Producers Under Pressure Amid Non-Clearance of Raw Materials

EghtesadOnline: The shortage of foreign currency for importing raw materials is the biggest challenge facing Iranian industries.

News ID: ۷۵۱۳۱۰

21 October 2020

According to Abdolvahab Sahlabadi, the head of Iran’s House of Industry, Mine and Trade, many producers purchase their raw materials from foreign countries but their imports are unable to undergo customs clearance, Fars News Agency reported.

“One manufacturer is now paying $5,200 per day in demurrage charges. This comes as they managed to skirt sanctions and buy unprocessed goods or spare parts with great difficulty, only to fail to clear them from customs,” he said.

Sahlabadi said it is six months now that goods have been piling up at customs offices, adding that without production, manufacturers cannot have exports and export earnings to repatriate to the country.

“The Central Bank of Iran and the Ministry of Industries, Mining and Trade need to reach an agreement in this regard. The multiple exchange rate system has puzzled producers. Some of them have even floated the idea of discharging their goods by providing forex at the free market rate but their proposal was rejected,” he said.

Following the depreciation of national currency against foreign currencies in early 2017, the government introduced stringent rules like banning the import of non-essential goods, especially those produced inside the country (known as Group IV goods).

It allocated subsidized currency at the rate of 42,000 rials to a dollar to 25 categories of goods (otherwise known as Group I or essential goods) to help protect consumers against galloping inflation, rampant price gouging and hoarding, not to mention the high and rising cost of living.

Two other categories of imports were also defined: Group II, which mostly included raw materials, intermediate and capital goods, and Group III consisting of essential consumer goods.

Importers of products in Group II were to meet their forex requirements from the secondary forex market. Importers of goods in Group III could buy hard currency from exporters who were not required to offer their forex earnings on Nima.

Export earnings should be returned via one of the following ways: selling currency on the secondary foreign exchange market, known as Nima (the Persian acronym for Integrated Forex Deal System), cash transfers through hawala, selling currency to exchange bureaus and finally using their money to import goods and machinery, or allow a third party to do so.

Nima is a platform where exporters sell their overseas earnings to companies importing non-essential goods. It logs data about repatriated and purchased forex for import and export.

CBI does not allow importers to use their own foreign currency, in or outside the country, to import goods, due to transparency issues.

PMI for Industries Stuck on the Threshold

The Purchasing Managers’ Index for the industrial sector during the sixth month of the current fiscal year (Aug. 22-Sept. 21) settled at 54.53 from 48.06 in the preceding month (July 22-Aug. 21)

The announcement was made by the Statistics and Economic Analysis Center of Iran Chamber of Commerce, Industries, Mines and Agriculture. The center is measuring PMI, known by its Farsi acronym Shamekh, in Iran for the past 24 months.

PMI is an indicator of economic health of manufacturing and services sectors. It provides information about current business conditions to companies’ decision-makers, analysts and purchasing managers.

The headline PMI is a number from 0 to 100. A PMI above 50 represents an expansion when compared with the previous month. A PMI reading under 50 represents a contraction and a reading at 50 indicates no change. The further away from 50, the greater the level of change.

PMI is based on a monthly survey sent to senior executives of more than 400 companies. It is based on five major survey areas: new orders (30%), raw material inventory (10%), production (25%), supplier deliveries (15%) and employment (20%).

The survey poses 12 questions about business conditions and any changes, whether it is improving, no changes or deteriorating.

Vehicle and auto parts manufacturing industries posted the highest PMI with a reading of 60.4 in the last fiscal month while petroleum and gas products industries registered the lowest PMI reading with 44.

The "production" sub-index for Iran’s industrial sector decreased from 56.47 in the fourth month (June 21-July 21) to 46.23 in the fifth month (July 22-Aug. 21), but improved to 56.17 in the sixth month (Aug. 22-Sept. 21).

Industries classified as "others" recorded the highest PMI of the "production" sub-index last month (66.7) while petroleum and gas products industries registered the lowest PMI with a reading of 40.

The "new orders" sub-index fell from 58.85 in the month ending July 21 to 44.23 in the month ending Aug. 21 but improved to 57.48 in the month ending Sept. 21, with the top performing industries being chemicals (64.4) and the worst being clothing and leather industries (42.3).

The "supplier deliveries" sub-index, which measures how fast deliveries are made, increased from 54.85 in the month ending July 21 to 55.49 in the month ending Aug. 21 to 56.72 in the month ending Sept. 21.

The highest "supplier deliveries" PMI was posted by wood, paper and furniture industries with a reading of 67.6 and the lowest was recorded for textile industries with a reading of 38.9.

The "raw material inventory" sub-index jumped from 39.53 in the month ending July 21 to 43.09 in the month ending Aug. 21 but slid to 41.01 in the month ending Sept. 21.

Non-metallic mineral industries and industries categorized as “others” posted the highest PMI (50) while textile industries registered the lowest PMI reading of 22.2 among all groups.

The PMI reading of "employment" sub-index was above the threshold last month. It dropped from 56.49 in the month ending July 21 to 52.98 in the month ending Aug. 21 but rebounded to 53.17 in the month ending Sept. 21.

Industries classified as "others" posted the highest PMI reading (66.7) whereas wood, paper and furniture posted the lowest PMI of employment sub-index (35.3).

To calculate PMI, seven secondary criteria were also surveyed by the center, namely "raw materials purchase prices", "warehouse inventory", "exports", "product price", "fuel consumption", "sales" and "production expectations".

The "raw materials purchase prices" sub-index decreased from 94.74 in the month ending July 21 to 88.63 in the month ending Aug. 21, but climbed to 93.08 in the month ending Sept. 21.

Winners and Losers

All 12 groups of industries under study registered PMI readings of higher than 50 for "raw material purchase price" sub-index in the sixth fiscal month.

The highest PMI was recorded for textile industries, wood, paper and furniture industries, and clothing and leather industries with a reading of 100 and the lowest for rubber and plastic industries with 80.

The "warehouse inventory" sub-index increased from 44.27 in the month ending July 21 to 51.28 in the month ending Aug. 21, but fell to 49.13 in the month leading to Sept. 21.

The highest PMI reading for "warehouse inventory" sub-index was registered for non-metallic minerals with 62.5 and the lowest PMI reading was recorded for rubber and plastic with 35.

The "exports" sub-index decreased from 49.45 in the month ending July 21 to 46.32 in the month ending Aug. 21, but rose to 47.44 in the month ending Sept. 21.

PMI reading of "exports" sub-index was the highest for rubber and plastic industries (55) and the lowest for textile industries (38.9).

The "prices of manufactured products" sub-index decreased from 76.16 in the month ending July 21 to 66.01 in the month ending Aug. 21, but grew to 70.80 in the month ending Sept. 21.

Textile industries recorded the highest PMI of 94.4 for the prices of manufactured products sub-index during the sixth month of the Iranian year while industries classified as “others” posted the lowest PMI reading of 41.7.

The "fuel consumption" sub-index sank from 61.83 in the month ending July 21 to 53 in the month ending Aug. 21, but climbed to 53.79 in the month ending Sept. 21.

Industries categorized as "others" registered the highest PMI measured for fuel consumption last month (66.7) while petroleum and gas products industries registered the lowest (40).

The "sales" sub-index decreased from 57.28 in the fourth fiscal month to 44.97 in the fifth fiscal month, but increased to 55.38 in the month ending Sept. 21.

Clothing and leather posted the highest sales PMI with a reading of 65.4 while industries classified as “others” registered the lowest PMI with a reading of 33.3.

The "production forecasts for the following month" sub-index improved from 51.37 in the month ending July 21 to 58.62 in the month ending Aug. 21 but slid to 52.28 in the month ending Sept. 21.

Six groups reported PMI reading above 50 for "production forecasts for the following month" sub-index with wood, paper and furniture industries registering the highest PMI reading of 64.7 and textile industries the lowest PMI reading of 22.2.

The overall PMI for industries decreased from 55.25 in the month ending July 21 to 48.06 in the month leading to Aug. 21, but improved to 54.53 in the month leading to Sept. 21.