Impact of Sanction on Iran Chemical Industry

It will be 3 years soon that US left the JCPOA and restored the sanctions against Iran. So it seems this the right time to study the impacts of this event on Iran Chemical Industries.

Since May 2018 that US announced its withdrawal from the JCPOA (Joint Comprehensive Plan of Action) we have experienced a signficant impact on Iran Chemical industries. The supply of the raw material including different types of Catalysts, Additives, Specialty Chemicals and spare parts have been paused or stopped especially from the EC sources. Also any new license contract have been stopped from the reliable partners from EC or Asia and many projects have been badly affected (delayed or stopped). And top of all this problems, the export of Iran Chemical indutry dropped dramatically due to the banking, insurance and shipment issues outcoming from restoring the sanctions.

All these led the Chemical industry of Iran to chose the different tactical and strategical path to survive and grow during the current difficult moments and I would like to summarize it as per the below:

1- Big Picture

Without having a big picture of the country from the economical point of view, we can not reach the right conclusion. So let’s have a summary of what is going on at the moment in the country.

Iran has a GDP of 628 current USD billion with a population of 84 million people. Years of sanctions put a pressure on Iran economy and the GDP growth has been dropped by 12%. Inflation has increased to 36% YoY since 2018/19 and surged by Feb, 2021 to 46%. Also the local currency (IRR) lost half of its value since the beginning of 2020 due to the sanctions, lack of foreign currency supply, restricted access to foreign reserves and decrees the oil revenues dramatically. Of course, exchange rate depreciation will raise the inflation rate accordingly. All of these have been affected badly by COVID 19 pandemic which put more cost on the government’s budget and decreased the public and private consumption and GDP which in turn push up the inflation.

Export also declined dramatically since 2018. The real net export contracted by 26.9%. The non-oil sector export declined from 5.8 billion USD on April 2019 to 1.6 billion USD on April 2020 (Tehran Chamber of Commerce data).

But in mid of 2020 we have also observed an unexpected rebound in economy. Oil and non-oil sectors have experiend a growth of 16 and 3.1 percent respectively and the unemployment rate fell to 9.4%. The new administration in US made some hopes here that the sanctions will be relieved soon and this inhibit the IRR depriciation more and helped it to make stronger 15% in Q4 of 2020.

2- Growth of Industrial Production

IRR depreciation made the local production more price competitive which led in turn the growth in manufacturing sectors of the economy. This is the reason that the non-Oil sector has had a growth of 3.1% in late of 2020. According to Tehran Chamber of Commerce, on supply side, the main contributor to economic growth is industries and mines sector (1.4 pp), followed by agriculture sector (0.5 pp).

Once we take a look at the below table (data source: World Bank), we realized that the local industry of Iran is growing especially in the difficult time of 2020-21 and the international forecasts have been showed that this will continue.

3- Chemical and Petrochemical Production

As the major sector of the Industry and Mining, Chemical & Petrochemical industry have played a very positive roll here to cover the local demands and increase the GDP. We have not seen any major pause or stop in Chemical/Petrochemical production despite all the bottlenecks in supply the required raw materials and export their products. In contrary, we have witnessed many new projects that have been announced and registered in Chemical and Petrochemical sections. Short story version, the local Chemical and Petrochemical industry of Iran not only did survive but also is transforming to something new, local oriented industry. Simultaneously, decreasing the export (due to the Banking issues caused by US sanctions) and increasing the local manufacturing (due to the government ban on many imported consuming items),the Chemical industry of Iran has focused on local demands more than ever.

In order not to have any pause in the local production, the said industry also adjusting himself with the available source of its required raw materials. So we have seen a shift, significant one, in sources of raw materials (Catalysts, Additives, Spare Parts, etc.) from the EC to Asian and even local. This is not a tactical point of view rathe a strategical one. Such a shift have been seen already in 1990s once US stopped trading with Iran. First the required US materials have been traded via different countries but after a while, prolonging and strengthening the US sanctions, the local demand for US materials have been vanished and replaced by the EC ones mostly. I do personally witnessed how easily during a period of 10 years of 1990s the local demand for some US especially chemicals were replaced first with EC and now with local or Asian (Chinese, Indian, etc) ones. Believe me, if by 1996, you went to a Pulp and Paper factory in Iran and promoted your Asian Retention Aids or an Indian Z/N Catalyst to a Polyolefin plant or a Chinese Scale Inhibitor to Oil production field; you will be guided out immediately. But nowadays, things are very different.

Therefore it seems that a very significant change in supply and demand sides of local Chemical/Petrochemical industry of Iran is being happened. The new deal with US or restore the old one, will boost the production of this industry in Iran but I don’t think that the no-deal situation could stop this progress.