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IPF Exclusive, July 2013


Tenth Iran Petrochemical Forum | Summit 2013

In case of four-fold increase in feedstock prices

Capitals to Flee from Petrochemical Market


The government should consider feedstock as a part of the cost price of the final product and not as a channel for increasing its own revenues.


Insistence of the government on liberalization of feedstock prices for petrochemical complexes is still continuing and at present implementation of the project requires approval of the Majlis (Parliament); this is while latest reports indicate that the Majlis is against a four-fold increase in the price of injected gas into petrochemical complexes, as stipulated in the Budget Law.

Dr. Ahmad Mahdavi, Secretary of the Association of Petrochemical Industry Employers

Commenting on this issue, Dr. Mahdavi, Secretary of the Association of Petrochemical Industry Employers, pointed to the rate of 155 rials for gas feedstock prior to the implementation of the law on targeted subsidies (Economic Reform Plan) and said: "Since the execution of the law on targeted subsidies, it was decided to increase the gas price to 700 rials or about 7 cents, which was even at that time high as compared to the FOB prices in the Persian Gulf and striped domestic producers of the capability to compete to some extent.

But the fact that at present the government considers foreign exchange (US dollar) rate at about 24,500 rials set by the foreign exchange trading room and on this basis the price of feedstock reaches 3 to 4 cents is not the fault of producers but a problem caused by the foreign exchange market in the country which has disturbed calculations and control."

Mahdavi asked when the price of 4 cents on the basis of foreign exchange trading room rates is exactly equal to 7 cents on the basis of foreign exchange reference rates, what is the aim of increasing the price to 13 cents?

In his opinion, at current prices that the government attempts to impose on producers, the prices would reach 3000 rials on the basis of foreign exchange trading room rates, which is much higher than the figures in the Middle East region and even the world.

Under the present condition, however, it seems that the government is after supporting its own revenue interests through the activities of the petrochemical sector so that with regard to the extent of the gas delivered to petrochemical complexes the government is expected to earn 100 billion rials daily out of the increase in the prices of feedstock; and this figure would amount to 36,500bn rials annually, which is equivalent to about $1.5bn on the basis of forex trading room rates.

Suggesting that instead of increasing the gas feedstock prices the government could have encouraged, and not obliged, the producers to develop complementary projects especially in the downstream industries, Dr. Mahdavi noted that in this way the government would have prepared the ground for development of production.

In the meantime, he said, the government scenarios for determining the price of feedstock should be based on modus operandi. This is while the government seems to adhere to no specific regulations except for calculations on the basis of its own advantages and disadvantages. And even more disturbingly, it does not seem that transfer of interests from petrochemical balance sheet to that of the government would have any result but increasing liquidity out of the cash subsidies.

Meanwhile, he added, if production capacities increase in the petrochemical sector as per plans, according to a report by Mehr News Agency the amount of feedstock injection in the petrochemical sector would increase up to 130 million cubic meters per day, which means a three-fold increase in the amount of interest that has been taken from the petrochemical sector and poured into the pocket of the government.

However, by throwing a glance at the price of feedstock in Iran and its comparison with other countries in the region, it should be said that previous prices of the feedstock in the country (7 cents) is even higher than the highest rate in the Middle East - including Bahrain with a figure of 5.6 cents. This is while the government claims it is selling the feedstock at a low price to domestic producers.

This issue, in the opinion of the Secretary of Association of Petrochemical Industry Employers, would lead to annihilation of advantages of investment in Iran in comparison with competitors. This means that investment could not be competitive in the case of many products as more than twice the price of other countries should be paid for feedstock.

Of course, Mahdavi added, some of the units that are mainly export units make good profits but this does not mean that all the producers would make profits.

He also argued why the government does not support a company which sustains losses but if some companies make profit it would monitor all the companies and would fine them somehow.

Dr. Mahdavi said: "No boundary could be drawn around the country to annihilate competition; if we intend to compete and develop exports, we should revive competitive advantages in the country and pay further attention to them."

That the government revenue increases is not sufficient for the government to consider measures of this kind in this issue. The result of such measures is increase of the prices in the market. The liquid feedstock in Saudi Arabia is put at the disposal of producers with 30percent discount. This rate is 5 percent in our country. Saudi Arabia has attracted investments by practicing this policy and has acted successfully whereas we are driving investors away. Some reports indicate complexes which are using liquid feedstock have suffered losses and this shows that the marginal profit the government thinks is very high in this sector cannot come up with increase in prices  higher than a certain limit.

Under the present conditions, however, it seems that through revision of its own methods on increasing feedstock prices, the government should follow strategies which would not intensify the misgiving that it is standing against the private sector.

On this basis, using mechanisms that would lead to stagnation in petrochemical sector are dangerous and would weaken grounds for the development of exports. The government should consider feedstock as a part of the cost price of the final product and not as a channel for increasing its own revenues.

Under the current situation that we are faced with reduction of productivity in the country, adoption of present methods would weaken the only remaining profit making sectors in the Iranian economy and continuation of government’s insistence on this method would only destabilize the sectors that are hopeful in production.

Thus, the government is recommended to give up this decision and set prices in accordance with the logic of elasticity of production, the existing inflation, the downstream sectors and international competition.

 

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