Will emergence of Iran impact 2014?
Removal of sanctions against Iran would present opportunities and challenges for machinery sellers, says CMME International Editor Stian Overdahl
Iran is the largest market for vehicles, and one of the largest markets for machinery in the wider region.
While in the political sphere there are myriad interests, ideologies and matters of national security being played out in the competing interests of the gulf states, America and Iran, in the world of construction machinery the reality is a lot more simple: companies just want to sell some kit.
Since European and US companies were barred from selling machinery and vehicles to Iran, their overall sales figures in the middle east region have suffered to some extent – with some companies that had a larger share of the Iran market more heavily impacted by the freeze. And for good reason: Iran is the largest market for vehicles, and one of the largest markets for machinery in the wider region. Many truck sellers had assembly facilities in the country, and there exist long-standing relationships with local distributors.
It’s no secret that virtually the day after sanctions are lifted (and all signs are pointing that they will be) the flights into Tehran will be full of representatives from the various equipment sellers, looking to re-establish connections, and their presence, in the market. After all, there must be a huge and unmet demand for spare parts in the country.
But on arrival they may find a country where the trading environment has changed massively. Chinese manufacturers – unconstrained by political sanctions – have made massive in-roads into the market, both for heavy machinery and trucks, busses and passenger vehicles. Other manufacturing nations have also been similarly unrestrained – on a recent trip to Taiwan (see CMME December 2013), I was told by companies there that there were no restrictions in trade with Iran, as long as their technology did not contain any elements licensed or built by a us company.
Nevertheless, practically speaking, Chinese equipment sellers have talked about the difficulties of receiving payment for machines – after all, the international links for Iran’s banking system were shut down by the sanctions. Chinese brands have in the past been beset by quality issues in some markets – but with the new wave of machinery of a tougher design, it will be interesting to see how deeply the Chinese brands have penetrated the Iranian market, and whether the western brands will be able to wrestle back something approaching their former market shares.
It’s also worth wondering how successful the sanctions have been in restricting the flow of spare parts into the country – one imagines that where there is a demand, the market will do its best do meet it (though of course this is not to cast aspersions on the integrity of the major companies in abiding by the sanctions). I remember at a recent aftermarket expo in Dubai, hearing at the booths the numbers of buyers from Iran who were looking to purchase spare parts including tyres, air, oil and water filters, that could be containerised and shipped across the Arabian gulf. With these sorts of cheap parts able to be sourced en masse from smaller suppliers in china and elsewhere in Asia, it’s a likelihood that some traders in Dubai – ever the trading hub – have seen excellent business. But certainly there must be many OEM machines operating in Iran which are in need of a good overhaul with the less common parts.
Closer to home, there may also be indirect effects. The removal of sanctions could also see a sudden flood of oil to the market, with Iran saying that it was to return to ramp up production as soon as the restrictions are lifted. Since the sanctions it has only been able to sell oil to a handful of nations, including china.
While there are many benefits for a lower price per barrel of oil, any significant drop will also impact on the earnings of the gulf states, to varying degrees (oil revenues only make up a fraction of Dubai’s budget, for example). The price of oil is closely watched by industry insiders as a barometer of health for the construction industry, since the government budgets play such a big role in the constitution of the construction sector in the gulf. If the price of oil is high, then money will more readily be released for projects; if it drops to a medium price, then projects will continue, but with money released at a slower pace; and if the price of oil drops too low, then some publicly-funded projects may come to a halt.
Nevertheless, it’s too early at this stage to guess what other oil producing nations will do in response to an increase in Iran’s production output, and whether the price of oil will remain stable at historically high levels – but it’s certainly a contingent factor when it comes to business forecasting in the region.
