Iran’s petrochemical development and the implications for Turkey
FATİH MACİTThe lifting of sanctions on Iran has created an excitement in the energy markets as Iran holds the world’s largest natural gas reserves and is ranked the fourth largest country in the world in terms of oil reserves. However, Iran’s impact on world markets in the post-sanction era will not be limited to oil and gas markets. The petrochemical industry is going to be another important area in which Iran will generate an important change in the coming years. The development of the Iranian petrochemical industry will also have important implications for Turkey.
Taking support from rich natural gas reserves, Iran initiated a very comprehensive expansion program for its petrochemical industry in the early 2000s. The total capacity of the petrochemical industry was 9 million metric tons (MMT) in 2001 and the aim was to increase this capacity to 100 MMT by 2015. Iran was unable to reach these targets as the access to technology and financing was very limited due to sanctions. However, despite these difficulties, Iran increased its petrochemical capacity to approximately 60 MMT and actual production by the end of 2015 was very close to 45 MMT.
The abundance of natural gas is not the only factor that has created a positive environment for the Iranian petrochemical industry. In addition to that, highly developed infrastructure and a favorable geographic location also support the petrochemical industry in Iran. The 2,700-km-long West Ethylene Pipeline provides feedstock to 12 different petrochemical plants. The lifting of sanctions on Iran is expected to generate a significant boom in the natural gas production of the country, and this will strongly encourage new ethylene investments which in turn will generate an additional polymer capacity.
When the U.N. Security Council imposed sanctions on Iran in 2006, only energy exports were targeted and the petrochemical industry was not affected by the sanctions. Until 2013, European markets had been the primary source for Iranian petrochemical exports. However, after 2013 as sanctions become more rigid, China and India became major export destinations for petrochemical products. Turkey has also been a significant importer from Iran in some specific products like polyethylene and polypropylene.
In the post-sanction era, Iran has ambitious new investment plans in the petrochemical industry. Taking into account continuing and planned investments, it will not be a surprise for Iran to double its petrochemical capacity within the next three years. Due to its favorable geographic location, both Asian and European markets will be an important export destination for Iranian petrochemical products.
This ambitious expansion program of the petrochemical industry in Iran will have some important implications for Turkey as well. Turkey is already one of the largest importers of petrochemical products in the world. During the period 2002-2015, the total net imports of the country in these products almost reached 175 billion dollars. Due to its large domestic market, Turkey will be an important target market for Iran’s petrochemical industry. This will harm the competitiveness of domestic production in Turkey and will further increase the dependence on imports in the petrochemical industry.
Another important threat for Turkey regarding the expansion of the petrochemical industry in Iran is related to downstream industries. After the recent decline in oil prices, energy exporting countries like Iran have given more emphasis to economic diversification. For that purpose, besides making large investment in upstream industries, Iran will also support investments in downstream industries due to their potential to create new employment and high value-added production. Although Turkey is largely dependent on imports in upstream products, the country has the Europe’s second largest capacity in downstream products like plastics. A potential capacity expansion of Iran in these industries may create a threat for downstream industries in Turkey over the long run. Therefore, Turkey should watch developments both upstream and downstream in Iran and should take the necessary measures to preserve the competitiveness of domestic production.
Associate Professor Fatih Macit is a senior fellow at the Hazar Strategy Institute and head of the economics department and director of the Center of Economic Studies at the Suleyman Shah University (firstname.lastname@example.org).