Economy, Business And Markets

Quagmire of Piling Inventories

Quagmire of Piling  InventoriesQuagmire of Piling  Inventories

A recent fall in demand for a wide range of commodities mostly related to the construction sector has caused a considerable rise in the inventories of companies listed in Tehran Stock Exchange.

The mounting stockpiles have turned into one of the major issues the economy has been grappling with in the past two years.

Head of Tehran Chamber of Commerce, Industries, Mines and Agriculture, Masoud Khansari, touched on the issue in the fifth meeting of the commission of representatives of the chamber early in September.

“In the first three months of the current Iranian year (March 21-June 21, 2015), domestic manufacturing recorded an 8% drop and TSE companies and small factories faced a 12% decline in sales,” he was quoted as saying by the Persian weekly Tejarat-e Farda, adding that the inventories increased by 4% during the period.

Iranian companies have 90 trillion rials (over $2.6 billion) worth of unsold goods piled up, according to Shahin Shyan Arani, a market analyst. The costs are evident: no earning, cash flow hiccups and paying for the storage of inventories.

The Institute of Education and Research affiliated with Management and Planning Organization has published a report on “Real Economy and Growth Vision in 2015-16”, in which it assessed the “Inventories of Bourse Industries”.

The ratio of inventories to production of TSE firms, according to the report, followed an upward trend in the last Iranian year to reach its peak over the past five years.

On the underlying reasons causing the issue, the report mainly blames the slump in the housing market and construction in the past few years.

From 2001 to 2012, domestic demand for construction materials recorded a sharp rise.

According to official statistics, during the period, a majority of investments were made in sectors related to construction, including chemicals, metals and minerals. The number of constructions, which hovered around 370,000 housing units in 2001, jumped to 800,000 units in 2012.

In an economy with a double-digit inflation rate lasting for years, forcing the government to pursue price-manipulation policies to control the prices of assets, housing units turned into an investment option for households.

In 2012, however, the tightening of sanctions imposed over Iran’s nuclear energy program reduced government revenues and curbed its spending in the construction sector. Sanctions also resulted in a fall in households’ income in the past few years.

Demand for building materials such as cement and steel, consequently, dropped, manifesting itself in the falling indexes of cement manufacturing firms in TSE as of summer 2013.

On the other hand, sanctions not only hit the construction sector through reducing oil revenues and lowering average income, they also imposed an embargo on exports of construction materials preventing the manufacturers from increasing exports amid falling domestic demand.

Moreover, diminished demand for the products of companies listed in the stock market is also attributed to the high public expectations from the July nuclear deal reached between Tehran and the world powers, which stipulated the lifting of sanctions in the upcoming months.

Lately, consumers have been hesitating to spend much, expecting the removal of sanctions to result in lower commodity prices.

In the shadow of the falling oil prices by almost 60% since last June, resulting in a corresponding drop in the government’s oil revenues, experts envision no rise in the government’s construction budget until sanctions are lifted.

The issue has recently compelled the government to adopt measures to stimulate demand. In mid-October, the government unveiled a stimulus package to put the capital market in order by increasing money supply.

The package is mainly focused on industries that produce durable goods—incidentally the biggest listed companies at TSE–and moves to stimulate demand in the least inflationary way possible.

As part of the package, 100-million-rial ($2,876) credit cards will be offered for buying Iranian appliances.

The government later released a draft policy aimed at ending the recession in the housing sector. The details of the policy have not been publicized.