The petrochemicals industry has become an important aspect of Iran's non-oil economy and the basis of the country's economic diversification, but it is believed further capacity expansion in the medium-term will be obstructed by poor investment risk and the country's increasing international isolation.
Around 40% of non-oil exports totalling US$6.5bn were from the petrochemicals industry in FY09/10. Ordinarily this would attract foreign investment, but Iran's increasing political isolation and economic problems have made the country a risky prospect for petrochemicals majors and financiers. Similarly to upstream sectors, an increasing number of foreign companies abandoning the petrochemicals sector, fearing the risks posed by the sanctions against the Iranian government. Western European firms are being followed by companies from Russia, which has been regarded as less hostile to Iran than the US. Russian companies such as oil and gas trader Vitol and oil company Lukoil have suspended work in Iran because of Western economic pressure and signs of growing impatience in Moscow over Tehran's stance on its nuclear programme. This will have an impact on investment prospects for petrochemicals in terms of joint ventures and the security of feedstock availability.
BMI estimates that Iranian petrochemicals output totalled approximately 30mn tonnes in 2009/10, an increase of 13% year-on-year (y-o-y). Output has been boosted by increased capacity and domestic demand faring better than expected, although exports are unlikely to have reached the targets the government have set. Ethylene exports from Iran plunged in 2009 to about 450,000 tonnes per annum (tpa) from 700,000tpa in 2008. Nevertheless, weaknesses remain and according to BMI's estimates Iran's petrochemical output in 2009/10 was below the 80-85% capacity utilisation rate we consider financial sustainable.
Iran's bold 20-Year Outlook Plan envisions petrochemical output reaching 100mn tpa by 2015, but BMI believes that this target, given the current conditions, is verging on fantasy. Given Iran's notoriety for overrunning projects and a lack of investment from global majors, we doubt the National Petrochemical Company (NPC) will come anywhere near reaching these targets. Success in achieving the government's ambitious objectives rests on a number of related factors: the strength of the domestic economy, Iran's diplomatic and trade relations, and progress on capacity expansion.
A US$25bn investment outlay is planned for 2010/11 to help meet these targets, with the beginning of the construction of 46 new petrochemicals projects adding 50mn tpa to capacity. Twenty-nine projects are already being built at the cost of US$18bn, adding 22.5mn tpa to current production capacity. In Q110, NPC commissioned six petrochemical complexes in Assaluyeh, on the southern coast of Iran, including a complex with capacity for 645,000tpa of ethyl benzene and 600,000tpa of styrene belonging to NPC subsidiary Pars Petrochemical; a 1.65mn tpa methanol complex owned by Zagros Petrochemical; and a 245,000tpa butadiene plant operated by Jam Petrochemical. Several new jetties at the Pars petrochemical port in Assaluyeh were also completed, bolstering its position as one of the major specialised ports in the Middle East for exporting petrochemicals products. It has the capacity to export 35mn tpa of liquid and solid products.
In April 2010, the Ministry of Petroleum announced that work was underway on the privatisation of the refining sector. Minister of Petroleum Masoud Mir Kazemi told the semi-state Mehr News Agency (MNA) that 'all petrochemical units and refineries' will be sold to private hands. Privatisation is being carried out under the terms of Article 44 of the Iranian constitution, which requires 80% of the country's state-owned companies to be sold. BMI believes the privatisation programme is a poor compromise between economic liberalisation and the supposedly redistributive policies of the Ahmadinejad administration. Spinning off of NPC's assets into smaller units will lead to fragmentation, adding complexity to the production chain in an industry that is already overregulated. This will ultimately undermine Iran's competitiveness against regional rivals such as Saudi Arabia, which is benefiting from foreign capital and expertise, where larger petrochemicals firms are aiming to become global suppliers and investors. By splitting up NPC, Iran is stunting the growth potential of its subsidiaries and they will be worth less as individual units than as part of a larger company.
Iran Petrochemicals Report Q3 2010: http://www.companiesandmarkets.com/r.ashx?id=T60Y4U3DB287817&prk=90045b483c0fe044fd1f1942fe34ddf3
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