Petrochemicals to be included as a priority sector in the National Export Strategy of Iran

The NES initiative is being led by the Ministry of Industry, Mine and Trade and the Iran Trade Promotion Organization, with financial support from the European Union and technical assistance from the International Trade Centre. The NES process aims at designing a strategic detailed plan of action for improving Iran’s international trade prospects over the near and long term. It includes six priority sectors – medicinal herbs, fruits and vegetables, auto parts, tourism, information and communication technology, and petrochemicals – which will each be covered by dedicated sector strategies.

Petrochemicals are a major component of global trade; the world’s exports of organic chemicals totalled USD 444.6 billion in 2018. Demand is increasing, and further growth is expected to accompany rising incomes in emerging economies. At the same time, however, competition is intensifying. China has become a major producer and the shale gas revolution is lowering production costs in the United States, for example. Producers around the world will also have to pay additional attention to the environmental impacts associated with the production, use, and disposal of petrochemical goods if the sector is to expand in a sustainable fashion in future.

The NES and petrochemical sector strategy will be designed to help Iranian exporters best navigate this complex global environment to foster growth and development at home.

Certainty, petrochemical exports are already very important to the Iranian economy. Organic chemical exports were worth USD 4.1 billion in 2018, representing 13.6% of total non-fuel exports. The importance of the sector has also been recognised by the government – including in the Sixth National Development Plan, which targeted an increase of petrochemical production capacity to 120 million tons by 2021 – and through the establishment of Special Petrochemical Zones and investment incentives under the Direct Taxation Act, Law for the Targeting of Subsidies, and Foreign Investment Promotion and Protection Act.

It is clear that there is the potential for Iran to leverage the strengths of its natural assets, strategic location, industrial capacity, and human capital to grow by supplying international markets. In particular, the sector can prosper by expanding into new markets, improving quality, and increasing domestic value added through the further development of downstream activities.

According to estimates by the International Trade Centre, billions of dollars in export potential remains untapped. Polyethylene is already a major export product, but it is estimated that an additional USD 1.0 billion could be exported by reducing trade frictions and taking advantage of growing demand in import markets. Methanol, urea, and ethanediol also have significant potential for growth. There is the potential to expand petrochemical exports to many countries, with additional export potential particularly high in China (USD 1.6 billion), India (USD 725.3 million), and Iraq (USD 169.9 million).

However, unleashing the sector’s full potential through the strategy will mean dealing with the main challenges facing the sector, as identified through research on recent trends and discussion with sector participants and experts. The sanctions imposed in June 2019 on the Persian Gulf Petrochemical Industries Company are complicating trade in the sector. The use of ad hoc arrangements with key trading partners is helping exports to continue, though a plan for managing the uncertainty generated by sanctions is needed as well.

On top of these concerns, domestic factors affecting international competitiveness will also need to be addressed. Among other issues, product concentration in lower value added areas of the value chain limits the sector’s potential, underinvestment affects capacities for growth and innovation, and a lack of coordination and convergence within industry’s operators and inefficiencies arising from the regulatory framework.

The petrochemicals sector strategy will work on these issues through a unified plan of action outlining the concrete steps needed to enhance competitiveness by building on Iran’s competitive advantages. It will likely include actions in a broad range of policy areas to work toward the sector’s growth and development through enhanced exporting. These potential actions can be grouped into four main categories:

·         Given the uncertain and changing external environment, proper management of trading relationships over both the short and longer term will be needed. Measures to mitigate the effects of sanctions would be likely priorities, and trade policy and the development of new bilateral relationships could be looked at as well.

·         Institutional and policy reforms aimed at enhancing the sector’s competitiveness may be considered under the strategy. These actions could include the use of cluster policies and SPZs and fostering of linkages and productivity spillovers beyond these zones. Regulatory and other barriers to firm dynamism may need to be addressed, and there is the potential to enhance the capacities of institutions supporting exporting and investment attraction.

·         The growth and diversification of the sector – including through greater innovation and the expansion of downstream activities – will depend on strengthened investment and improved access to finance. As such, there may be a need for targeted investment promotion activities, as well as the development of alternative financing mechanisms for marginalized firms.

·         Quality and sustainability in production can be enhanced through actions on the development of standards and other areas. Actions in this area would likely include enhancing the quality management system and the creation of means of fostering investment in environmental safeguards and innovation would help to mitigate environmental impacts.

The exact scope and content of the strategy remain to be settled, however. Work on the design of the NES and petrochemicals sector strategy is ongoing in close consultation with key stakeholders that will be involved in the strategy’s implementation.