The Forum for Partners in Iran's Marketplace

IPF Exclusive, July 2013

IPFs at a Glance | 1999-2005

The Power of Petrochemicals

NPC has increased in expertise and experience through sheer hard work and dedication. Combine these assets with an internationalized company and NPC is set to be a major competitive force for the next 40 years and beyond.

Year in, Year out

Gray hair, thick glasses, wrinkled foreheads, but smiling faces. That is a combination of the years and years of service with a feeling of achievement that comes after. At the end of the day, what remains is more precious than agreements on paper: it is lasting ties.

Industry & Intellectual

Both seniors in their spheres; one in industries, the other an international intellectual. Both taking a right step in the direction of achieving excellence for Iran. The deep-rooted relations these men have established over years and years of effort, will surely blossom in unprecedented success.

Iran's National Petrochemical Company (NPC) has traveled a great distance since it was formed in 1964. But Mohammad Reza Nematzadeh, the company's President and also Iran's Deputy Oil Minister, stresses that the journey is far from complete with the next destination being the conversion of NPC into an international company.

This does not mean that one can expect any change in the ownership of NPC, but rather substantial, and possibly very quick, changes in what Nematzadeh describes as "business, investment and technology". By business he refers to how projects are financed to strengthen and increase the number of relationships with traders and distributors essential for selling the company's rapidly expanding volume of product.

A Financial Synopsis: In the early 1990s, NPC raised $2.2 billion through export credit financing facilities with a further $l billion borrowed through syndicated loans from European banks and Japanese trading houses. In the late 1990s, the government decided to broaden the company's funding base through borrowings from European banks that were channeled into Iranian banks. This financing was then passed along to NPC, with sovereign guarantees provided to the European banks.

In 2000, NPC went directly to European banks for loans totaling $1 billion. Crucially, these syndicated loans - used for the company's third five year development plan - were obtained without sovereign guarantees. Collateral for this lending has been in the form of current and future production. However, Mohammad Hadi Rahbari, Managing Director of NPC International - the financing division of NPC - says that gradually, "the amount of collateral required is being reduced. Also, loans don't have to be qualified as we are being accepted as a stand alone creditee by the banks and the export credit agency with the help of pioneering banks such as Deutsche Bank and HSBC."

NPC has also helped itself into a much stronger financing position, through a strong track record of bringing projects on-stream successfully. Plus, the fact that NPC product is well accepted in the Asian and other petrochemical markets is an indication of a proven ability to deliver on quality. This has enabled NPC to move into a new area of business where it has become detached from the government budget, and it is assessed on its current and future cash flow.

This raises the question of whether or not NPC will resort to project financing in its fourth five year development phase, which begins in March of this year. Nematzadeh says yes, with Rahbari saying it would be a "natural progression," enabling the company to perhaps expand even more rapidly, "beyond our own financial capability." What he means by this latter phrase is that project financing is based primarily on the viability of the particular project and not on the financial size or strength of the sponsor or co-sponsors.

Meeting Financiers' Criteria: If NPC opts for project financing, there will inevitably be close and exhaustive studies by lenders into the availability and pricing of feedstock, the reliability of technology, and the strengths and weaknesses of the domestic and the international markets for products.

The environment is also recognized as an area for close study. It is not just a case of producing an environmental impact study, but also an analysis of the potential for environmentalists to put pressure on the contractors, the licensor, NPC and our co-sponsors. It would be necessary to assess whether this pressure could either lead to delays in construction, or even prevent a plant from being built. Plus the financiers would look at the ability of NPC, its co-

sponsors and the export credit agencies and multilateral agencies that have financed NPC to bail a project out.

NPC's track record of commissioning plants on schedule will also be closely examined, in addition to the competence, level of training and experience of those who would be employed to run a particular planned facility or complex. "If we want to tap into project financing, we would have to provide enough examples of projects implemented on time," says Rahbari. He and other senior NPC executives feel that there are already enough examples of on schedule startups, and that skeptics have placed too much emphasis on relatively few delays.

The insistence of project financiers on a single, internationally recognized contractor for each project that would take responsibility for ensuring that the project was executed to the standards and timing stipulated by the lenders is identified as a drawback for project financing. This would mean less local employment, although fabrication and engineering work could still be carried out by Iranian companies sub-contracted by the international, overall contractor.

Another illustration of just how far NPC has come in the last 40 years is that a bond issue for financing further new projects is an option that Rahbari feels "we would not wish to deprive ourselves of." This could either take the form of a general bond issue or specific project bonds. However, there are no immediate plans to issue any form of bonds given that NPC still has some work to do to achieve the necessary credit rating. International ratings agency Fitch currently assesses NPC at B+ with a positive outlook, short of A - the investment grade required for a bond issue.

IPCCľA Strong Arm: To move on to the relationships with traders and distributors, there are already 27 deals in place covering the Asian, European and African markets, says Mohammad Ehtiati, Chairman and Managing Director of the trading arm of NPC - Iran Petrochemical Commercial Co (IPCC).

In October of last year, IPCC signed an important agreement with a Sudanese agent, in line with its increased focus on Africa. It is looking for more agents in African markets where growth potential is strong. More deals will surely follow as IPCC tackles the responsibility of shifting the parent company's rapidly increasing production volume. In excess of 25 million ton/year of output is already being sold through IPCC, with the value of the subsidiary's sales having increased by 15-16 million dollars each year since 2000.

For the six months ending 22 September 2003, IPCC posted export earnings of $576 million, an 18% increase over the corresponding period the previous year. IPCC has four bonded warehouses in China through its trading company deals, in Ningbo, Shantong and Shanghai and a bonded warehouse in Dubai. Trading companies already working with IPCC include Mitsubishi Corp, Samsung Corp and LG International.

Other IPCC goals include advancing technology, training existing marketing staff and expanding marketing capabilities. IPCC's marketing offices include one in India, two in China and one each in Singapore and Pakistan. A further office in Turkey is due to open this month. The chairman also stresses the importance of good research in order to constantly improve the way IPCC does business. "We have to learn from our competitors about how to sell into their markets and we need to fully utilize the strong trading houses with which we already work," he says.

It is IPCC's objective to be the strong arm of NPC, meaning that potential weaknesses have to be tackled head on. One such weakness is the forecasts of increasing freight rates from the Middle East due to the requirement to backhaul vessels, and the shortage of liquid and gas chemical tonnage. IPCC has therefore established a shipping joint venture - Proton Shipping Co - in which it has a 25% stake. The remaining 75% is shared between two other Iranian companies, Iranian Shipping Line and Iranian Naftkesh. Ehtiati was due to visit SABIC this month to discuss cooperation in shipping that could even extend to the Saudi Arabian major being invited into the joint venture.

"The problem that we both want to resolve (IPCC and SABIC) is the shortage of chemical vessels. However, we believe that container traffic repositioning costs will be less of an issue for us because of Iran's big population and therefore its large demand for consumer goods," he adds.

Ehtiati says the joint venture will initially charter vessels. However, it may eventually own tonnage because of the shortage that he says is being felt most acutely in the ammonia, ethylene and liquefied petroleum gas shipping sectors. A great deal more can be added about how NPC is reshaping the way it does business in order to become a truly international company, but the above will serve as just a few examples of the dynamism and constant evolution within NPC, which applies to its investment strategy in no lesser degrees. "We are working on further joint investments in Iran and on outside acquisitions," discloses Nematzadeh. "We have concluded a contract with a European consultancy firm which will help us define our long term choices for investment overseas."

Choosing China: The country for which every chemical producer needs to define a strategy is China. The western majors have either opted for construction of integrated facilities in the Middle East partly for supply to the People's Republic, such as

Borealis through its share in the Borouge complex in Abu Dhabi, or have opted for building greenfield integrated projects in China. BP Chemicals, for instance, is constructing a complex based around a 900,000 ton/year cracker with Shanghai Petrochemical Co at Caojing, near Shanghai.

NPC's approach is a combination of both of the above approaches. It is to continue to take advantage of very low cost feedstock in Iran, for instance, paraxylene to produce purified tereplithalic acid (PTA). The PTA could then be shipped to China to produce polyethylene tereplithalate (PET) at what could either be acquired plants or greenfield facilities.

"Our China strategy is, however, at a very preliminary stage," stresses Nematzadeh, who adds that studies into how best to tackle the world's most rapidly expanding petrochemical market will take more than one year to complete. But he adds that if NPC is to become an international company, "we must invest directly in China."

Eyeing India: India is the other major market for which everyone needs to have a strategy. NPC's approach has been to reach preliminary agreements with Gail India and Indian Oil Corp (IOC) on trade and investment. MoUs with Gail and IOC have already been signed in this regard. Because of Iran's feedstock advantage, Gail and IOC are primarily interested in investing in Iran but an NPC investment in production in India is also possible. One route for such investment could be through a long mooted ethane pipeline project between Iran and India. However, the project remains mired in politics, as the pipeline would have to pass through Pakistan in order to be economically viable. Nematzadeh says that the alternative of laying the pipeline beneath the sea would be too expensive. It is possible that if the project progresses, ethane could be used for petrochemical projects in India. However, most of the gas would be sold for domestic purposes.

Turning to Turkey: Nematzadeh also confirms NPC's interest in Petkim, the Turkish state owned petrochemical producer that is being privatized. But he stresses that the interest is only at an early stage and that NPC has concerns over the Turkish economy. Nevertheless, with Turkey's polymer deficit at around 2 million ton/year, Petkim could represent a good opportunity for NPC.

Another minus, though, might be the investment needed to raise Petkim's capacities which are non-worldscale. For instance, it has 190,000 ton/year of low density polyethylene (PE), 96,000 ton/year of high density PE (hdPE) and 89,000 ton/year of monoethylene glycol fed by a 400,000 ton/year cracker.

The very fact that NPC is evaluating Turkey, and also China and India for investment is firm evidence of its commitment to become a truly international company. However, while it attempts to spread its wings, focus is also a central part of its approach. "We will stay in commodities, in basic petrochemicals. We have defined our core businesses and we don't see any reason to change. We are not going into specialties, but will instead stick with olefins, aromatics, PTA and fertilizers," Nematzadeh emphasizes.

Ninety percent of NPC's operations will remain in these core areas with 10% in areas such as engineering polymers and crystal melamines. In engineering polymers, Khuzestan Petrochemical Co - an NPC subsidiary - is currently commissioning a project at the Bandar Imam petrochemical complex in Iran. The capacities of the facilities are 25,000 ton/year of polycarbonate epoxy resin, and 5,000 ton/year each of liquid and solid epoxy resin. In the case of crystal melamines, another NPC subsidiary, Khorasan Petrochemical Co, is scheduled to start up a 20,000 ton/year project this year. The project is located at Bojnourd in Iran.

Technology Issues: The final key for strategic focus is identified by Nematzadeh, who says: "Firstly, we have to know about the technologies we have licensed; secondly, we have to make changes and modification and finally, we have to develop new technologies which follow our core businesses." He adds that in PE and polypropylene, NPC had established more than 20 pilot plants for developing new grades. He cited the example of a new hdPE pipe grade that is being developed. Also, research is being done into PET and into oxidization of aromatics.

What is also of great importance to NPC is R&D being carried out into improving furnace technology. "We are working with several well-known companies on R&D. We can expect substantial progress in a short period of time," adds Nematzadeh, who also discloses that the company has developed a new catalyst for polymers. Another achievement that he points to is a 20% capacity increase the 60,000 ton/year Arak Petrochemical hdPE plant, which is the result of NPC research.

It is, indeed, a remarkable journey for a company with a relatively brief history and one that will surely continue to the point where NPC will become genuinely international. Iran has tremendous feedstock advantages - it has the world's second biggest gas reserves behind Russia. Also, NPC has increased in expertise and experience through sheer hard work and dedication. Combine these assets with an internationalized company and NPC is set to be a major competitive force for the next 40 years and beyond.


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  July 2013
No. 68