New data released by the Statistics and Economic Analysis Center of Iran Chamber of Commerce, Industries, Mines and Agriculture show the Purchasing Managers' Index for Iran’s overall economy saw a “massive crash” in the tenth month of the current Iranian year (Dec. 22, 2022-January 20, 2023).
The report attributes the downturn in economic performance to long-standing factors plaguing the Iranian economy, such as runaway inflation, plummeting value of the national currency and ever-dwindling demand in the market in addition to a new challenge, namely “shortage of energy”.
The PMI for Iran’s overall economy settled at 41.89 in the tenth month of the year from 49.14 registered in the previous month, indicating a 7.25-point or 14.75% decrease.
Describing the huge fall in the index as indication of a “rare” slump in Iran’s economy, the report said: “Except for the first month of every Iranian year [which coincides with new Iranian year holidays, which in turn sees marked decline in economic activities], and the last month of 1398 Iranian year [Feb.-March 2020] which saw the outbreak of Covid-19, this is the lowest level the PMI has recorded ever since the project [i.e. PMI reports] began.”
PMI indicates the prevailing direction of economic trends in the manufacturing and services sectors. The headline PMI is a number from 0 to 100, such that over 50 indicates an economic expansion compared with the previous month. A PMI reading under 50 indicates contraction and a reading of 50 implies no change.
The index is indicative of the prevailing direction of a country’s economic trends, aiming to provide information about business conditions to company directors, analysts and purchasing managers.
According to the new report, rise in production costs as a result of hike in foreign currency rates against the rial, and closures due to shortage of energy have severely impacted companies’ ability to meet their customers’ demands.
“Internet disruptions have also added to decline in business activity, particularly in the services sector,” the report read, adding that decline in customers’ demand in addition to rising costs’ pressure on the activities of companies have led to drop in recruitment of new human resources.
Local Industries Hard Hit by Gas Cuts
The sharp drop in temperatures in recent weeks, including in the capital Tehran, has led to an unprecedented increase in energy consumption. Iran has also lost gas import from Turkmenistan due to problems in the Central Asian country’s domestic supply network. Moreover, the cheap price of gas in the country has led to excessive consumption leading to shortage despite the fact that it has the world’s second largest reserves. Amid the shortage, the state-run National Iranian Oil Products Distribution Company has cut supply to local industries in a bid to meet the growing needs of households.
Between 30% and 70% the gas supplied to local industries have reportedly been cut this winter. Normally, 65% of the gas produced in Iran is allocated to the domestic sector.
The priority of the National Iranian Gas Company is providing gas for the household and commercial sectors. Before the start of the cold season, the Oil Ministry took measures to allocate alternative fuel to the industries so that when the consumption of the households increases and less gas is delivered to the industrial sector and power plants, they can use other fuels such as diesel and mazut.
Cement factories were among the first producers whose gas supply was cut, after gas consumption soared late in fall.
Most manufacturers have started to tap into liquid fuel in order to continue their operations.
The Oil Ministry has said it compensates the cement producers’ financial loss through discounts in liquid fuel bills.
Iran offers natural gas to households and businesses at highly subsidized rates, which experts blame for the illogically high level of gas consumption in the country.
In fact, shortage of gas has become a major headache for the many industry in recent years. One hard-hit sector is steelmaking. The restrictions on gas supplies to steel mills has intensified since last year; so much so that direct reduced iron production units have had to close down or under server restrictions, which has consequently affected the steel industry, according to Vahid Yaqubi, executive manager of the Iranian Steel Producers Association.
“Due to gas and electricity supply restrictions we fell behind by about 6 million tons from out steel production plans last year [March 2021-22],” he was quoted by the news portal of Iran Chamber of Commerce, Industries, Mines and Agriculture as saying recently.
“Despite the better management of electricity in the summer [June 22-September 22, 2022] compared with the corresponding period of last year, the gas restrictions started sooner this year. While our plan was for the restrictions to start from the beginning of the tenth month of the year [Dec. 22, 2022-January 20], they started from the beginning of the ninth month [Nov. 22-Dec. 21, 2022]. At first, we saw 30% cut in gas supply, then 50% and 70% and currently the supply to northern steel manufacturing companies (mostly DRI plants) has been completely cut off and the plants are closed. Some arc furnaces and rolling mills have also closed since they do not have raw materials,” Yaqubi said.
Noting that gas plays a pivotal role in the steel industry, he said the Iranian steel production is based on DRI. “If there is no gas, no DRI will be produced, and in the absence of DRI, other parts of the steel manufacturing chain will be closed and the steel products cannot be produced. Therefore, the role of gas in the steel industry is vital.”
He explained that there is no replacement for gas in the Iranian steel industry.
“For example, gas can be replaced with mazut in other industries, while it is not possible in the steel industry. Therefore, with gas outage or restrictions, inevitably, all processes in the steel industry will be disrupted.”
According to the official, the steel industry’s gas usage stands at about 550 cubic meters per ton, of which 70% is used alone by DRI plants.
“In the ninth month of the current year [Nov. 22-Dec. 21, 2022], out of 40 million cubic meters of needed gas, they only supplied 15 million cubic meters. During the last 7-10 days, the weather has become colder and they’ve reduced the allocated gas volume and even the 15 million cubic meters has not been supplied.”
The ISPA chief added that due to restrictions in supply of gas to power plants, industries have also had to grapple with electricity shortage.
“For instance, for more than 40 days, the gas supply of Khorasan Steel Company has been cut off and since last week, there are electricity restrictions imposed on this plant. Mobarakeh Steel Company, the biggest steel manufacturer in Iran, has been facing a 50-70% gas usage restriction since last week besides a 30% electricity usage restriction. We fear that as the weather gets colder this restriction will also increase to 50% or more.”
According to the official, a total of 800 million cubic meters of gas is used in Iran, of which 650-700 million cubic meters are used by households and commercial units. “Therefore, there is practically no gas left for industries.”
He concluded that there is pressing need for investment in Iran’s gas industry to increase production. Meanwhile, household and commercial consumption needs to be optimized.
Main PMI Indexes
Notably all of PMI’s main indices were reported to stand below the 50-mark.
The ICCIMA survey has five main indices to calculate the overall PMI.
According to the report, the “activity level” index increased from 46.24 in the eighth month of the year (Oct. 23-Nov. 21) to 50.51 in the ninth month (Nov. 22-Dec. 21), but decreased to 39.48 in the tenth month (Dec. 22, 2022-January 20).
The “new orders” index increased from 43.91 in the eighth month to 48.47 in the ninth month, but declined to 40.82 in the tenth month.
The “supplier deliveries” index, which measures how fast deliveries are made, decreased from 51.73 in the month to Nov. 21 to 49.75 in the month to Dec. 21 and to 43.35 in the month ending January 20.
The “raw materials inventory” index declined from 51.26 in the month ending Nov. 21 to 46.41 in the month ending Dec. 21 and to 39.54 in the month ending January 20.
The PMI reading of “employment” index increased from 48.88 in the 8th month to 49.32 in 9th month, but declined to 46.62 in the 10th month.
Sub-Indices
To calculate PMI, seven secondary criteria are surveyed by the center, namely “raw material purchase prices”, “warehouse inventory”, “exports”, “product price”, “fuel consumption”, “sales” and “production expectations”.
The “raw material purchase prices” sub-index increased from 78.49 in the month ending Nov. 21 to 85.25 in the month ending Dec. 21 and 85.26 in the month ending January 20.
The “warehouse inventory” sub-index increased from 48.86 in the 8th month to 50.49 in the 9th month, but decreased to 46.58 in the 10th month.
The “exports” sub-index increased from 45.69 in the eighth month to 50.84 in the 9th month, but declined to 45.74 in the 10th month.
The “prices of manufactured products or services” sub-index grew from 55.47 in the month to Nov. 21 to 58.58 in the month to Dec. 21 and to 59.61 in the month ending January 20.
The “fuel consumption” sub-index increased from 49.8 in the month ending Nov. 21 to 67.25 in the month ending Dec. 21, but decreased to 59.09 in the month ending January 20.
The “sales” sub-index declined from 48.21 in the 8th month to 48.15 in the 9th month and to 43.31 in the 10th month.
The sub-index of “business output forecasts for the following month” increased from 52.62 in the month ending Nov. 21 to 55.01 in the month ending Dec. 21, but declined to 52.7 in the month ending January 20.
PMI, among the most precise indicators showcasing a country’s economic condition, was first devised by the Institute for Supply Management in the United States in 1948. It is calculated as (P1 * 1) + (P2 * 0.5) + (P3 * 0) where P1 is the percentage of answers reporting an improvement, P2 is percentage of answers reporting no change and P3 is percentage of answers reporting a deterioration.
