is a long host of shortcomings: For example, there is a ban on exporting raw minerals and domestic companies are obliged to add value to their products. However, industry insiders state that raw minerals are being exported in order to generate hard currency revenues. Deputy Industry Minister Reza Mohtashemipour stated in this regard: “Most exported items are materials that are not needed for processing inside the country — like low grade hematite iron ore.”
- Iran currently exports about $1 billion worth of mining products per month. The value of exports peaked in 2021, when the annual figure reached $14.5 billion. However, to sustain that level of annual exports, the sector needs investments and capacity building.
- In a normal year, the steel manufacturing value chain (iron ore, semi-finished and finished steel) makes up about 50% of the exports. On the other side, copper, iron and aluminum represent activities with export potential and a higher added value.
- Top export markets for Iranian minerals and metals are Russia, China, India and Turkey — all countries that are less influenced by US sanctions.
- Iranian authorities have envisioned to attract more than $70 billion of investment into the sector (including $15 billion in foreign investment), but it is clear that external sanctions and internal impediments will render such investments impossible.
- According to industry sources, importation of the needed equipment and machinery is one of the top priorities — also hampered by sanctions.
- In December 2022, representatives of the business community communicated the challenges of the sector to officials. Key challenges discussed were: “Weak transportation infrastructure, insufficient supply of water and energy, bottlenecks in the value chain of the industry, inefficient government system in licensing and allocating resources to the sector, insufficient attention to environmental issues and lack of investment activity.”
- Consequently, the mentioned steering committee will face an uphill battle to “transform the mining sector” as long as external sanctions and internal structural deficiencies are in place.
Scenario 1: Mediocre performance relying on domestic technologies
One scenario is the continuation of the status quo, i.e. a sector mainly reliant on domestic capacities. This means that there will be limited investment in infrastructure and only opportunistic development of the industry. Because of the abovementioned rent seeking nature of key stakeholders, mainly semi-private entities will be attracted to mining projects and their investments will be more focused on their own interests and not on a comprehensive strategic development of the value chain. As such, some subsectors will be more developed because of the availability of export markets. All in all, the industry will remain underutilized.
Scenario 2: Mining sector stagnates due to lack of investment
If external sanctions and internal bottlenecks continue, lack of attention and investment will lead to further stagnation of the sector. Some of the subsectors will grow based on growing domestic and regional demand, but insufficient development will lead to the sector losing significance in the economy.
In this scenario, the steering committee may decide to privatize a number of entities, but the genuine private sector would not show much interest, leaving the main enterprises to the semi-state foundations.
The most likely scenario is that Iran will engage Russian, Chinese and other Asian companies to invest and develop its mining sector. This strategy won’t introduce the latest technologies into the industry, but it will allow Iran to monetize a larger section of its mining potential and increase the contribution of the sector to the economy. The main driver of this strategy will be to reduce the dependence on petroleum exports.
To achieve the above, the authorities will have to clarify a number of legal and commercial issues, but considering the fact that the rent seeking culture will continue, it is most likely that the foreign entities will partner with semi-state enterprises that have been active in the sector. This would mean that Western companies will remain hesitant to engage the sector, even if the current sanctions are lifted.
Bijan Khajehpour is the managing partner at Eurasian Nexus Partners - eunepa.com - a Vienna-based international consulting firm. He also sits on the board of the Europe Middle East Research Group. He is considered an expert on geopolitics of energy and the Iranian economy and energy sector.
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