A Deeper Look At Iran’s Commodity Industry

Iran is quite possibly one of the best-known and least-known countries in the world for American investors. Tense, if not outright hostile, relations between Iran and many Western countries have kept it in the news, but relatively few investors seem to appreciate Iran’s size, demographics (it’s a very young country), and economic prospects. In recent years sanctions have had a massive impact on Iran’s economy, but it remains a major player within OPEC and in the global energy market [for more commodity news and analysis subscribe to our free newsletter].

Mining

Mining is relatively insignificant as a contributor to GDP, and Iran is not a major player on the global stage in terms of producing or exporting minerals. Although the country produces a meaningful portion of the world’s gypsym (about 9%, making it #2 in the world), some barite, feldspar and other materials, and does have some active production in iron, copper, steel and aluminum, it has yet to really make an impact on the global scene.

That could very well change in the coming future. Iran is thought to have substantial reserves of zinc (9% of world reserves), copper (6% of global reserves), iron, uranium, and lead – not enough to make it another Australia, perhaps, but enough to be a meaningful contributor to export earnings. Other resource deposits, including coal, salt, and gold, are large enough and of high enough quality to be economically viable as well. While Iran has attempted to develop some of these reserves on its own, the country’s mining sector has had a difficult time finding the capital and technology it needs to economically develop these resources [see also Investing In Gold: The Definitive Guide].

Energy

Iran’s economy is driven (and funded) by oil. The Middle-Eastern nation is the fourth-largest oil producer in the world (accounting for about 5% of the world’s production), and holds about 10% of the world’s proven oil reserves and 15% of its proven natural gas reserves.

Oil dominates the economy of Iran. Oil exports make up almost 80% of Iran’s exports, and the oil industry contributes about 20% of the country’s GDP and 60% of government revenue. Keep in mind, too, there is a larger economic ecosystem that extends out from the oil industry – including oil service companies, transportation and storage companies, and petrochemcials. In fact, petrochemicals represent about 4% of Iran’s exports [see also 7 Surprisingly Large Producers of Oil].

Agriculture

While Iran’s extensive oil exports are well known, perhaps less well known are its agricultural exports. Roughly one-quarter of the country’s non-oil exports are made up of agricultural products. Although the country has relatively little arable land, it is the world’s leading producer of pistachios and saffron, and a major producer of a variety of fruits (including dates, apricots and cherries), vegetables (including cucumbers and melons) and grains (including chickpeas and wheat).

Commodity Imports

The combination of sanctions, incomplete government reporting, and murky distinctions between government and quasi-government/military/private organizations, there’s only a limited amount of information on Iran’s imports. That said, it seems like the largest category of imports into Iran (roughly one-quarter) is various types of machinery and equipment.

On the commodity side, Iran’s primary imports are a variety of raw materials, including iron ore (approximately 10% of imports). Iran is also a significant importer of foodstuffs, including cereal grains like rice. Approximately 10% of Iran’s 2010 imports were foodstuffs, with cereal grains taking up the largest portion of that amount [see also The Ten Commandments of Commodity Investing].

Stocks/Funds To Play Iran’s Strengths

Iran’s present status as a pariah state and the resulting economic sanctions make it extremely difficult for American (or European) investors to profit directly from developments in Iran’s commodity industry. While many Western oil firms have had substantial dealings with Iran in the past, companies like Total (TOT), BP (BP) and Eni (E) have largely appeared to suspend their activities within Iran. In any case, none of these companies have critical reliance on Iran, and it is difficult to say that 10% or 15% exposure to a country is really a “play” on that country. That said, countries like Brazil and China have been much less inclined to support sanctions against Iran and companies like Petrobras (PBR) and CNOOC (CEO) have had more extensive dealings with Iran.

As the U.S. and European governments have tightened compliance and surveillance efforts tied to economic sanctions, it is very difficult for investors to play any commodity trends impacting Iran outside of energy (and, as said above, even that is not an especially viable play). While there are companies in countries like Russia, China and the U.A.E. that do work in and with Iran, and these shares do trade on overseas exchanges, they are not particularly ease to buy or follow for American investors.

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Disclosure: Photo courtesy of Babak Farrokhi. No positions at time of writing.

About Stephen D. Simpson

Stephen D. Simpson, CFA is a former Wall St. sell-side analyst who currently spends most of his time writing about investments, business, and the economy. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income, and been a freelance writer for ten years. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog.
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  • Zohaib Khan

    Finally an objective analysis of Iran’s economy, thank you! People are tired of the growing number of war mongering articles.