To address its ballooning budget deficit, the government has decided to raise petrochemical feedstock prices by at least 80%, the secretary-general of the Association of Petrochemical Employers Unions said.
“The government had promised to calculate prices of natural and liquefied gas feedstock on the basis of rates in the Integrated Forex Deal System, locally known as Nima, of $1 for 285,000 rials. Nonetheless, based on a new directive issued by the National Iranian Oil Company, petrochem firms will have to pay 80% more to receive natural gas not only as fuel but also as feedstock,” ILNA also quoted Ahmad Mahdavi-Abhari as saying.
The new directive calls for selling each cubic meter of natural gas at 22 cents, whereas the same volume of gas in international markets can be purchased at less than 11 cents, he rued.
The official noted that the new price will certainly help the government reduce its huge budget deficit, but many petrochemical plants, especially methanol production units, will have to scale down production or pull down shutters in the near future.
Put it simply, selling natural gas as feedstock to petrochemical companies at exorbitant prices will push the key sector to the brink of insolvency.
This wrong policy needs to be revised soon, or its irreparable consequences will have a ripple effect nationwide and exacerbate the current inflation.
“The government has encouraged private sector investors to invest in urea and methanol projects over the last two decades, but now that they are fully operational, they either lack feedstock or have to buy it at very high prices,” he said.
Coherent Policy
According to Mahdavi-Abhari, as long as the National Petrochemical Company does not adopt a coherent and long-term policy regarding feedstock, efforts to attract investment (either foreign or domestic) will be in vain.
“This is the third time prices have changed over the last two years and the petrochemical sector is in a state of shock,” he said.
Criticizing the unreasonably high prices of domestic natural gas as petrochem feedstock, the official said, “There prices are more expensive than those of European firms that import natural gas. Why should we be paying the same price, given the fact that Iran is exporting the commodity?”
Comparing gas prices for petrochem units, cement factories and power plants, Mahdavi-Abhari noted that petrochemical firms have to purchase each cubic meter of gas for 22 cents, while the cement plant pays 1.3 cents for the same volume and power plants get the feedstock for free.
“The 55 petrochemical companies in Iran use 35 million tons of natural and liquefied gas as feedstock annually to produce 31 million tons of products,” he said.
“Petrochem goods account for 40% of Iran’s non-oil exports and formulating a pricing mechanism for feedstock is of great importance.”
The official noted that the petrochemical industry comprises 60% of Iran's capital market and any changes in feedstock prices could give rise to wild fluctuations in the market.
Floating Pricing Mechanism
Providing a floating pricing mechanism for feedstock delivered to the petrochemical sector is necessary to help sustain production and guarantee long-term profit, Mehdi Mohammadi, the head of Masjed Soleyman Petrochemical Company in the southern Khuzestan Province, said.
Using a floating pricing system could help firms adjust the prices of products based on a set percentage of any changes in the feedstock prices, he added.
The official explained that as the tariffs of petrochemical goods experience wild fluctuations, supplying the plants with feedstock at a fixed price does not make economic sense and is likely to inflict losses.
Mohammadi noted that the implementation of a floating pricing system could help companies increase their profit margin, but the sale of natural gas as feedstock to petrochemical companies at exorbitant prices will push most of them over the edge.
Costly feedstock prices have compelled investors to stop their business in Iran and fund petrochemical projects in Qatar where feedstock tariffs are half as much as Iran’s.
“Iran holds 33 trillion cubic meters of the world’s natural gas resources. However, most petrochemical firms and gas processing facilities, including the Persian Gulf Bidboland Gas Refinery in Khuzestan Province, are facing problems in completing the value chain of their products because there is no feedstock,” he said.
