Iran Petrochemicals Report Q2 2008

The development of the Iranian petrochemical sector is being severely hampered by seasonal feedstock shortages, project delays and the threats of further sanctions, according to BMI's latest Iran Petrochemicals Report.

Iran's petrochemical output was worth US$8.5bn in 2007/2008, of which nearly two-thirds was exported.

Iran aims to exceed Saudi Arabia's petrochemicals capacity by 2024, when it aims to control a third of the Middle Eastern market and around 6% of the world market. By end-2007, the fourth plan had already achieved nearly 50% of the targeted investment in petrochemicals. Assalouyeh is one of the largest and is due to start-up in 2008, delayed from Q407 due to a lack of feedstock. Out of 22 petrochemical units at Assalouyeh, the three plants of Kavian, Morvarid, and Mehr are under construction and will be expected to come on stream, although completion has been repeatedly delayed.

BMI envisages significant problems on the way to achieving these targets. Current projects are already subject to significant delays. Outages in winter 2007-2008 meant that some petrochemicals plants were forced to prioritise domestic customers through drawing on inventories and halting exports, although BMI believes that Iran was still able to meet the US$5.5bn target by the end of the Iranian year on 20 March. A cold winter hit feedstock supplies to the Iranian petrochemicals industry, revealing underlying structural vulnerabilities in the sector. Outages were reported in some downstream plants, while others were running well below capacity. The situation has been compounded by constant delays in the completion of key petrochemicals projects. Added to this is the high level of investment risk due to economic sanctions by the US and the potential for their extension. Investor wariness will not just impact on Iran's hopes of diversifying downstream operations, but also its ability to increase upstream capacities which are crucial to the development of the petrochemical sector. The political will to liberalise the petrochemicals sector is also wavering. Overbearing state interventionism and price-fixing have prevented the growth of the industry. A reduction in state involvement in the sector and the provision of more facilities to investors are essential to secure future growth in petrochemicals capacity. A growing export market is also essential to offset the negative impact of domestic sales at government fixed rates.

In BMI's Middle East and Africa Petrochemicals Rankings, Iran has maintained its fifth place rank with 57.8 points, up 0.8 points since the last quarter due to an increase in capacity, although its score could have been higher if the country's long-term economic and political risk ratings had not dropped. Iran is 3.8 points behind the UAE and 1.4 points ahead of Israel. With the state sector dominating the petrochemicals industry, Iran's market risks score is low while high levels of economic and political risk have pulled 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.