Israel Petrochemicals Report Q3 2009

BMI's latest Iran Petrochemical Report challenges official estimates and forecasts, arguing that there is ample evidence that the Iranian petrochemical industry is headed for stagnation or even contraction in the year ahead, with the prospect of significant project delays and lower rates of capacity utilisation.

There have been few year-end indicators from individual petrochemicals producers to judge the accuracy of official statistics, which suggest 18% growth in the 2008/09 Iranian year, despite the country's economic slowdown and a sharp decline in demand from key export markets. BMI believes that sales and therefore production have been affected by the global economic downturn, with a contraction in output of up to 10% in the second half of 2008/09. We estimate that Iranian petrochemicals exports reached 11.2mn tonnes in 2008/09, which is 1.8mn tonnes below the target set by Iran's petrochemical exporter, the IPCC. In terms of value, we project the value of exports to be around US$7.9bn, US$1.1bn below IPCC's target but still 32% above the previous year. The situation may have been worse if it had not been for the final completion of the Jam Petrochemicals Complex in December 2008, three years behind schedule. It is hard to believe that the collapse in the Gulf property market, with its resulting effects on construction, and the slump in the automotive industry - two major petrochemicals consumers - will not have a major negative impact on the Iranian petrochemicals industry, both in terms of current output and planned capacity expansion. The government anticipates 10 petrochemicals projects worth US$12bn coming onstream in the 2009/10 Iranian year, helping to raise output to 39mn tonnes, a 44% year-on-year (y-o-y) increase.

BMI is highly sceptical that the industry will meet its project deadlines or that additional capacity will be fully utilised given the current economic environment. We are mindful of the Iranian government's desire to play down and suppress bad news, particularly in the run up to the presidential election, where the incumbent will be defending his track-record on the economy. Iran has a poor reputation for meeting project deadlines and this will be compounded by lack of expertise, a more restrictive financial situation and ongoing international sanctions. Added to this is the country's worsening macroeconomic situation, with a sharp slowdown expected in the Iranian economy in 2009/10. We now see real GDP growth in 2009/10 falling to just 2.4%, down from 4.7% in 2008/09. While we are not expecting Iran to fall into recession, our projected growth rate would be the most lacklustre in a decade.

General risk aversion will continue to inhibit foreign investment, although foreign joint venture projects that are currently advanced will be completed. The country's feedstock advantage recently prompted Turkey's petrochemical company Petkim to announce its intention to invest in new facilities in Iran.

Petkim has signed a preliminary contract with Iran's National Petrochemical Company (NPC) to establish a methanol and PE complex in Iran. The facility will have a capacity of 300,000 tonnes per annum (tpa), while the methanol plant will have a capacity of 1.65mn tpa. Costs have not been announced, but it will be a 50:50 joint venture (JV).

In Q209, Iran has maintained its fifth-place rank with 55.8 points. Iran is 0.5 points behind Kuwait and 0.1 point ahead of Israel. With the state sector dominating the petrochemicals industry, Iran's Market Risks score is low, with high levels of economic and political risk pulling down its score. In order for an improved score and ranking, Iran needs a more positive political risk outlook and a breakthrough in terms of the regulatory regime. This looks unlikely on a short- to medium-term view.