Economy, Business And Markets

Petchem Feedstock Price Cut Boosting Industry

Petchem Feedstock Price Cut Boosting IndustryPetchem Feedstock Price Cut Boosting Industry

Iran's Oil Ministry cut the price of natural gas fed to the petrochemical industry by 38.5% to less than 9 cents per cubic meter on Saturday, sending most petrochemical stocks up while some lost, as they expected a steeper cut.

The price cut will boost petrochemical profits, though some industry managers say the pricing is still uncompetitive, putting Iran's sanctions-battered petrochemicals at a disadvantage vis–à–vis their foreign rivals, especially those in the Persian Gulf periphery.

Oil Minister Bijan Namdar Zanganeh issued a directive on the pricing of "sweet" natural gas fed as a raw material to Iran's numerous petrochemical plants, fixing the pricing method for the gas for the next 10 years. The new pricing formula will be effective from March this year until March 2026.

"The new formula sends a good message to prospective investors in this industry," IRNA quoted Zanganeh as saying.

Petrochemical stocks have shown mixed reactions to the news this week. The axing of international sanctions against Iran's oil and banking sectors has led to Tehran Stock Exchange's biggest rally since June.

Shareholders rejoiced as petrochemical producers, which already account for half of Iran's corporate sector exports, regained access to their overseas export markets.

The industry needs billions of dollars in investment to increase its capacities, though most producers already have a below capacity output.

The feedstock cut boosted share price gains of some petrochemical companies while some others fell.

"Most manufacturers already expected the cut to 8.5-9 cents. Some were expecting 8 cents, others more. So each has to adjust their earnings estimates for the upcoming year," said Reza Qahremani, Maskan Investment Bank's head of asset management.

"Naturally, companies that expected a bigger drop will have to revise down. So their shares are adjusting."

The seven-article directive calculates the price of gas based on an average of domestic and international gas prices using a new formula.

"The prices will not exceed 90% of those our competitors offer in natural gas trading hubs across the world," he said.

The formula uses international gas trading hubs, including US's Henry Hub—a distribution hub on the natural gas pipeline system owned by a subsidiary of Chevron Corporation, UK's National Balancing Point—Europe’s longest-established spot-traded natural gas market, and the Netherlands' Title Transfer Facility, a virtual trading point for natural gas similar to NBP.

However, based on the Oil Ministry's conversion rate of one million British Thermal Units—a unit of energy per 28.3 million cubic meters of natural gas—the price of gas is way lower than the one offered by the ministry.

Each million Btu of gas traded for $1.93 in December 2015, putting its price at 6.8 cents per cubic meter.

This is the second change in the pricing method in the past year.

The Oil Ministry offered another formula in September, putting the gas price down to 13 cents. There was no unified pricing method before.