The expected lifting of international sanctions against Iran has been the catalyst for much speculation across regional markets and industry alike.
As gasworld explored in part one of this hot topic last month, Iran looks likely to become the biggest country to rejoin the global economy since post-communist Eastern Europe in the early 1990s.
This would create a multi-billion dollar business boom for both local and foreign companies, and a whole new wave of growth in the Middle East’s second-largest country. The potential for massive value to be generated from Iran’s previously restricted resources cannot be ignored. So what impact might this have on the gases business in the region?
Boosted by strong revenues from the petrochemical and steel industries, the industrial gas sector in Iran has significantly outperformed the overall economy in the last decade and has seen revenue growth begin to pick up over the last year following a period of previous stagnation at the hands of international sanctions. As a result, gasworld Business Intelligence believes the industrial gas market in Iran reached revenues of $280m in 2014, up from around $90m in 2004.
This upward trend could continue in the face of any renewed flow of investment into the country’s petrochemicals industry, and gasworld Business Intelligence believes there is a lot of potential yet to be realised for the Iranian industrial gas sector if the country’s differences with the international community are resolved as expected.
The manufacturing sector accounted for the largest proportion of industrial gas revenues (35%) in 2014, while chemical and refining clients combined accounted for just 16% of total sales. A growing share of sales is expected to be made within the metallurgical and petrochemical industries in the future – largely at the expense of a decline in importance of revenues generated within the manufacturing sector – and a continued rise in industrial gas intensity.
This is in line with one of the major identified drivers for growth for the industrial gas business in the country – the conversion of captive operated production facilities to onsite projects operated by traditional industrial gas companies. This trend has been witnessed in many other similar markets, where the petrochemical and steel industries contribute highly to the economy. gasworld has identified over 100 captive production facilities in Iran, with total production capacity dwarfing that of commercial production facilities operating in the country; if these facilities were to all be converted to onsite projects, the market could hypothetically generate revenues of over $1bn.
For the financial-bears in the industrial gases market, the potential reward presented by doing business in Iran will far outweigh the possible risk associated with investment in this nation.
None of the major international industrial gas companies are currently active in Iran. Linde formerly had a sizeable presence in the country, but exited the country in 2010 under political pressure to leave Iran from countries in the West. The company was understood to be extremely interested in beginning operations in Iran again in recent weeks.
Indeed, since part one of this hot topic last month, this interest has developed to action, if reports coming out of Iran are to be believed. According to a recent article published online by a news agency based in Iran, Linde AG Chief Executive Dr. Wolfgang Buchele had ‘just’ returned from a visit to Tehran in the middle of September, where he said his company will ‘definitely’ transfer technology to Iran to carry out petrochemical projects once sanctions are lifted on the country. The article quotes Büchele as saying, “We know that Iran’s Ministry of Petroleum is about to make big investments to develop the petrochemical sector. For our part, we are definitely seeking to cooperate with Iranian companies on (the) transfer of technology after the annulment of sanctions.”
The article continues to state that the company is ready to resume its ‘legitimate presence in Iran as soon as Western sanctions are lifted’.
When gasworld approached Linde for comment on these claims, the company was quick to distance itself from the ‘facts’ stated in the report and stressed that, “Decisions about the company’s business in Iran will not be made until the announcement of sanctions being lifted – allowing Linde to legal trade with Iran.”
Risk vs reward
It has also been reported in the last few weeks that Iran is looking at satisfying Europe’s LNG needs by exporting through a Spanish terminal – with Chinese, Arabian, and European companies also apparently keen to acquire Iranian LNG plants.
But are there risks associated with doing business in Iran again once sanctions are relieved? According to IHS Chemical analysis, Iran’s many risks include an extremely high degree of political risk, legal uncertainty, and bothersome levels of administrative and bureaucratic obstacles.
Yet despite these risks, Iran has a number of important advantages to potential petrochemical investors, including low-cost feedstocks and access to major markets. Iran has the world’s fourth-largest supply of proven oil reserves and the second-largest supply of conventional natural gas reserves, much of which is rich in ethane, a petrochemical feedstock. This is significant given that chemical feedstock availability in other countries like Saudi Arabia, Kuwait and Oman has become more limited.
“If you are a global petrochemical producer looking at Iran for its investment and growth opportunity, and you can forget for a minute about the major business and political risks involved, it presents an attractive opportunity,” said Michael Smith, Vice-President of Europe, Middle East and Africa at IHS Chemical.
“Major chemical players are champing at the bit to explore the potential that Iran offers, but they will not be doing so haphazardly. These companies are used to operating in risky environments and managing significant risk—it’s the nature of the business, but the reward has to significantly outweigh the risk, which is something they will be assessing very carefully and deliberately.”
The positives of conducting business in Iran are obvious, says Iranian national Dr. Fatemeh Didehvar, from Mack Valves. Providing an insight again into the evolving market conditions since part one of this article last month, including strong European interest in Iran, she said, “Iran has investment needs of around $100bn per year. The country needs to update ageing infrastructures, it needs modern automobiles, heavy machinery and pharmaceuticals – all segments in which Germany is a global market leader.”
“Before sanctions against the country were tightened four years ago, German companies exported just under €4bn ($4.5bn) worth of goods and services to the country each year. If the embargo is lifted in phases next year, the Economics Ministry claims, trade volume could ‘markedly exceed’ that figure.”
According to Didehvar, examples lay in Frankfurt. She claims that leading bankers have taken up secret contact with the government in Tehran – a delicate balancing act aimed at ensuring business channels to Iran are reactivated once money is circulating in the country again. Not to be left behind, top officials from France, Spain, Austria, Serbia and Switzerland have also recently travelled the road to Iran, reports suggest.
Companies will remain tight-lipped about any potential activity in Iran until sanctions are relieved and it is effectively welcomed back into the global fold. Then, we will see just how much value is to be realised in the country.