By Arash Karami, for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iran Business News.
Why sanctions relief has not been enough to kick-start Iran’s industry
A cursory review of changes in the volume of untreated steel, base metals and petrochemical products traded on the Iran Mercantile Exchange reveals that demand is depressed. Disregarding imports, it is evident that local industry is on a downward trajectory.
A survey conducted by the bimonthly economic publication Payam-e-Eghtesadi shows that the volume of steel exchanges reached 5.46 million tons in the Iranian calendar year 1394 (March 21, 2015-March 20, 2016). This figure is a 31% drop from the preceding year’s 7.9 million tons. Similar declines can also be seen in the trade of other key goods.
For instance, during the same period, consumption of copper decreased by 20% while aluminum consumption dropped by 5%. Meanwhile, the volume of petrochemical products traded on the Iran Mercantile Exchange dropped from 2.9 million tons in the Iranian calendar year 1393 (March 21, 2014-March 20, 2015) to 2.5 million tons in 1394, a 13.7% decline.
In sum, as far as the exchange of base materials is concerned, the past Iranian calendar year ending March 20 was one of decline, confirming the reported 2.2% negative growth of local industry.
Among the issues driving the decrease in the volume and value of transactions on the Iran Mercantile Exchange are decreased funding for construction projects, a decline in demand for housing and the growing recession in the industrial sector.
Economic analysts argue that among the many problems that are affecting construction projects, lack of adequate capital is a key factor. Although allocated funding should have been sufficient, these funds have in reality been spent on other, peripheral areas. The available statistics show that the budgets allocated to construction projects between the Iranian calendar years 1388 (March 2009) and 1395 (March 2016) have increased — but only on paper.
Indeed, the portion of promised funding for construction projects that actually materialized dropped from 61% and 65% in 2009 and 2010, respectively, to 19.5% in 2013-15. This means that a large portion of the government’s general budget has consistently been spent elsewhere, resulting in an effective reduction in the development budget. Thus, one of the key drivers of consumption of basic commodities traded on the Iran Mercantile Exchange has been halted. As long as construction projects do not receive adequate funding in practice, it is unrealistic to expect any improvement in the overall economic conditions.
Domestic producers of various goods, including steel and base metals, need to sell a major portion of what they have in stock to the government and state-owned companies, considering that their bottom lines — as well as cash flows — are dependent on the government buying their products. Given low oil prices and government subsidies largely being extended to consumers rather than producers, local industry is faced with major problems and it is no surprise that trade volume on the Iran Mercantile Exchange has noticeably decreased.
Another feature of the big picture is the continuous recession that has afflicted the housing and construction sector since 2013. As a result, the demand for goods used in the housing and construction sector has plummeted, with a corresponding drop in the consumption of raw materials. In other words, the recession in the housing sector has quickly spread to local industry. This decline has, for instance, negatively affected the market for steel beams, reinforced steel, sheet metal, metal doors and windows, aluminum, asphalt and paint as well as polymers.
Another key driver of the reduced trade of basic commodities is the decline in Iranian auto production. The Ministry of Industry, Mine and Trade has announced that 976,836 vehicles were produced in the last Iranian calendar year, a decline of 13.5% compared with the preceding year, after auto production actually experienced a growth of 53.4% from March 2013 to March 2014. The recession in the auto industry without a doubt directly impacts the volume of metal traded on the Iran Mercantile Exchange.
Worryingly, statistics released by the Iran Mercantile Exchange for the past two months show no significant changes in the market for raw materials compared with the previous year. Rather, there has been a continued decrease in the volume and value of trade in the output of local industry and mining. For petrochemical products, there has been a very small increase in exchanges. These sectors make up the vast majority of the volume of trade on the exchange. As such, in order to aid local producers grappling with the ongoing recession, it is important for the government to find solutions to these problems.
In this vein, supporting small and medium-sized enterprises (SMEs) is necessary to stimulate demand that can revive the industrial sector and also boost the volume and value of trade on the Iran Mercantile Exchange. In this regard, the recent letter from the governor of the Central Bank of Iran to CEOs of banks and credit institutions asking them to allocate at least 10% of loans to SMEs is an important step forward. The launch of a market for SMEs on Iran’s smaller Fara Bourse later this month is another important step that can facilitate the kind of financing necessary to boost SMEs, thereby creating sustainable economic growth that can create jobs.