Chemical Transactions with Iran after Sanctions

Prior to the full imposing of sanctions in 2012, Iran had a buoyant, oil driven economy, with major trading partners in Germany, France, Italy and Greece (who together accounted for more than one third of Iran’s total import and exports.

Chemicals were a key part of this trade, as a world bank report confirms, “During the early 2000s, when oil prices were soaring (and sanctions were not restrictive), the Iranian industries that made progress were the petrochemical and chemicals industries, which received massive subsidies, including subsidies on their consumption of fuel.”

At that time the Iranian chemicals industry was dominated by two or three major corporations, which were closely monitored (some would say even controlled) by the government. For example, in 2005 as much as 43% of investment in the entire industry was from Iran’s National Petrochemical Company, a subsidiary of the Ministry of Petroleum.

The dominance of the big Iranian corporations was aided by their inside influence in government which gave these major players an upper hand in striking deals, with official assistance for everything from planning permission to improved energy prices.

The other major players were large foreign investors, who accounted for as much as 53% of the total funding for chemicals projects. Small and medium sized businesses were notably absent from the market, much as they still are today.

Before the sanctions bit, in 2012, investment was strong, with deals such as the 2006 construction of petrochemicals plants in Asaluyeh and Marun, by the Iran National Petrochemical Company. These production plants are so large that they are expected to propel the company into becoming the world’s second largest chemical producer (after Dow Chemical), when production begins running at 100% (predicted to be sometime in 2016). However, since 2012 there has been limited foreign investment (which in turn has limited local investment), leaving the petrochemical and oil industry in need of updated refineries and processing plants.

That said, this will not stop the oil flow, with the world bank reporting that, “While it will take time to resume oil production because of under investment in the sector, most observers predict that in 8 to 12 months, Iran’s crude oil exports can reach pre-2012 levels [of 3 million barrels a day].“

Naturally, this will have an impact on oil and petrochemical prices, and although the actual effect is difficult to gauge, the world bank predicts that, “Iran’s full return to the global market will eventually add about a million barrels of oil a day, lowering oil prices by US$10 per barrel next year, whilst economic growth in the country [is expected] to surge to about 5% in 2016 from 3% this year.”

The price drop would have been more, but Iran has still been exporting oil throughout the period that sanctions have been in place.

As Greg Myre, International Relations Editor at American radio network, NPR, notes, Under the sanctions, many European states and other countries stopped buying Iranian crude [whilst] those still importing it have been putting money into escrow accounts. Those accounts are now estimated to total around $100 billion, which [when sanctions are lifted] would be released to Iran.“

Whilst it is true that Iran does hold billions of dollars of currency in foreign accounts, it is being cautious about spending its windfall in a hurry. As Akbar Komijani, deputy-govenor of Iran’s central bank explained, “The foreign asset position of the central bank is around $100bn, but we are bringing back only $29bn to the country.”

Experts predict that this cautious approach to much needed investment is a back up against the return of sanctions, as well as the need to allow room for foreign investment for the technological know-how that will accomany it.

Whatever happens, it seems that investment in petrochemicals there certainly will be, with Golnar Motevalli of Bloomberg Business news reporting that, “Iran’s planned $20 billion petrochemical hub at Chabahar on its southeast coast may be open to foreign investment once restrictions are lifted [as] the port has direct access to the Arabian Sea and Indian Ocean and sits at the end of a natural gas pipeline to Pakistan, across the border.”

Whilst Deputy Oil Minister and National Petrochemical President Abbas She’ri Moqaddam claimed in a June interview that, “The country is investing to tap global markets and could triple petrochemical production capacity to 180 million metric tons. Output at that level could bring in revenue of at least $90 billion.”

So where will the money go? Lili Mottaghi at the World Bank reports that, “pharmaceutical industries are expected to get a significant boost … as these firms will now be able to import parts and machinery that have been subject to sanctions in the past two years. It is expected that pharmaceutical exports to Europe, which were worth $2.5 billion prior to 2012, will resume after sanctions are removed.”

But other sectors will also be of focus, and traders should expect an impact from Iranian business in the coming 24 months, as was made clear in a recent study by Dr Anna-Karin Tunemalm, Dr Per Lind and Dr Mohammad Fazlhashemi, entitled ‘Incentives for the Iranian Chemical Boom’ who note that, “Organic chemistry is a keystone in important Iranian industrial sectors like the petroleum and agricultural industries, and also in the growing field of life science and pharmacology. The development of the petroleum industry and further refinement of raw oil into value-added fine chemicals holds a key position in the reinforcement of the Iranian economy and labor market.”

They further observe that, “The fact that organic chemistry holds a strong position in Iran is the result of the fact that the agriculture and oil industries—two industries that are reliant on physical-organic and synthetic chemistry—are responsible for nearly one third of the Iranian GDP. One may argue that a strong organic-chemical profile is desirable to further develop the chemical industry in terms of refining petroleum products to fine chemicals, gasoline, and polymers. This process is a key objective in increasing the national benefit from oil revenues. Such an improvement would also be beneficial for the domestic industry and help create more job opportunities. Furthermore, the growing domestic biotech sector also calls for expertise in organic and synthetic chemistry, as does the pharmaceutical industry.”

So it seems that Iran is preparing itself for more research, more investment and more joint ventures with foreign enterprises to expand its global market share in a wide range of chemicals, even those outside of its natural petrochemical advantage.

Indeed, Mohammad Reza Nematzadeh, Iran’s industry minister made it clear that he sees Iran’s future as a much larger global trader than before sanctions began, stating in a recent speech that, “We are no longer interested in unidirectional importation of goods and machinery from Europe. We are looking for two-way trade, as well as cooperation in development, design, engineering and joint investment for production and export. In mining too, we need a further $20bn of investment by 2025 for the exploration and development of mines.”

Much of the Iranian governments desire to reinvest and to strike up new partnerships is through the opportunity to reignite stagnated areas of the economy. For too long, Iranian oil wells and refineries have been working at under capacity, whilst the opportunity to develop more advanced petrochemical processes has, until now, also passed by.

Iran is run with a strong central government that has strategic control over large sways of public, private and business life. The ruling powers want to see a stronger Iran, that is less dependent on crude oil prices, and one that will not have to face the threat of western sanctions in the future. This is why it is investing so heavily and currently looking for global trade partners and expertise in many fields. As Elena Ianchovichina, Lead Economist in the Chief Economist Office of the World Bank’s Middle East and North Africa region, notes, “Iran has for some time pursued an industrial strategy to be independent regarding the importing of products and expertise in various fields, not least in the chemical and chemical engineering sector.”

This is a point agreed upon by Oliver Jakob, managing director of Zug, a Swiss based Petromatrix GmbH, who notes the strategic value for Iran to invest in chemical production partnerships. He said, “In the long term, Iran wants to move more into selling refined products and having joint-venture refineries abroad. Diversifying exports beyond crude and into higher-value refined products will help Iran boost revenue, and owning geographically dispersed assets would help shield it from potential sanctions in the future”

Certainly it seems that the chemicals industry is about to change yet again. These are exciting times to be trading in chemicals. The value of oil (and its many chemical derivatives) appears to be in constant fluctuation; the growth of the Chinese economy at the heart of global production may or may not have turned a corner. Meanwhile, America and Canada have begun a shale gas revolution, which may or may not be followed by other countries and now Iran is rejoining the global economy.

With an historic lack of small and medium sized chemical firms in Iran, there are certain to be plenty of market niches for the clever entrepreneur of fine and specialised chemicals. The business atmosphere is overwhelmingly upbeat, and clearly has government backing. American traders are seemingly sidelined whilst US economic sanctions continue, so possibly the time is ripe to strike up a co-operation, with Germany already moving in on trade deals.

“Construction machinery, chemicals, food processing, renewable energy equipment – those are some of the areas I think are especially promising for German industry,” said Sasan Krenkler of Krenkler & Partner, a business consultancy specialized in helping German companies enter Iranian markets. Meanwhile, Iranian exports to Germany include crude oil, agricultural products and increasingly petrochemicals produced in Iranian chemical plants, like the €350 million processing unit complex built by the German firm Linde, at Bandar Imam.

So clearly there is business to be done in Iran, if not for any other reason, than the fact that there are 80 million Iranians waiting to buy products. Given this final number, isn’t it time we all started thinking about trading with Iran.