global investment house- kuwait – iran economic & strategic outlook – manufacturing and mining & oil sectors

Published July 4th, 2007 - 02:08 GMT

global investment house- kuwait – iran economic & strategic outlook – manufacturing and mining & oil sectors

Manufacturing & Mining Sector
Industrialization has recently accelerated economic development, backed by high oil prices, which led to a rapid increase in manufacturing output. However, many new industries were established after 1972. The impressive new range of domestic manufacturing enterprises include iron and steel, machine tools, agricultural implements, tractors, communications equipment, television sets, refrigerators, car and bus assembly, and petrochemical products, in addition to many others. A number of large-scale industrial projects were undertaken during the period of the Fourth Development Plan (2005-2008), with government investments concentrated in petrochemicals and basic metal industries as well as crude oil production. In the petrochemical sector, the state owned National Petrochemicals Company (NPC) is undertaking an expansion program aimed at the construction of close to 30 petrochemical plants by 2013.

Industrial production grew at close to 4.50% in 2005/06, and a CAGR of 13.6% over the period 2002/03-2005/06, and a diversified industrial base was established. For the fiscal year 2005/06, manufacturing and mining contributed about 19% of GDP. The investment in new manufacturing and mining units in Iran increased by 17.9% in the fiscal year 2005/06 in an effort by the government to diversify its economic base. The government throughout the past years realized that the resilience of strong oil prices would not maintain its momentum indefinitely, and hence introduced measures to uplift other economic sectors. 

The targeted growth rate for manufacturing and mining during the years of the fourth development plan (2005-2008) was set at an average of 10.5% per annum over the years of the plan. However, due to the increase in output of large manufacturing institutions and the increase in the number of the manufacturing institutions, the value added of manufacturing and mining sectors are projected by the Central Bank of Iran to reach 11% and 9.4% at constant 1997 prices in 2006/07 and 2007/08 respectively. It is evident that investments in manufacturing fell short of meeting the manufacturing output in 2002/03. However, this trend was reversed in the first year of the Fourth Socio-Economic and Development Plan in 2005/06 as the Iranian government allocated more capital for investments in the Iranian manufacturing sector. Private investments also increased in recent years as the number of permits increased by 22.3% in 2005/06, and at a CAGR of  13.3% over the period of 2002/03 to 2005/06.  Total investments in establishing and operating new manufacturing and mining units increased by a CAGR of 49.3% over the period of 2002/03 to 2005/06, and a y-o-y growth rate of 17.6% to reach IR956.0bn.

One form of private sector participation in the manufacturing and mining industry in Iran comes in the form of employment in that sector. However, in the recent years, employment in manufacturing and mining in Iran has been on a declining trend where it decreased in 2005/06 by 49.6%. This can be attributed to the gradual decrease in wages in the manufacturing and mining sector which has declined by a staggering 49.5% in 2005/06, and over the seven-year period of study, 1996/97-2003/04, it has declined by 5.5% compounded annually.

Up to 50% of total work force in the manufacturing sector are employed in the food products and beverages, non-metallic mineral products, textiles and motor vehicles manufacturing sectors.

The manufacturing sector in Iran is widely diversified and the manufactured products range from canned fish to heavy vehicles. Output volume of the machine made carpets decreased in 2003/04 by 33%. However the output’s CAGR over the seven-year period, 1996/97 to 2003/04, was 21.3%. The largest increase in output registered in the manufacturing industry in 2003/04 was that of trucks manufacturing, which increased in 2003/04 by a whooping 741.3%. The other manufacturing industries also witnessed an increasing trends in recent years, reflecting the increasing demand by an increasing Iranian population for domestic goods and exports, and the effort by the Iranian government to transform the economy into a self sufficient one in the future.

Oil Sector
Oil has been the main industry in Iran since the 1920s. Iran was the world's fourth largest producer of crude oil and the second largest exporter of petroleum at the peak of its oil industry in the mid-1970s. The war with Iraq cut Iran's production in the 1980s, although Iranian oil reserves remained the fourth largest in the world.

As part of the nationalization process, the government formed the National Iranian Oil Company (NIOC). As the owner, the government directs NIOC policy. As a result of the Consortium Agreement reached in 1954 between the government and a consortium of foreign oil companies, industry control of the oil companies was left virtually intact, but the agreement greatly increased the government's share of income from each barrel of oil produced. The combination of the larger share of income and rising oil production provided the government with increased revenues which financed industrial development. In 1961, Iran joined with other major oil-exporting countries to form OPEC, in a bid to control world oil supply and control its prices.

According to the Energy Information Administration, as of  January 2006, Iran held 132.5bn bbls of proven oil reserves which amounts to roughly 10% of the world’s total proven reserves. Overall Iran has 40 producing fields, 27 onshore and 13 offshore. Iran’s current sustainable crude oil production capacity is estimated at 3.8mn bbl/d, which is below around 310,000 bbl/d below Iran’s latest OPEC production quota of 4.1mn bbl/d. Through the first half of 2006 Iran’s crude oil production stood at 4.1mn bbl/d. Currently Iran exports around 2.6mn bbl/d of oil, of which OECD countries import 60%. Iran’s main export blends include Iranian Light, Iranian Heavy, Lavan Blend, and Foroozan Blen/Sirri.

The Iranian constitution prohibits the granting of petroleum rights on a concessionary basis or direct equity stake. However, the 1987 Petroleum Law permits the establishment of contracts between the Ministry of Petroleum, state companies and “local and foreign national persons and legal entities”. Buyback contracts are arrangements in which the contractor funds all the investments, receives remuneration from National Iranian Oil Company (NIOC) in the form of allocated production share, and then transfers operation of the field to NIOC after a set number of years, at which time the contract is completed. Iran has imported refined products since 1982, and these imports have been increasing rapidly. The country imports around one-third of its gasoline. As per the EIA, Iran is the second largest gasoline importer in the world after the United States. Although Iran imports large amounts of gasoline, it is an overall net petroleum product exporter due to its large gross exports of residual fuel oil. According to the Energy Information Administration, Iran contains an estimated 970 tcf of proven natural gas reserves, making it the world’s second largest reserves and surpassed only by Russia. Around 62% of Iranian natural gas reserves are located in non associated fields and have not been developed. Despite the fact that domestic natural gas demand is growing rapidly, Iran has the potential to become a significant natural gas exporter due to its large reserves. Currently natural gas accounts for nearly half of Iran’s total energy consumption, and the government is planning to invest billions in coming years to increase this share. The price of natural gas to residential and industrial consumers is state-controlled at extremely low prices, encouraging rapid consumption growth and replacement of fuel oil, kerosene and LPG demand.

Iranian oil contract in the international markets ‘Iran Heavy” increased by a CAGR of 11.8% during 1996 to 2007 to reach US$63.34/bbl as of June 2007. The OPEC’s reference basket has reached US$67.01/bbl as of June 2007 growing at an annual compound rate of 11.5% during the same period.

Iran’s economy relies very heavily on oil export revenues, with such revenues representing 81.4% of total exports in 2005/06 reaching US$48,823mn. Strong oil prices helped Iran recently boost its oil export revenues which consequently helped its economic stance. Downstream activity both in refining as well as petrochemicals is on the rise. While refining projects are mainly designed to respond to domestic needs, the country’s petrochemical output is fully outward oriented and is generating new export potential for Iran.

According to the Energy Information Administration, Iran has a combined oil refining capacity of 1.64mn bbl/d. In 2004/05, Iranian refineries produced about 30% of fuel oil and 31% of gas oil in terms of its refined products, followed by motor spirits, which cover 16% of total refined products. Major refineries in Iran include Abadan (400,000 bbl/d), Isfahan (265,000 bbl/d), Bandar Abbas(232,000 bbl/d) , Tehran (225,000 bbl/d), Arak(150,000 bbl/d) , and Tabriz (112,000 bbl/d). Iran plans to increase its refining capacity to 2.54mn bbl/d by 2010. The National Iranian Oil Refining and Distribution Company (NIORDC) plans to begin construction work in 2007 on three units aimed at increasing gasoline production from the Isfahan refinery. Currently technical proposals are being reviewed for the construction of three units, where NIORDC is negotiating with bidders to reduce construction time to 30 months. In June 2004, Japan’s JGC reached an agreement with Iran to expand Arak’s refinery capabilities. In addition to that, Iran has plans to boost capacity at its northern refineries at Arak, Tebriz, and Tehran in order to process additional Caspian oil.

Although Iran imports large amounts of gasoline, it is still an overall net petroleum product exporter due to its large gross exports of residual fuel oil. The gasoline imports has been increasing gradually as the population increases and as the economy expands. Currently gasoline in Iran costs less than 40 cents per gallon, far below the international level; which also contributes to the increase in gasoline consumption in Iran as well as its imports. Gasoline is subject to subsidies in Iran and the government allocates a certain budget yearly to gasoline subsidies, which has been a factor in increasing budget deficit.

Exports of Iranian crude oil has been on a decreasing trend due to the restrictions imposed on its exports. In 2005/06, crude oil exports from Iran fell by 2.4% to reach close to 2bn bbl/d, which translates into a decline of 0.6% compounded annually over the period from 2003/04 to 2005/06. The major country that imports Iranian crude oil is Japan, with a share of 28.1% of Iran’s total crude oil exports. Japan’s share of Iran’s crude oil imports has declined in 2005/06 by 9.5%. The second major country that imports crude oil from Iran is China. The economic boom that China has been witnessing in recent years has increased its need for fuel products to maintain its economic performance and to satisfy its domestic needs for crude oil. China’s imports of Iranian crude oil has increased in 2005/06 by 8.1% to reach 14% of total Iranian crude oil exports. Other importing countries include South Korea (9.6%) of crude oil exports, Italy (9.5%), France (7%), Netherlands (6.9%), Turkey (6.8%), South Africa (6.6%), Taiwan (6.6%), and Greece (5.2%). 

The government of Iran is taking measures to reduce its dependence on foreign gasoline imports through significant expansion of Iran’s refinery capacity, and reducing the use of gasoline. To that end, Iran has embarked on an energy independence program by converting the country’s vehicles to run on natural gas rather than gasoline. Iran’s proven gas reserves which amounts to 16% of world total, essentially guarantees an uninterrupted supply of cheap transportation fuel for many decades to come. This programs distant the country from its dependence on gasoline imports, minimizing the need for gasoline subsidies which have been a major obstacle in maintaining budget surplus. The Tehran government has also developed a plan to start competing with the New York Mercantile Exchange (NYMEX), and London’s International Petroleum Exchange (IPE) with respect to international oil trades using a Euro-dominated international oil-trading mechanism. The government in Tehran has also announced its intentions to create an Iranian oil bourse.


 


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