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
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
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
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
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.