◢ Iran is seeking to complete the value chain and export more final goods in the petrochemical sector
◢ An ambitious investment program aims to nearly triple production by 2025, but foreign investment will be needed to reach these targets
An Industry Poised for Revival
Iran’s petrochemical sector is poised for revival following the lifting of sanctions. Iran’s Ministry of Petroleum is seeking USD 60 billion in investment in the sector, courting global leaders such as Total and Mitsui. These efforts are part of a larger revitalization plan, which is entering a critical phase in this Iranian calendar year (1395, which started on March 20, 2016). This plan encompasses work to improve Iran’s petrochemical value train, to diversify export markets, consolidation in the industry both upstream and downstream, and increased funding of research and development. Many of these efforts are being drafted for inclusion in Iran’s sixth Five-Year Development Plan. Policymakers hope that high-value exports of petrochemical products, less exposed to fluctuations in the global oil price, will help ensure Iran can achieve the targeted 8% annual economic growth in the post-sanctions period.
Reorientation of Production
Leaders in Iran’s petrochemical industry are working to maximize the value of Iran’s manufacturing capacity. At the moment, Iran’s petrochemical exports largely comprise of petrochemical inputs. Iran is working to complete the value chain to take inputs such as purified butadiene and raffinate and direct them for use in Iranian facilities to create more advanced compounds which can then be used in the manufacturing of final goods.
The current capacity of Iran’s petrochemical industry covers 58 million tons per year, according to the National Iranian Petrochemical Company (NPC). Monthly production of Iranian petrochemical plants reached more than 4.5 million tons in the Iranian month of Khordad (ended on 20 June 2016), with production reaching a total of 12.8 million tons in the first quarter of the Iranian year 1395 (started on 20 March 2016).
Iran’s petrochemical industry is primarily located in Bandar Mahshahr at the northern tip of the Persian Gulf, and South Pars, on the southern central coast of Iran. Key facilities in Mahshar include the Bandar-e Emam Petrochemical Complex (producing 1.2 million tons monthly), Maroun Petrochemical Company (producing 0.9 million tons monthly), and Razi Petrochemical Company (producing 0.4 million tons monthly). In South Pars, key companies included Nouri Petrochemical Company (producing 1.3 million tons monthly), followed by Pardis Petrochemical Company (producing 0.9 million tons monthly), Zagros Petrochemical Company (producing 0.8 million tons monthly) and Jam Petrochemical Company (producing 0.7 million tons monthly).
Iran is seeking to expand production capacity in other sites across the country, with significant investment. USD 800 million has been spent to bring two facilities online in the Kurdish region of western Iran. The Mahabad and Sanandaj Petrochemical Complexes will represent the largest industrial investment made in the region to date, promising employment and economic opportunity through the creation of new “towns” to house workers and support other downstream industries.
The Ministry of Petroleum has further plans to develop the western Bakhtar region as a further manufacturing hub, strategically located for easy exportation of products to Eastern Turkey and Iraq.
To ensure foreign and domestic investor operators contribute to the larger value chain completion efforts, the Ministry of Petroleum and the National Petrochemical Company (NPC) have mandated that licenses for hydrocarbon resource feedstock will only be provided for projects that add to the value chain.
This year Iran is targeting annual production of 61 million tons, following the opening of 10 new production facilities at various sites across the country. The long-term plan is to achieve 160 million tons by 2025, but this goal depends on significant levels of foreign investment.
Balancing Domestic Sales and Exports
According to the NPC, of the 46.5 million tons of petrochemical products produced in the previous Iranian year of 1394, 33 million tons reached the market as final goods, of which 19 million was exported and 14 million was sold domestically. In the last year, exports have increased by around 30% when measured by the weight. However, the value of exports has remained flat due to a drop in international market prices. Iran’s key export markets for petrochemical products mainly include China, India, Africa, Central Asia, and Turkey. However, the prospect of European investment in the industry has opened the door to potential exports to European countries.
Despite promising developments in the industry, many challenges remain. Fragmentation in the industry and the related inefficiencies has led to unnecessary competition between the many petrochemical companies for market share. Fragmentation also means that no Iranian company has been able to develop a compelling international brand for petrochemical products, which hurts export potential.
Fragmentation is actually an unintended consequence of efforts at privatization in the industry over the last two decades. In 1990, all of Iran’s petrochemical complexes were state owned, under the NPC. The marketing of Iran’s petrochemical products was handled by a spate entity called the Petrochemical Commercial Company (PCC). PCC focused both on managing supply to downstream buyers within Iran as well as working to develop international markets.
By 2006, the Iranian government accelerated plans for privatization in the petrochemical sector, reestablishing all petrochemical companies as private entities. PCC was also privatized, but as a result it lost its central coordinating position among the newly private petrochemical producers. In effect, the lack of state oversight led to many petrochemical companies competing for market share with no central coordination. Regional trade partners were forced to adopt anti-dumping regulations and tariffs to prevent the competing Iranian companies was flooding the market as part of their price wars. Consequently, Iranian exports became less attractive to these markets.
Consolidation will be an important next stage for the industry. One possibility is that foreign investment in the sector will focus on acquisitions of existing production facilities. The presence of major multinationals with stakes in several leading petrochemical companies (effectively bringing them under a single ownership structure) would help streamline the industry and enable greater coordination.