economy
Iran is currently preparing for negotiations with the World Trade Organization (WTO) for full membership status. In this edition of the Economy page a brief study of opportunities and threats posed by Iran’s membership in the WTO is provided for some of country’s main industries and sectors.
Automobile and Auto Parts
Currently there is a 90% tariff on import of all foreign-made vehicles. This is while the profit margin of Iran’s auto manufacturers is only around 9.5%. This margin has dropped in recent years from 28% in 2002 due to the government’s policy of keeping the price of domestically produced vehicles unchanged while inflation has been running at over 12% annually in recent years. This situation will make any future competition hard for this industry as the tariffs will have to decrease over time while the Iranian auto manufacturers have only a 9% range of manoeuvre with their current prices. It is worth noting that imports of foreign-made cars were totally banned in Iran from 1995 to 2003. In 2003, the ban on imports was lifted but a 170% tariff was introduced. The tariff was later reduced to 130% in 2004, 100% in 2005, and 90% in 2006 and 2007.
Steel
From early 2006, the tariffs for steel ingot and sheets were reduced first to four and then later to zero percent. This is why Iranian steel products (mostly produced by Mobarakeh Steel and Khuzestan Steel Companies) are currently competing with their foreign rivals in global prices and on the Tehran Metal Exchange. The cost of production of each ton of steel ingot in Iran with subsidised raw material and energy is currently at $400 which given the global price of around $550 produces a safe and significant profit margin. It is worth noting that in other parts of the world where energy is not subsidised, the production costs are around $450 per ton. The no tariff policy on steel imports and Iran’s competitive advantage in the energy sector means that the steel industry could stay competitive even after Iran’s membership in the WTO.
Iron Ore
Iran is rich in iron ore resources. Currently the price of iron ore for use at steel production facilities in Iran is set by the government, which has recently increased it from $40 to $50 per ton. This is significantly lower than the global prices of $68 for the Persian Gulf FOB. Adding the transportation cost, which is quiet high considering the size and weight of the materials, Iranian steel producers have to pay around $90 for each ton of iron ore to be imported and transferred to their manufacturing complexes. This provides a unique opportunity for Iranian iron ore producers which are very competitive in Iran and can even look at export opportunities once their production capacities grow. In this sector too, WTO membership will not impact the industry negatively.
Sugar
Iran has dropped the tariffs on sugar from 190% in 2005 to 10% for white sugar and 4% for raw sugar in 2007. This has caused serious difficulties for domestic sugar producers and beetroot farmers who can not compete with global producers. Producing a ton of sugar in Iran costs around $500; this is while global sugar prices after recent declines are currently settling at around $400. This means that most probably, the Iranian sugar industry will not be able to compete internationally and will lose out to foreign producers in the long run.
Cement
The cost of production of cement in Iran is currently very low at the extraordinary level of $25 per ton. This is because of the cheap and heavily subsidized energy that is required in large amounts for the production of cement. The sell price of cement in Iran is currently set and fixed by the government at $30 per ton which is very cheap even in comparison to India ($70 per ton) that offers one of the lowest prices in the world. These facts coupled with the high transportation cost of cement means that not only does Iran have absolute domestic competitiveness, but it can potentially capture foreign markets once the domestic market is saturated, This sector is therefore safe from shock waves created by WTO membership and in fact could even benefit from it to enter new global markets.
Household Goods and Textile
There had been a few years when the domestic textile and household goods producing companies were on the verge of bankruptcy due to the lifting of all tariffs on these products in the late 1990s. This is why the share of these two sectors together in the country’s GDP was only about 0.1% in 2006. Recently, there have been new tariff rates for Household and White Goods (around 60%) but analysts believe that it was too little too late. These two sectors are also suffering heavily from the rising smuggling of goods from countries like China. Since most of the companies active in these sectors have already lost out to their foreign competitors, it is not expected for WTO membership to significantly impact figures of the remaining operating companies.
Petrochemical
Petrochemical complexes could be divided into two categories: gas-based and naphtha-based. The government, as the sole producer of naphtha and natural gas, is currently selling these two commodities with discounts of 30% and 90% respectively which makes the production of petrochemical goods very competitive in Iran. Naphtha-based companies are now experiencing a profit margin of around 30% while the gas-based companies are enjoying profit margins of around 70%. Companies from both groups are selling large portions of their products in global markets which means that not only is this sector competitive domestically, it can also secure good market share at the global level. In fact, for the petrochemical sector, WTO membership could help significantly increase its presence in global markets and secure foreign currency income for the country.
Prepared by Turquoise. Turquoise is a boutique investment bank based in Iran with offices in Tehran and London. Turquoise publishes Iran Investment Monthly with the aim of keeping its recipients updated on the latest macroeconomic developments in Iran, providing an in-depth analysis of the Tehran Stock Exchange as well as introducing new financial products and private equity opportunities to potential investors. For more information please visit: www.turquoisepartners.com/iraninvestment
