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Week Jun 29 - Jul 03, 2015

Chabahar Port: Window of opportunity for India

India and Iran have many common interests in Afghanistan. Both nations fear the adverse impact of a prolonged war and instability in Afghanistan on their security interests. Both also have growing concerns on the rising influence of Pakistan in Afghanistan and on the Taliban becoming a dominant force there, thereby leading to negative repercussions on their interests in Afghanistan.

From India’s perspective, Iran’s strategic location makes it a viable transit point to Afghanistan and Central Asia. Iran is at the crossroads of some of the key international transportation corridors, such as the North-South corridor, the East-West corridor (old Silk Road), the Transport Corridor Europe-Caucasus-Asia (TRACECA) programme and the Asia Land Transportation Infrastructure Development (ALTID). Both countries have been jointly involved in completing these projects to realise Iran's transit potential.
 

Chabahar Port holds strategic and economic importance

The Chabahar Port is one such vital project that has assumed significant economic and strategic importance. Charbahar in Persian means char (four) and bahar (spring) implying a place where all four seasons of the year are spring time. Located on the Makran Coast off Southeast Iran, the Chabahar Port provides Iran with direct access to the Indian Ocean. Furthermore, the port’s proximity to one of the world’s fastest growing regions underscores its strategic importance. Chabahar port is also at close proximity to some of the key ports on India’s west coast such as Jawaharlal Nehru Port, Kandla, Panjim, Mundra, etc, which widens the scope of trade between the two regions (exhibit :1). Development of Chabahar Port will not only serve the interest of Iran, Afghanistan and other Central Asian republics but is also of great strategic utility for India ensuring a sea land access route to Afghanistan bypassing Pakistan. The Chabahar port is also barely 72 km from Pakistan’s Gwadar port that was constructed by the Chinese. To counter the ubiquitous Chinese influence in infrastructure development in the Chinese neighbourhood, Chabahar port provides the necessary alternative route.
 

Close proximity of Chabahar Port to west coast of India

 Source: Industry sources, ICICI Securities
 

Development of the port at Chabahar will also potentially reduce the cost of transportation to the eastern parts of Iran, Afghanistan and Central Asia and would also reduce some of the pressure on the other Iranian port of Bandar Abbas. Furthermore, the fact that Chabahar, unlike Bandar Abbas, is located beyond the Straits of Hormuz adds to its significance. Around 35% of the world’s sea-borne oil shipments and 20% of the oil traded worldwide passed through the Strait of Hormuz. Iran fears that any blockade of the Straits of Hormuz would create challenges for its trade and commerce activities. In a scenario where the Straits of Hormuz are shut down, trade and commercial activities at Chabahar will remain unaffected. Hence, for Iran, development of Chabahar would act as another vital alternative for carrying out uninterrupted trade and commercial activity.
 

Chabahar Port to remain unaffected even if Straits of Hormuz is shut down

Source: Industry sources, ICICI Securities
 

 India to play key role in development of Chabahar Port

India and Iran have signed an inter-governmental MoU on India’s participation in the long delayed development of the Chabahar port. The MoU involves a joint venture (JV) investment of US$85.21 million that will allow operation of the port for 10 years. According to plans, Jawaharlal Nehru Port Trust and Kandla Port Trust will form a joint venture (JV) or an appropriate special purpose vehicle to lease two fully constructed berths in the first phase of the Chabahar port project for 10 years, which could be renewed by mutual agreement. The Indian JV will develop two berths at Chabahar, one to handle container traffic and the other a multi-purpose cargo terminal. As per industry sources, India has committed to complete the port project by December 2016.

The Chabahar port has a cargo handling capacity of 2.5 million tonnes (MT) a year, which Iran would like to increase to 12.5 MT. Iran has made the area adjacent to Chabahar town a free trade zone in addition to allowing transit of goods into Central Asia using the International North-South Transit Corridor (INSTC). Furthermore India, Iran and Afghanistan have also signed an agreement to give Indian goods, heading for Central Asia and Afghanistan, preferential treatment and tariff reductions at Chabahar. Additionally, a strategic partnership between India, Iran and Russia is intended to establish a multimodal transport link connecting Mumbai with St. Petersburg, providing Europe and Central Asia access to Asia and vice versa. Furthermore, many other notable investments are also planned, specifically in the road segment but are currently being held up, pending the finalisation of a nuclear agreement between Iran and the US.

Iran’s isolation is likely to be over once the end of sanctions against Iran happens and it reaches a deal with world powers. The scheduled deadline for reaching an agreement was 30th June 2016, but all parties agreed to extend it by a week, to 7th July, 2016. Between 2006 and 2010, the UN Security Council adopted six resolutions, four of which imposed sanctions, over Iran’s nuclear and missile programmes. Since 2012, the US and the European Union have also applied a series of unilateral sanctions that specifically target the energy and banking sectors. In early April, however, Tehran and six world powers reached a framework agreement aimed at paving the way for a final nuclear deal. The deal is aimed at preventing Iran from developing nuclear weapons in exchange for an easing of the sanctions. The US, one of the six world powers negotiating with Iran along with the UK, China, France, Russia and Germany, has said sanctions would be lifted in stages as and when the deal is implemented.
 

To also provide gateway to mineral rich Afghanistan

India plans to complete the Chabahar by the end of CY16 and assist Iran in augmenting the existing rail and road links with Afghanistan and Central Asia to tap the mineral-rich area. The Chabahar port can also provide access to Afghanistan's Garland Highway using the existing Iranian road network. Development of Chabahar port will also allow India to establish a direct road access to four major Afghan cities viz. Herat, Kandahar, Kabul and Mazar-e-Sharif. According to the US Geological Survey, Afghanistan is believed to be sitting on a geological gold mine containing around 60 million tonnes of copper, 2.2 billion tonnes of iron ore and 1.4 million tonnes of rare earth elements. As per industry sources, India has chalked out plans to build the 900-km Chabahar-Zaranj-Delaram-Hajigak railway line to evacuate iron ore from Hajigak iron ore mine in Afghanistan. The Indian government wants to build the railway project in addition to a highway, which will link an existing highway built by India's Border Road Organisation between Zaranj and Delaram in Afghanistan.
 

Chabahar-Zaranj-Delaram-Hajigak railway line to aid India to evacuate iron ore from Hajigak

                                               Source: Industry sources, ICICI Securities

 

In 2011, the Afghan Iron and Steel Consortium (AFISCO) had got three high-grade iron ore mines, having an estimated reserve of 1.28 billion tonne (exhibit:4). The seven-member consortium, which includes JSW Steel, JSPL, NMDC and RINL, devised a plan to set up in phases a 6.12 MT steel plant, an 800 MW power facility, create infrastructure for mine development and necessary infrastructure at a cumulative investment of US$10.8 billion over 11-15 years. However, on security concerns, the investment plan was later pruned by 75% to just US$2.9 billion for a 1.25 million tonnes per annum (MTPA) steel plant, 120 MW power plant and for creation of necessary infrastructure. The project has made little headway till date also because of the ongoing slowdown in the global steel sector.
 

Hajigak mines has high grade iron ore deposits

                             Source: Industry sources, ICICI Securities
 

 Balancing act for fruitful future

Iran was India’s second largest supplier of crude oil until 2006 but dropped to No. 7 by the end of FY14. Although India has reduced its oil imports from Iran, it has continued to maintain good relations with the West Asian nation, which has been reeling under economic sanctions imposed by the US and European Union. Despite the economic sanctions that the world powers (P5+1) have imposed on Iran and the fact that Indo-Iran relations have seen their fair share of ups and downs, there is ample evidence of India and Iran having maintained a steady trade tempo. Over the last few years, the two-way commerce has remained around US$14-15 billion. From FY12-14, Indian exports to Iran have climbed 90%, from US$2.4 billion to $4.5 billion, while imports are down 25.4%, from $13.8 billion to $10.3 billion. While crude oil and other petroleum products constitute 85-90% of India’s import from Iran, other key imports from Iran includes saffron, urea and fruits and nuts. On the other hand, India’s key exports to Iran include rice, machinery & instrument, iron & steel, pharmaceuticals, textiles and tea.
 

Bilateral trade between India and Iran

Source: Ministry of commerce, ICICI Securities 

 

With the development of Chabahar port, the trade between the two economies is likely to likely to enter a new era. On the one hand, for Iran, Chabahar Port will enhance trade activities and reduce the dependence on Bandar Abbas while, on the other hand, Chabahar port will aid India to circumvent Pakistan, in carrying out trade with Central Asian economies. The Chabahar port is likely to act as a key catalyst in improving economic ties in the region. While the construction of Chabahar Port augurs well for India and Iran, opening the trade routes to Afghanistan and Central Asia will also bolster economic ties with even other nations, resulting in a win-win situation for both India as well as Iran.

 
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