Project Alpha Centre for Science and Security Studies

Electric Resistance Furnaces Proliferation Case Study Series Dominic Williams1 and Catherine Dill2

3 April 2015

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About Project Alpha Alpha was established in 2011 at King’s College London’s Centre for Science and Security Studies (CSSS) with government funding to improve the implementation of trade controls. Alpha conducts research to understand both illicit trade and the effectiveness of supply-side controls in countering such trade. This research forms the basis of Alpha’s outreach and capacity building activities.

About the Case Study Series This series was developed to highlight individual cases of illicit trade so that broader policy lessons can be identified an enacted. The series draws upon a variety of open source information, including US government cables, information from Internet-trading platforms, media reporting and court transcripts.

Acknowledgements Alpha’s work is funded from a variety of sources, including the British Foreign and Commonwealth Office and the MacArthur Foundation.

Copyright 2015 King’s College London The author/s of this report invites liberal use of the information provided in it for educational purposes, requiring only that the reproduced material clearly cite the source, using: ‘Electric Resistance Furnaces’, Proliferation Case Study Series, Dominic Williams & Catherine Dill, Project Alpha, 3 April 2015.

About the Authors 1. Dominic Williams is a Researcher Working on Project Alpha in the Centre for Science

and Security Studies, King’s College London. 2. Catherine Dill is a Research Associate at The James Martin Centre for Non-

Proliferation Studies, Middlebury Institute of International Studies at Monterey, California.

© King’s College London

All Rights Reserved

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Summary Documents recently leaked in South Africa reveal an attempt by Iranian entities to acquire a furnace and control equipment from a South African firm. These documents – alleged correspondence between the UK Secret Intelligence Service and their South African counterpart – state that the furnace was destined for SBIG, an Iranian entity responsible for aspects of Iran’s UN-prohibited ballistic missile programme. There are several key aspects of this case that are worthy of note. First, while the exact nature of the furnaces involved in the deal is unavailable, it is very unlikely that the goods being sought were controlled by the Missile Technology Control Regime or other key export control regimes. Second, it does not appear that the South African firm knew that they were dealing with an entity of proliferation concern because of the use of front companies in Iran. Third, this case highlights the global nature of proliferation threats: in this case the Iranian procurers targeted South Africa, which is not commonly thought as a significant source of proliferation.

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Contents

Summary......................................................................................................................3  

1. Introduction............................................................................................................... 5  

2.   The scheme ............................................................................................................ 5  

3. The targeted company............................................................................................... 5  

4. The technology.......................................................................................................... 7  

4.1 Resistance furnaces ............................................................................................... 7  

4.2 Arc furnaces .........................................................................................................8  

4.3 Induction Furnace ................................................................................................8  

4.4 PLC .....................................................................................................................9  

4.5 Status of the goods under export control regimes ...................................................9  

5. The Iranian companies...............................................................................................9  

5.1 LMI and Esfahan Steel .........................................................................................10  

5.2 Shahid Sattari Group Equipment Industries (SSGEI) and Shahid Bakeri Industrial Group (SBIG) ........................................................................................................... 11  

5.3 The Defence Industries Organisation (DIO) .......................................................... 11  

6. South Africa as a target for Iranian proliferation efforts .............................................. 12  

7. Conclusion ...............................................................................................................13  

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1. Introduction This case study explores an attempt by an Iranian company with close links to Iran’s ballistic missile programme to procure furnaces that could be used for the production of rocket bodies and other components useful in the development of ballistic missiles. In this case, procurers reportedly used front companies to conceal the real end-user of the imported furnaces. The case raises several interesting issues, including whether or not South Africa has become a focus of Iranian procurement efforts.

2. The scheme The scheme is described in documents published by Al-Jazeera, which reportedly represent correspondence between the UK Secret Intelligence Service (MI6) and South Africa’s former National Intelligence Agency (NIA).1 These documents allege that in 2009, LMI, an Iranian firm purported to be connected with Iran’s ballistic missile program, approached a South African firm, ERFCO, about the supply of a furnace. (These connections along with the deal in question were apparently reported to MI6 by more than one source. ) ERFCO reportedly dropped the deal after being strongly advised to do so by the NIS, even though the products not being subject to export. The deal, worth between USD$500,000 and $1,000,000, was apparently at an advanced when MI6 allegedly contacted NIS.

3. The targeted company The South African company targeted in this case was a furnace equipment supplier, Electric Resistance Furnaces (ERFCO) SA. Little online information is available about the company’s activities, but it is located in Johannesburg and was incorporated in 2006, according to South African business registration records from the South African Companies and Intellectual Property Commission.2 At the time of writing, the company appears to be inactive, and has no functional website. It was also deregistered in 2010 from the South African official company registrations.

1 Al-Jazeera, ‘The Spy Cables: A glimpse into the world of espionage,’ 23 February 2015, http://www.aljazeera.com/news/2015/02/spy-cables-world-espionage-snowden-guardian-mi6-cia-ssa-mossad-iran-southafrica-leak-150218100147229.html, accessed 1 April 2015. 2 The company’s website is no longer active, and no archived versions are available.

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Figure 1: ERFCO SA record from the South African Companies and Intellectual Property Commission

Figure 2: Google street view of ERFCO SA listed address

It is possible that ERFCO SA was affiliated with a separate Johannesburg-based company with a similar name, Electric Furnaces (EFCO) SA Ltd, which, in addition to having almost identical names, also shares a director and contracts manager.3 However, the exact nature of the relationship between the two firms remains unclear. EFCO was also deregistered around the same time as ERFCO, according to the South African Companies and Intellectual property Commission.

3 Hofstatter, S, ‘Murkey Aircraft and Nuke Deals with Iran as Spies Invaded SA’ 2 March 2014, http://www.timeslive.co.za/local/2015/03/02/murky-aircraft-and-nuke-deals-with-iran-as-spies-invaded-sa, accessed 8 March 2015. Engineering News, ‘Furnace Company Expects Record Turnover’ 16 August 2002, http://www.engineeringnews.co.za/print-version/furnace-company-expects-record-turnover-2002-08-16, accessed 8 March 2015.

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Without active websites for either company, it is difficult to discern the product lines of the companies and assess what model or models of electric resistance furnaces Iranian entities might have sought. The companies’ names suggest that they likely offered a variety of electric furnaces – these pieces of equipment can have applications in a ballistic missile program but are too ubiquitous to be export-controlled.

4. The technology While details of the furnace and accessories involved in the deal were said to be ‘unavailable’ in the alleged correspondence between MI6 and the NIA, the documents assert that the products and product support ERFCO provided could ‘significantly enhance Iran's ability to produce ballistic missiles, including some which would be suitable for carrying nuclear warheads.’4 Industrial electric furnaces consist of a heating chamber employing to melt and alloy metals and refractories. Importantly, the electricity has no electrochemical effect on the metal, and is only used to heat it. Notable uses of electric furnaces include production of stainless speciality steels and alloys for a variety of industries.5 There are three main types of electric furnace which might have been sought by the Iranian procurers involved in this case.6

4.1 Resistance furnaces Resistance furnaces are widely used in the materials industry. Power supplied to the heating element with a predefined electrical resistance generates heat. Resistance furnaces can range in capacity from kilograms to several hundred tonnes, and can be used to melt aluminium and aluminium alloys as well certain non-ferrous metals.7 Of particular relevance in the proliferation context is these furnaces’ utility for manufacturing titanium and titanium alloys suitable for the construction of missile bodies.8

4 Rahul Radhakrishnan, ‘Spy Cables: South African Spies Wary of Iranian Operations’ 23 February 2015, http://www.aljazeera.com/news/2015/02/spy-cables-south-africa-spies-iran-operations-guardian-ssa-tehran-undercover-carpet--150219184023503.html, accessed 8 March 2015. 5 Notable industries include the chemical, automotive, aircraft, machine tool, transportation, and food-processing industries. See Ibid. 6 Britannica, ‘Electric Furnace’, http://www.britannica.com/EBchecked/topic/182618/electric-furnace, accessed 8 March 2015. 7 Physical Process Modelling, ‘Electro-Resistance Furnace part III,’ http://processmodeling.org/model_ht/furnace3.html, accessed 8 March 2015. 8 Bulletin of Defence Research and Development Organisation, ‘Technology for Commercial Production of Titanium Sponge,’ December 1997, http://www.drdo.gov.in/drdo/pub/techfocus/dec97/tech.htm, accessed 8 March 2015; J. Christiana, ‘Improved Methods for the Production of Titanium Alloy Extrusion,’ June 1963, available from: http://www.dtic.mil/dtic/tr/fulltext/u2/408203.pdf, accessed 8 March 2015.

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Figure 3: Examples of resistance furnaces

4.2 Arc furnaces An electric arc furnace, or EaF, is a furnace that uses an electric arc for heating and melting materials. The capacity of arc furnaces ranges from about one tonne – used in foundries for cast iron products – to 400 tons, used in steel plants.9 A large range of special quality steels can be made in electric arc furnaces by adding other metals to form steel alloys: stainless steel being the most common type. In the proliferation context, arc furnaces can be used to make steels for machine tools; specialised steels for use in nuclear reactor environments; light but strong steels used in aerospace; and extra tough steels for armour-plating. 10

Figure 4: Examples of Arc Furnaces

4.3 Induction Furnace Induction furnaces are ideal for melting and alloying a wide variety of metals, and are used to melt iron and steel, copper, aluminium, and precious metals. 11 Heat is applied by induction heating of metal. Most modern foundries use this type of 9 IMESA Electrical Engineering, ‘Application for Electric Arc Furnaces’, 2011, http://www.imesaspa.com/products/detail.php?language=en&id=25, accessed 8 March 2015. 10 EEF UK Steel, ‘The Electric Arc Furnace,’ http://www.eef.org.uk/uksteel/About-the-industry/How-steel-is-made/step-by-step/The-electric-arc-furnace.htm, accessed 8 March 2015. 11 ‘Electric Induction Furnaces,’ http://materialrulz.weebly.com/uploads/7/9/5/1/795167/induction.pdf , accessed 1 March 2015.

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furnace. Induction furnace capacities range from less than one kilogram to one hundred tonnes. They can be used to melt proliferation-relevant metals like uranium and zirconium.

4.4 PLC As well as furnaces, Iranian entities purportedly sought ‘programmable logic controller (PLC) related’ equipment. 12 A PLC is an industrial computer control system that continuously monitors the state of input devices and makes decisions to control the state of output devices. They can be found in almost any application where machine function or process automation is required. PLCs can therefore be found in everything from commercial manufacturing production lines to centrifuge cascades in uranium enrichment facilities.13 It is to be expected that ERFCO would have been selling PLCs (which they would not have manufactured) along with the furnaces, as if the deal included assistance with installation, something that is asserted in the leaked documents, PLCs would have been an important part of the set up process.

4.5 Status of the goods under export control regimes Interestingly, the leaked document mentions that the furnace and accessories ‘may not be controlled in [their] own right.’14 Indeed, electric furnaces do not appear in the technical annexes of the Nuclear Suppliers Group, Missile Technology Control Regime, or Australia Group. This is likely due to their ubiquity within the materials processing industry. Similarly the PLC-related accessories referred to are unlikely to be controlled, as they too are widely used in non-military industrial applications. Moreover, PLCs are small, easy to transport and exist in such large numbers globally that to try to control them may well be unfeasible.

5. The Iranian companies The documents suggest the involvement in this procurement of a complex chain of Iranian entities, several of whom are either sanctioned and/or appear in lists of national entities of proliferation concern, specifically for missile technology. The documents assert that the company or companies that ERFCO was dealing directly with were either owned or had close links with Iranian entities deeply involved in Iran’s military complex.

12 ‘Urgent Request for Assistance to Halt ERFCO Furnaces Supplying Equipment to Iran,’ 16 November 2009, https://www.documentcloud.org/documents/1672756-uk-mi6-writes-to-ssa-on-ian-profileration.html, accessed 8 March 2015. 13 Advanced Micro Controls Inc, ‘What is a Programmable Logic Controller?’ http://www.amci.com/tutorials/tutorials-what-is-programmable-logic-controller.asp, accessed 8 March 2015. 14 ‘Urgent Request for Assistance to Halt ERFCO Furnaces Supplying Equipment to Iran,’ 16 November 2009, https://www.documentcloud.org/documents/1672756-uk-mi6-writes-to-ssa-on-ian-profileration.html, accessed 8 March 2015.

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Figure 4: Diagram showing the connections to designated entities alleged by the leaked document

5.1 LMI and Esfahan Steel The leaked cable states that ERFCO SA was dealing directly with an Iranian company referred to only as “LMI,” and asserts that LMI is a front company set up by Shahid Sattari Group Equipment Industries (SSGEI), a known Iranian military equipment producer. There is little further information on LMI. Project Alpha’s research found an Iranian company sometimes referred to by the abbreviation LMI, but there is little evidence that this is the same firm referred to in the leaked documents beyond the fact that the stated business scope of this company would likely require industrial furnaces. The leaked document states that a second company, Esfahan Steel Co. (ESCO), is working as LMI.15 ESCO has been designated by the UK, Japanese and Canadian governments as an entity of concern relating to the proliferation of missile technology.16 ESCO is also listed as an entity of concern for military procurement in document distributed by the German government. According to ESCO’s website, its managing director is Ardeshir Sad Mohamadi.17 An individual of the same name is also managing director of the National Iranian Copper Industries Company, which is included in the UK’s list of entities of proliferation concern.18

15 ‘Urgent Request for Assistance to Halt ERFCO Furnaces Supplying Equipment to Iran,’ 16 November 2009, https://www.documentcloud.org/documents/1672756-uk-mi6-writes-to-ssa-on-ian-profileration.html, 8 March 2015. 16 IranWatch, ‘Esfahan Steel Company,’ http://www.iranwatch.org/iranian-entities/esfahan-steel-company, accessed 8 March 2015. 17 Esfahan Steel Company, ‘Board of Directors,’ http://www.esfahansteel.com/en-board-of-directors, accessed 8 March 2015. 18 Export Control Organisation, ‘Guidance: Iran List,’ https://www.gov.uk/government/publications/iran-list/iran-list, accessed 8 March 2015.

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5.2 Shahid Sattari Group Equipment Industries (SSGEI) and Shahid Bakeri Industrial Group (SBIG) SSGEI has been designated by the UN Security Council, and is listed by several national governments list as an entity of proliferation concern.19 SSGEI is a subsidiary of Iran’s Ammunition Industries Group (AMIG), and produces ammunition components, including fuses, detonators, primers and commercial blastings. It is also involved in the manufacturing and maintenance of ground support equipment for the Shahid Bakeri Industrial Group (SBIG) who ‘own or control’ the company.20 The Shahid Bakeri Industrial Group produces a variety of solid-fuelled artillery rockets, including the North Korean-designed Fajr rocket series and the Fateh-110 missile. According to IISS, SBIG ‘is believed to have assumed responsibility for solid propellant production in Iran in the mid-1990s.’21 Shahid Bagheri Industrial Group was listed in an annex to U.N. Security Council resolution 1737 as an entity involved in Iran's ballistic missile program. It was also added in 2007 to the U.S. Entity List of end-users whose activities impose ‘a risk of diverting exported and re-exported items into programs related to weapons of mass destruction.’ The company has also been sanctioned by the Japanese, German, UK governments and the European for proliferation relating to missiles.22

5.3 The Defence Industries Organisation (DIO) According to the cable, between late 2007 and early 2009, Iranian entities associated with the Iranian Defence Industries Organisation (DIO) made payments to ERFCO totalling USD$0.5m-1m. Controlled by Iran's Ministry of Defence Armed Forces Logistics (MODAFL), the DIO has, according to the U.S. Department of State, engaged in activities that have materially contributed to the development of Iran's nuclear and missile programs. The DIO produces various defence equipment, including main battle tanks (MBTs), guns and gun-howitzers, multi-barrel rocket launchers, anti-tank missile weapon systems. short-, medium- and long-range missiles and rockets, and chemical materials. The DIO has been designated by the UK, Japanese, US and German governments, as well as listed in an annex to U.N. Security Council resolution 1737 , as an entity involved in Iran’s proliferation-sensitive nuclear activities. DIO has reportedly been involved in procurement for a range of sensitive materials, including specialised aluminium alloy used almost exclusively in long-range missile production.

19 Export Control Organisation, ‘Guidance: Iran List,’ https://www.gov.uk/government/publications/iran-list/iran-list, accessed 8 March 2015. 20 IranWatch, ‘Shahid Bagheri Industrial Group,’ http://www.iranwatch.org/iranian-entities/shahid-bagheri-industrial-group, accessed 8 March 2015. 21 Nuclear Threat Initiative, ‘Shahid Bakeri Industrial Group’, http://www.nti.org/facilities/286/, accessed 8 March 2015. 22 ‘Urgent Request for Assistance to Halt ERFCO Furnaces Supplying Equipment to Iran,’ 16 November 2009, https://www.documentcloud.org/documents/1672756-uk-mi6-writes-to-ssa-on-ian-profileration.html, accessed 8 March 2015

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6. South Africa as a target for Iranian proliferation efforts Further evidence revealed in the Al-Jazeera material suggests that that South Africa has become a focal point of Iranian efforts to circumvent international sanctions. A leaked document from the South African State Security Agency (SSA), titled ‘Operational Target Analysis,’ indicates an awareness of rising Iranian interest in South Africa as a proliferation route. They suggest that a network of Iranian front companies and entities which were apparently operating in South Africa, who were attempting to obtain aircraft and military equipment, including technology for Iran’s missile program. These document state that Iran even approached South Africa’s leadership in 2007 in search of a workaround for international sanctions imposed by Western powers. Citing a ‘covert source,’ the documents claim that on two occasions, then-President Thabo Mbeki had met with senior Iranian officials requesting help with their nuclear programme. The Iranian delegation was reportedly headed by a ‘Mr Rowhani’ – likely to be current Iranian President Hassan Rouhani.23 According to the document, ‘[t]he nature of the discussions was a request from the Iranian Government to the SA Government to assist Iran with their nuclear program and to provide technical advice and technology.’24 Why would Iran target South Africa for proliferation purposes? The SSA attribute the cause of this intense Iranian interest to the availability in South Africa of advanced aerospace technologies, especially of those in the missile guidance field. But there is a far broader range of technologies available in South Africa that Iranian agents might seek. As Stephen Burgess notes, South ‘has a domestic nuclear energy program and the kind of sophisticated manufacturing machinery, expertise, and industrial infrastructure sought by states and organizations seeking to build nuclear weapons.’25 This was proved by the arrest in the early 2000s of four South African nationals in connection with the AQ Khan proliferation network. Other aspects of the Iran-South Africa relationship might provide avenues for Iran to obtain sanctioned technology. South Africa enjoys strong diplomatic and commercial ties with Iran, despite international sanctions.26 (Even the SSA does not dismiss the idea of assisting Iran with nuclear technology, rather advising caution.27) Even innocuous civil trade relations might inadvertently provide avenues for proliferation. Reuters has cited internal documents of a South African-owned telecommunications company, MTN, which allege the company ‘plotted to procure embargoed US technology products for an Iranian

23 Rahul Radhakrishnan, ‘Spy Cables: South African Spies Wary of Iranian Operations,’ 23 February 2015, http://www.aljazeera.com/news/2015/02/spy-cables-south-africa-spies-iran-operations-guardian-ssa-tehran-undercover-carpet--150219184023503.html, accessed 8 March 2015 24 ‘Operational Target Analysis’ January 2010, https://www.documentcloud.org/documents/1674131-south-africa-operational-target-analysis-of-iran.html, accessed 11 March 2015. 25 Stephen F. Burgess, ‘South Africa from the Perspective of WMD Supply Networks: Indications and Warning Implications’ Strategic Insights, Volume VI, Issue 5 (August 2007), www.dtic.mil/cgi-bin/GetTRDoc?AD=ADA519821, accessed 11 March 2015. 26 S. Hofstatter, ‘Murkey Aircraft and Nuke Deals with Iran as Spies Invaded SA,’ 2 March 2014, http://www.timeslive.co.za/local/2015/03/02/murky-aircraft-and-nuke-deals-with-iran-as-spies-invaded-sa, accessed March 8 2015. 27 ‘Operational Target Analysis’ January 2010, https://www.documentcloud.org/documents/1674131-south-africa-operational-target-analysis-of-iran.html, accessed 8 March 2015.

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subsidiary through outside vendors [in order] to circumvent American sanctions on the Islamic Republic.’28

7. Conclusion It should be emphasized that many elements of the case cannot be substantiated by evidence beyond that provided in the leaked documents. Connections between Iranian front companies and those known to be of proliferation concern are difficult to prove. Similarly, the South African company apparently targeted by Iran, ERFCO, has seemingly been inactive for at least four years, complicating research efforts. However, this case raises an important concern: that sanctioned Iranian entities may have been targeting South Africa firms in procurement for the Iran’s ballistic missile and nuclear programmes. At the very least, the case underscores the need for the South African government to build awareness among key South African industries of Iranian procurement attempts.

28 Steve Stecklow, ‘Special Report: Documents Detail How MTN Funnelled US Technology to Iran,’ http://www.reuters.com/article/2012/08/30/us-mtn-iran-documents-idUSBRE87T05R20120830, accessed 17 March 2015

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