Iran Mercantile Exchange Moves to Break Auto Pricing Monopoly

Offering SAIPA’s Kia Cerato on Iran Mercantile Exchange is the first step toward breaking the auto market monopoly in Iran, the chairman of Majlis Economic Commission said.

“This will bring about transparency in Iran’s auto market, as every automobile’s [real] price will be discovered using IME’s mechanisms,” Mohammad Reza Pour-Ebrahimi was also quoted as saying by ILNA.

Automobiles made their debut for the first time in IME's history last week. Fifty Kia Ceratos with a base price of 872.6 million rials ($22,963) were offered through Salaf contracts. Value-added tax, insurance and services amounting to 118.3 million rials ($3,113) were added to the price, IRNA reported.

IME has tried to sweeten the deal by promising the delivery of the cars in a week, which is quite fast compared to what buyers experience while purchasing it from other market sources.

Salaf is an Islamic contract similar to futures contracts used to forward sell an underlying commodity with a predetermined interest for the period.

Kia Cerato is manufactured in Iran by SAIPA, the second largest domestic carmaker.

The second-generation Kia Cerato was launched in South Korea in late 2008 under the Kia Forte brand—a name that was used in most international markets. The "Cerato" name has been retained in some markets, such as Australia, Iran, South Africa and Brazil.

According to IME Chief Executive Hamed Soltaninejad, other carmakers such as Iran Khodro have also asked to offer their products at IME and their applications are currently being reviewed.

"This will enable them to secure long-term financing for their production lines," he added.

SAIPA reportedly plans to offer 25% of its annual Cerato production via IME, which amounts to 2,540 cars each year based on its current output. The mercantile exchange will host Cerato sales four times each month.

Over the past few years, IME has traded various commodities traditionally dominated by state-enforced pricings, such as cement. This has raised hopes for market players that supply and demand dynamics would become the deciding factors in pricings and balance the market.

For the auto market, such a development would be nothing short of a major shakeup.

The car industry in Iran has suffered a lack of positive development and realistic prices over the past 10 years due to the absence of a competitive environment among local producers. This is due to the fact that the biggest carmakers, IKCO and SAIPA, control over 85% of the market, with most of their production comprising outdated models like Pride and Peugeot 405.

Most cars, which Iranian automakers produce in collaboration with their foreign partners, are priced around $10,000 higher than their price in international markets. This is while the government-run Competition Council is in charge of setting the prices for locally-produced vehicles. The council’s oversight so far has only resulted in unrealistic pricing and done little to benefit the consumers.

On the other hand, imported cars in Iran have always been far more expensive than the domestic models due to punitive import tariffs that reach up to 100%.

It may be too early to tell if IME’s participation in auto trading will bring about a major overhaul into the long-standing dynamics in the domestic market, though it is definitely a step in the right direction.