Iran-India $2.5 bn steel deal totters as end of sanctions looms

* $2.5 billion, three-year export deal agreed in June 2014

* Iran has complained of irregular shipments

* No exports since Iran stopped paying in September - source

* UN nuclear watchdog poised to pave way for lifting of sanctions

* End of sanctions will allow Iran to strike alternative deals

India's largest-ever steel export deal, struck with Iran in 2014 to allow it to buy the metal without violating Western sanctions that are now set to end, has become mired in a dispute that has seen no payments made or shipments delivered since last fall.

The impasse underlines how Tehran is taking a more assertive posture in its dealings with trading partners as options open up for business and it looks to strike better deals.

Iranian Gas Engineering & Development Company (IGEDC) has written to Indian state-trader STC India Ltd complaining that steel shipments have been irregular and far below terms set out in the $2.5 billion contract, according to a letter seen by Reuters.

It also said in the letter, dated late last month, that it would like to deal directly with Essar Steel India Ltd, which was supplying the steel to STC for export, if the state trader did not restart regular shipments soon.

"We strongly urge STC to either be more flexible to enable regular and faster shipments or allow the contract to be dealt directly between IGEDC and the manufacturer," it wrote.

The complex arrangement was put in place to allow steel exports without violating sanctions that prevented private Indian companies from dealing directly with Iran.

That is set to change, with Western sanctions expected to be lifted under a historic nuclear deal struck in July between Tehran, the United States, Britain, France, Germany, Russia and China, giving Iran far more flexibility to pursue deals.

A source familiar with the matter said steel exports had been halted since Iran stopped making payments in September.

IGEDC's managing director's office did not return calls seeking comment.

Essar Steel and STC did not have any immediate comment.

Steel deal

Under sanctions, India has been one of the few countries willing to do business with Tehran.

"When this steel export deal was done, Iran had virtually no choice than to accept it, as sanctions isolated it from the world financial system," said Robin Mills, chief executive of Dubai-based Qamar Energy.

Mills said the end of sanctions would open a wider circle of trade partners for Iran, such as those from Europe and China.

"So Iran would like to diversify and buy steel from other players instead of having a huge contract with India," he said.

Iran expects the UN nuclear watchdog to confirm on Friday it has curtailed its nuclear programme, paving the way for the unfreezing of billions of dollars of assets and an end to bans that have crippled its oil exports.

India is the top oil client of Iran after China, and Essar Oil, an affiliate of Essar Steel, is a key customer of the National Iranian Oil Co (NIOC).

The three-year steel contract was struck in June 2014, after the Indian government, worried about its trade balance with Iran and looking to boost exports, directed trading firms STC and MMTC Ltd to help facilitate business for Indian companies.

Indian refiners have been paying 45 per cent of their oil dues to Iran in rupees. These rupee-funds are used by Tehran for importing goods, including steel, from New Delhi.

Blame game

The steel deal ran into trouble in September, when Tehran failed to clear dues of about Rs 4.5 billion ($66.73 million) for steel exported to it by STC, the source familiar with the matter said.

STC was supposed to supply 1 million tonnes of steel in the first year of the contract, which is for a total of 2.5 million tonnes of steel plate and coil over the three-year span.

By September of last year, however, STC had supplied only about 450,000 tonnes of steel.

In its December 22 letter, IGEDC told STC that it needed to expedite supplies and make them regular.

"Not only have the deliveries been irregular, we have not even received" the minimum quantity of 50,000 tonnes per month in most months, IGEDC wrote.

The source said STC supplied the steel to Iran based on availability and demand from Tehran, which was why the shipments were far below the expected levels.

STC has been regularly writing to IGEDC asking for payments and would restart supplies if Iran resumed them, the source said.