Irans Potential

In her opening remarks at a seminar in London, Consultant Geeta Agashe told attendees that despite Irans disappointing economic performance since sanctions were lifted last year, foreign companies could still reap the benefits of doing business in the country. She pointed out that Iran has the largest population in the Middle East, with around 80 million people, more than 60 percent of whom are 30 years of age or younger and over 70 percent of whom live in urban areas. Its economy is diversified compared to other oil-rich countries in the region, with major potential for tourism around its 21 UNESCO World Heritage Sites.

Iran also holds great promise as a global trade hub, Agashe stated. Nearly 20 percent of oil trade makes its way through the Strait of Hormuz off the countrys southern coast – the only sea route out of the Persian Gulf. Iran is also strategically placed along the International North-South Transport Corridor connecting India, Russia, Iran, Europe and Central Asia by ship, rail and road.

Citing conversations with multinational companies focused on Iran, Agashe outlined five challenges that foreign businesses must address to succeed in the country. First, companies must strictly follow both their national and internal sanctions compliance policies. Agashe recommended hiring experienced compliance professionals and consulting an external compliance lawyer. U.S.-based companies ought to be extra vigilant due to the heightened tensions between the two countries, she cautioned.

Players must also invest in securing quality insight into the Iranian market, Agashe advised. She recommended partnering with local distributors when entering the market, naming distributors in Dubai and Istanbul as resources for connecting with Iranian businesses.

Companies must find banks willing to do business with Iran. Without access to the United States financial system, Iranian companies often spend weeks waiting for foreign currency to pay for goods from their nonnative partners. This problem is likely to persist, Agashe predicted, because Iran is unifying dual currency exchange rates while also seeking to protect local producers from volatility. For several years, Iran has had an official exchange rate, to which access is limited, and a floating open market rate used by those who lack access.

Once marketers are operating in the country, she continued, they will likely find it necessary to reclaim brand equity from counterfeit products and develop strategies to combat the underground lubricants market. Iran represents an important opportunity for multinational companies that operate in emerging markets, Agashe concluded. A smart approach will find the sweet spot – advancing ahead of competitors while sidestepping first-mover mistakes.

A Look at the Market

Majid Safdari, CEO of Vista Energie, reviewed the drivers of Irans lubricant markets in his London presentation. Major forces include legislation and environmental policies, lubricant industry development, vehicle fleet modernization, consumer behavior and economic and industrial development.

Safdari explained that one focus of government legislation will be to upgrade emissions standards and fuel quality. Iran has set a deadline of three years to implement the Euro IV standard, and it could take up to 12 years to implement Euro VI. The country also must implement legislation to minimize the production of obsolete performance levels and monogrades and to establish a regulatory framework to supervise compliance.

API CC monograde oils dominate the heavy-duty diesel engine oil market in Iran, and API CC to CG-4 comprise more than 70 percent of usage. API CH-4 and CJ-4 hold the most promise for growth, Safdari reported. In the passenger car market, API SF and SG 20W-50s dominate, with multigrades comprising more than 80 percent of the market. API SJ/SL 10W-40 shows the most promise for growth.

According to Safdari, API Group I base oil nameplate capacity in the country amounts about 1 million tons per year. However, Iran has no domestic additive production and no technical standards to limit the importation of low-quality additives. About 90 percent of the market is dominant by four major refiner-blenders, who are protected by high duties on imported finished lubricants.

In Safdaris view, legislation is required to encourage the production or importation of high-temperature high-shear, low-sulfur base oil and to limit the use of high-SAPS (sulfated ash, phosphorus, sulfur) additives. In addition, the government must enforce mandatory labeling requirements for fuel economy and compliance with European emission standards.

He then reviewed the challenges facing Irans Group I base oil refiners, noting that the industry is beset by a number of problems, including high production costs, low yields and inability to meet evolving OEM requirements. Output has ranged between 75 and 80 percent of capacity in recent years and will only get worse as the demand for Group I base oil wanes.

Iran has the capacity to blend more than 2 million t/y of finished lubricants, Safdari said. But to be competitive, blenders require the ability to differentiate their finished lubes, certifications from local and international OEMs, the support of major additive suppliers and the ability to target export markets.

Permian Energy Director, Mehrdad Vajedi, noted in his Dubai presentation that Iran will need 60,000 t/y of high-quality base oil in the next four years to fill the demand for original equipment manufacturer factory fill. Total demand in 2020 could exceed 100,000 tons. The country presently imports 45,000 to 50,000 tons of higher quality base oils, 95 percent of which comes from UAE, Turkmenistan, India, Malaysia and Korea.

Irans distribution channels are independent of lubricant blenders. Therefore, market players must set up exclusive channels to minimize their dependence on traditional players, said Safdari, and they must invest in new retailing initiatives and consumer services, advertising and promotional efforts.

According to Vajedi, Iran has about 250 active distributors of engine oil, one-half of which are located in Tehran. Ten percent of large distributors handle about 70 percent of total engine oil sales, and about 80 percent of sales are managed by distributors.

Safdari reported that Irans car parc numbers about 19 million vehicles, and average per capita gasoline consumption is 5 liters per day. Forty automakers are active in the Iranian market, and they are targeting the production of 3 million cars by 2025, an increase of about 25 percent over 2016 and 2017. He added that Iran needs to produce about 1 million heavy-duty commercial vehicles by 2025 to modernize its fleet, which was heavily impacted by sanctions, losing 75 percent of production in 4 years.

Doing Business in Iran

Atousa Mahmoudpour, head of the Iran Desk at Fichte Legal Consultants, outlined the pitfalls of doing business in Iran at the Dubai conference. First, although the Joint Comprehensive Plan of Action (JCPOA) has been in place for more than a year, not all sanctions have been lifted. Although banking and financial sanctions have been lifted in theory, issues remain to be resolved, he cautioned.

On the plus side, the prohibition on financial transfers to and from Iran has been lifted. And funds can be transferred between EU entities and non-listed Iranian entities, including Iranian financial institutions. Also, the requirements for authorization or notification of funds transfers no longer apply.

In addition, Mahmoudpour explained that non-U.S. companies can open branches in Iran, and Iranian nonsanctioned banks can open branches in Europe. Finally, the supply of specialized financial messaging services, including Society for Worldwide Interbank Financial Telecommunication, is allowed for Iranian entities, including the Central Bank of Iran.

However, he said, U.S. banks are still prohibited from doing business with Iran. And although Iranian banks have reconnected to SWIFT, traders complain about problems effecting transactions with Iranian banks because many foreign banks remain wary of doing business with the country.

Non-U.S. banks may resume trading with Iran, said Mahmoudpour, but because Washington retains sanctions over other issues, bankers are still uncertain about the legal basis for business and worry they could be targeted by U.S. officials. He added that smaller and non-mainstream banks are already doing business with Iran.

Banks remain cautious and reluctant to open their doors to Iranian nationals or to investors with Iranian interests, he said. But there have been some improvements. Belgiums KBC and Germanys DZ bank have confirmed they have started handling transactions on behalf of European clients doing business in Iran. Austrias Erste Bank is preparing to do the same.

Network International, the largest payments processor in the Middle East and Africa, plans to work with certain Iranian banks. And the Export-Import Bank of China has agreed to fund multiple projects in the country. Finally, the Financial Action Task Force has given Iran until June to update its anti-money laundering rules.

Mahmoudpour emphasized the need for intensive due diligence about the source of funds when doing business in Iran. In particular, obtain legal opinions on pending matters, be aware of export controls, implement strict compliance policies and include snap-back safeguards. He also emphasized the need to understand the Know Your Customer guidelines to ensure appropriate customer identification and to monitor suspicious transactions.

Mahmoudpour concluded, Doing business with Iran is difficult, but not impossible. With the assistance of a professional intermediary, experienced in transacting business in the region and a proper structure, business can be conducted in Iran successfully.

Future Outlook

Muhamad Fadhil, Head of Middle East Markets for ICIS, explained in a presentation in London that during the sanctions, Irans key export markets were China, Turkey and India. Since the sanctions were lifted, Europe has become a key target market. Exports to India comprise mostly Solvent Neutral 500; exports of SN 150 are scarce, he noted.

API Group I holds the dominate share of Irans output, comprising more than 50 percent of its base oil exports. According to industry estimates, more than 60 percent of Irans base oil exports move through UAE, Fadhil said.

Group I exports to China are sporadic and limited. China and other key markets are moving to Group II and III, he said. Most countries in Asia, import Group I oils from Thailand, Indonesia, Singapore and Japan, rather than Iran.

Prices for Iranian base oils have increased since mid-2016 due to tight supplies of crude and vacuum gas oil. The lack of Group II imports has supported SN 500 prices.

Iran is also aggressively expanding its petrochemical production. Other than the ports of Assaluyeh and Mahshahr, Chabahar near the Pakistan border is slated to be the next big petrochemicals site in Iran. Fadhil explained that India signed a deal with Iran to develop the Chabahar port, which is east of the Strait of Hormuz, giving India strategic access to Irans petrochemical products. Chabahar port will rival Pakistans Gwadar port, developed by China.

Geopolitical and economic uncertainties will play key roles in Irans future development. The presidential election in May will be closely watched by European and Asian investors, who prefer a moderate leader in Iran, Fadhil noted. In addition, he said, the status of upstream and downstream projects, including potential upgrades to the countrys Group I plants, remains unclear.

Caitlin Jacobs contributed to this article.