From woes to woos – Iran post-sanction opportunities

As sanctions against Iran are set to be lifted, industry experts in the Islamic Republic tell Shahrzad Pourriahi that the country is thirsty for investment. The feature article appeared in our Sept/Oct issue of ERJ magazine:

Iran is pursuing the construction of four tire plants in the country at the moment and is eagerly waiting for economic sanctions on the country to be lifted so it can let in top brands to invest in the industry.

The government body Industrial Development & Renovation Organization of Iran (IDRO) has introduced the four projects and will have a 19-percent share in each one of them, with the other 81 percent owned by private investors.

Head of the Iran Rubber Industries Research Centre Hassan Shabani explained that three of the proposed projects are located in western Iranian provinces of Lorestan (Khorramabad), Kermanshah and Kordestan, where the economy is not as strong as other central or big cities.

The fourth, which happens to be in one of Iran’s poorest cities, Zahedan, is near the Pakistani border and bears high security issues.

And all the project backers (see notes below) are looking for top brands to join them in their investments.

“They are only looking at top brands, the likes of Pirelli, Bridgestone, Continental, etc,” said Shabani.

But, he added, doing business is always complicated in Iran.

“First of all, not all of these projects are likely to be completed, and they will take around five years. By then, the Iranian consumer market will not have developed the capacity and tire makers will want to look into exports, which again will be complicated,” said Shabani.

Potential for exports

A strategic plan drawn up by Iran’s Industries and Mines Ministry estimates the production of 3 million cars a year and 700,000 tonnes of tire production in Iran by 2025.

The aim is to achieve a 30-percent level of export and an equal level of import, meaning the country’s tire demand in 2025 is predicted to be around 700,000 tonnes a year.

According to Nasser Emami, head of the tire standards upgrading committee of the Iran Tire and Rubber Association, Iran can reach the target if all expansions by existing tire factories and the new projects are completed by then.

“Obviously, our target market should be countries like Iraq, Afghanistan, Saudi Arabia, Turkmenistan, and north African countries,” said Emami.

Shabani explained: “It is not just these four projects, there are other expansion plans by local tire makers too, and they will all be radial tires, as opposed to bias ones.”

Now, Shabani added, the less developed countries do not have the radial technology and their market demand is for bias tires.

“Private investors are not going to get a top brand on board to produce bias tires, and if they do produce good quality radial tires, then we have the various issues of target market, finished price, and raw materials,” he noted.

In terms of raw materials, Iran is relatively self-sufficient with respect to synthetic rubber and the petrochemical materials needed for the industry.

However, both Shabani and Emami believe that the petrochemical industry is “not there yet” to support the requirements of big international brands.

“We only produce emulsion SBR as opposed to solution SBR, and if we are to aim for European and US markets, our tire companies need to meet EU tire labelling standards for PCR and TBR tires and US Smart Way standard and updated high speed and endurance standards for TBR tires” said Emami.

Up until a while ago, the standards only looked at safety, and Iran meets them all. But when it comes to quality standards, said Emami, Iran’s petrochemical suppliers need to upgrade. “Bandar Emam Petrochemical Co. produces the SBR and designing and installing solution lines is not easy,” added Shabani.

And that’s not all: Iranian local suppliers currently produce aromatic oils, which since 2010 have been banned in Europe.

“Iran will either have to change production to non-aromatic oil e.g. naphthenic oils, which is not really possible, or to import them, which makes the end product too expensive to export,” added Shabani. “In addition to that, we have to import compound silica as we do not manufacture it and it is now a major ingredient in the tire industry.”

Sourcing equipment

And Iran will have to start looking for companies to provide the tire machinery.

“The price difference between Chinese-made tire machinery and European-made tire machinery is around $1.5 per kilo of tire production – tires with Chinese machinery cost around $2.5 per kilo whereas European machinery bring up the costs to $4 per kilo,” said Emami.

Amir Sanatkar, who sources machinery for tire-makers through his Neda Engineering Group (NEG), explained that despite the Chinese having a foothold in Iran, the price is not the only determining factor.

“The Chinese have indeed had advancements but it has mostly been about copying and they hardly have developed their own technologies,” he said.

According to Sanatkar, major machinery including calendering, mixing, extrusion lines, and testing machines will still be sourced from European companies.

Sanatkar has concerns regarding the sudden turn to cutting-edge technology and producing highly advanced tires without taking the target market into consideration.

“And in any case, it doesn’t make any sense to make massive investments for a market like Iran, where 50-60 percent of the tires are normal tires, and the main competitors in tire market will be normal Chines tires with lowest prices” he added.

According to Sanatkar, the cost of making tires in Iran’s existing tire plants is around $2.5-$3 per kilo.

“But if we want to have new investments with good and new machinery from Europe, feasibility studies suggest that the price will be pushed up to $3.50-$4.

And this is while recent reports in Iran suggest that imported standard Chinese brands cost $2.50-$4 depending on quality.

Chinese machinery manufacturers such as Mesnac, Dalian, TST, CGEC and Beijing Hanch already have a foothold in Iran, with each having sales reps in the country.

However, by law, Iranian tire-makers have been encouraged to make use of locally manufactured machinery as well.

“In terms of technology and prices, Iranian manufacturers actually do better than the Chinese in certain aspects.” said Sanatkar.

“Cutters, slitters, bead apex machine, slitters, automatic painting and curing presses, for instance, are better built in Iran based on European know-how and tire-makers are asked to purchase them locally.

“In fact there is good potential for European machine suppliers to cooperate with Iran to save costs and achieve better final prices compared with what Chines suppliers offer,” he added.

Projects on track

Despite all the arguments, the four projects – at least two of them – seem set to materialise within the next few years and foreign companies are weighing their options.

The two companies declined to comment on the reports.

According to Emami, every effort is being made to open the doors to foreign investors in Iran to inject much needed fresh blood into the country’s economy.

“Everybody has their arms open for foreign investors and are thinking about changing the law to make room for 100-percent foreign direct investment.

“Even president [Hassan] Rowhani is personally pursuing the issue and wants to prepare the ground for foreign investment. I can see it in the private sector too and in my discussions with members of chambers of commerce,” said Emami.

Export issues aside, top brands will also have to face competition from Chinese companies in Iran too. Iran is, however, an unusual market.

“To be fair, we cannot even compete with the Chinese at home, and yet Porsche had its highest exports to Iran last year,” said Shabani, adding that top international tire-makers may have already won the brand-thirsty Iranian market.

But it is not all about brands.

“All-in-all, it is too early to say just yet, whether we will see a stream of foreign investors in the country,” concluded Shabani.

Notes: Amirali Zohreh-Nejad is an Iranian entrepreneur whose father currently imports tires into the country. He is now the private investor in Nikro Gostaresh Khorramabad Tire Company, the ground-breaking for which was held in July.

Zohreh-Nejad, according to ERJ sources, has a group of ex-Nokian experts on board to import technology.

All four projects, will have a capacity of 50,000 tonnes of tires, and each is estimated to cost around €200 million.

Another project, championed by entrepreneur Mitra Farzadnia, is to be completed in Kermanshah Province, where Farzadnia has her own tire cord company too.

The third investment is made in Kordestan Province by Massoud-Taqi Ganji and his brothers who are already shareholders in Artavil Tire and Yazd Tire.

And the fourth, in the more impoverished province of Sistan-Baluchestan has been taken up by charitable Mostazafan Foundation to work on along with potentially a Norwegian company.