Trading of petrochemical products has resumed in the Iran Mercantile Exchange. This indicates the government’s renewed mandate to trade petrochemical products in IME. The decision has not sat well with producers and some technocrats.
MPs, chief among them Ahmad Tavakkoli, believe offering petrochemical products on the exchange kills two birds with one stone. Petrochemical products are more transparently traded and this gives a boost to the bourse.
However, Mojtaba Khosrotaj, deputy minister of industries, mining and trade, says proponents of the move lack knowledge of the petrochemical industry and base their arguments on wrong statistics.
In a letter published on Thursday, the deputy minister laid out 12 reasons why petrochemicals should not be traded on an exchange, saying while some problems can be overcome, some will doom petrochemical trading.
In short, Khosrotaj argues that because of the intricacies involved in buying and selling petrochemicals, offering them on the exchange is difficult and will damage the industry’s business model, drive up costs and shut some consumers out of the market. Furthermore, it goes against an exchange’s core concept, i.e. free trade.
Petrochemical products are mostly tailored to the buyer’s specifications. Deals are haggled over and orders and production plans are drawn up accordingly. Small companies near petrochemical plants like to drop in, see the products and then purchase. Some companies have complex agreements with each other to share products, orders, etc.
Furthermore, after-sales services are an integral part of the business. Offering petrochemicals on the exchange creates a disconnect between the buyer and the seller, not to mention the difficulty of modeling financial products and standardizing contracts. These are not crude oil after all.
Instead of lowering costs, putting up margins and paying before getting the goods drive up the cost of trading and also harms small downstream companies.
“The decision to force producers to sell through IME has also caused sales hiccups for exporters,” Khosrotaj wrote. “Because the market is very small and finding the required products at the right time becomes an issue. Exporters have fallen behind on their commitment due to this.”
But most importantly exchanges are built on the premise that free trade trumps monopolies and open market beats command.
“Experience shows that if monopolies do not become competitive, they will lead to corruption. If [exchanges] want more customers, why don’t they offer better and more competitive services, and instead expect petrochemical producers to offer their products on the exchange by resorting to a monopolistic governmental approach,” he said.
Khosrotaj noted that Iran is on the verge of opening its doors to foreign investment, so what message will officials be sending foreigners if it intervenes in markets, sectors and the economy with a heavy hand.
