Ready for a Leap Forward

Professor of Economics
Ready for a Leap Forward
Ready for a Leap Forward

Iran’s petrochemical industry has been gearing up for a leap forward. It should learn from the  past to welcome the dawn of a new era.

 During the past decades Iran’s petrochemical industry has grown and expanded its both production capacity and export markets. Structurally this industry has gone through privatization and in the process created a conglomerate of different companies whose footprint  in the economy and Tehran Stock Exchange cannot be ignored. With the end of international  sanctions on Iran’s economy fast approaching, this industry has the self-drive and motivation of the private sector while it is a major source of revenue for the economy.

Investment in Iran’s petrochemical sector has helped create the second largest industry of its kind in the Middle East with the capacity to produce 60 million tons annually. It flourished in the mid-2000s by becoming a major exporter. However when the sanctions were tightened petrochemical exports declined reducing its share in the overall non-oil export sector. However, it remains debatable whether or not the decline was only because of the sanctions.

At the time when the government was privatizing the industry, some observers opined that the transition from public to private domain played a major role in production fluctuations.

 The source of oscillations notwithstanding, one must admit that Iran has secured robust export markets for its petrochemicals. At its peak in fiscal March 2011-12 the industry earned an estimated $15 billion from exports, only to drop to $10 billion a year later. Even if we accept that the decline was due to the sanctions, it is remarkable that Iranian petrochemical factories were able to export huge volumes in spite of one of the most severe sanctions regime in the history of global commerce.  Iran’s petrochemical industry has demonstrated its reliability with exports to more than 60 countries and as the sanctions fade this number will rise.

 Nuclear negotiations with the P5+1 signaled the beginning of the easing of sanctions. The deal forged in July in Vienna, known as the Joint Comprehensive Plan of Action, set in motion a process to end the international sanctions. Now Iran’s petrochemical industry is gearing up for growth and expanding its export markets. It must be noted that since 2013 Iran’s petrochemical exports have been increasing. In the last Iranian year (ended March 20) it earned $14.2 from exports.  Though not close to its peak, it is not far away either. To reach the $15 billion mark, Iran needs to restore its earlier export market share and also expand capacity.

 Many hope that lifting the sanctions will facilitate the export process and help Iran regain its lost markets in Europe and elsewhere. However it has to be noted that Iran’s petrochemical industry has found new partners as well. South African and Chinese firms in some cases have replaced European businesses. Reestablishing those partnerships will need new projects and expansion of production capacity.  Many consider this is doable.  Iran’s petrochem sector now promises a higher than global average return on investment. This is particularly attractive at a time when North American and European economies have taken refuge in low returns—the already low economic growth equilibrium and China’s economy is slowing down.

 It must be said that Iran’s diverse clientele guarantees such investments will produce results. Iran’s petrochemical export market includes Europe, Africa, and Asia encompassing Italy, Spain, Hungary, Russia, India and China among others. This is a strong market less vulnerable to fluctuations in the global economy while poised to benefit from economic recovery.

 In the meantime, Iran’s petrochemical industry can implement the lessons from its past to ensure smooth banking transactions and guarantee high returns on investments by expanding  capacity and improving competitiveness. It is a vast industry accounting for up to 30% of non-oil exports. A new emphasis on competitiveness encourages transparency and that in return increases investors’ confidence in the future of their investment.

One must also recall the significance of this sector in Tehran Stock Exchange. It is advisable to permit foreign investors to trade stocks in a petrochemical portfolio through this market to benefit from the market reaction to the news of further development and investments in this sector. 

This time the industry should emphasize on invested partners rather than just investors.

Investing in Iran’s petrochemical sector is a one great opportunity. Let’s make it more attractive by improving transparency and competitiveness.