Economy, Domestic Economy

How Fares Iran Amid Global Bear Market?

How Fares Iran Amid Global Bear Market?How Fares Iran Amid Global Bear Market?

The falling global commodity prices may be relatively unimportant to consumer nations, much as they have stoked concern in commodity producing ones.

While the World Bank predicts stable, if not downward, trend in global commodity prices in the next three years, the phenomenon and its implications for Iran’s economy have been the subject of heated debate among Iranians.

  Low Energy Prices Blamed

Although experts attribute the falling prices of many commodities in the world to a recent drop in energy prices, which has given rise to a decline in manufacturers’ overall costs, it has been a different case for Iranian manufacturers.

Energy prices in Iran have already been kept low by the government through subsidies in the past decades.

“In recent years, petrochemical industries, for instance, have been granted huge subsidies on some inputs,” Financial Tribune’s sister publication Tejarat-e Farda quoted head of the Financial Instruments Development Bureau at Tehran Mercantile Exchange, Alireza Nasserpour, as saying.

“Recently, however, the government has raised the prices of fuels such as gas. Petrochemical prices in Iran [in 2015] have, actually, soared compared to 2014. This is while Iran’s overseas rivals are experiencing a decline in their prices.”

Many Iranian industries have been considering boosting their production after the sanctions imposed over Iran’s nuclear energy program are lifted to compensate for their shrinking profits.

The negative impacts of the global bear market on Iran, however, goes beyond the diminishing profit margins for some industries. It directly limits Iran’s revenues, which mostly come from the export of oil and raw materials such as metal ores.

The government has already considered lowering the share of oil revenues in the annual budget, as experts estimate prices are to remain low at least until 2017.

  Domestic Situation

Iran, the second-largest wheat consumer in the Middle East, for instance, has decided to export 400,000 tons of the grain into the global glut after production exceeded domestic demand.

As for other agricultural products such as oilseeds and livestock, Iran has mainly remained a consumer, making the country vulnerable to global price changes.

“In the agricultural sector, however, Iran is mostly an importer,” Nasserpour said.

He cites the imports of 90% of domestic demand for soybeans, 50% for corn and 20-90% of livestock feed as examples.

Experts believe the import of cheap fodder and grain is one of the main factors contributing to single-digit inflation in the agricultural sector.

According to the latest statistics, price indices in agriculture, forestry and fisheries recorded a mere 0.2% increase in the Iranian month of Shahrivar (August 23-September 22) compared to the month before. Year-on-year inflation in the sector reached 7.1% during the period.

The low inflation in the agricultural sector, along with moderate increase in the industrial price indices, according to many experts, could lay the basis for the government to achieve the inflation of below 10%. But that is the bright side of it all.

In the industrial sector, too, as a major steelmaker in the region, Iran has been reeling from falling prices.

Following the decline in the value of steel in China, Chinese manufacturers of the metal have turned to exports at prices lower than the global norm.

In August, CEOs of three major Iranian steel companies, namely Isfahan’s Mobarakeh Steel Co., West Alborz Steel Complex and Yazd Rolling Mill, urged the government to take prompt action to confront Chinese dumping.

  Global Situation

The sharp decline in food, oil and industrial commodities has added to global woes.

According to the UN, global food prices fell by 5.2% in August–the biggest drop in seven years.

Meanwhile, oil prices have fallen 60% since July 2015.

Economists attribute the falling prices of construction materials, in particular, to the lackluster performance of the Chinese economy in the past two years. This is while the last decade’s great bull market was mainly driven by soaring demand for raw materials in China.

Chinese demand for construction materials has lately followed a downward trend, compelling the country’s manufacturers of iron ore, steel and cement to turn to exports.

In May, Bloomberg said China’s steel slumped to a 12-year low, following which global steel indices pulled down dramatically.

The prices of other commodities have also been on the decline. Wheat futures, according to Bloomberg, dropped 15% this year after successive bumper global harvests boosted supply, helping a United Nations food price index slump in August by the most in almost seven years.

World wheat production and stockpiles will reach records in 2015-16, the US Department of Agriculture said on Friday. El Nino-defying rain in Australia’s winter has boosted the outlook for production in the fifth-biggest exporter before harvesting starts next month.