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Cross-commodity factbox: Iran elections to shape energy and steel markets

Dubai — This Friday, May 19, Iranians will go to the polls to elect the country's president for the next four years, a decision that will set the tone for Iran's relations with the rest of the world and how its economy and key commodities sector will be managed in the short-to-medium term.

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Iran's powerful Guardian Council approved six candidates to run in the election but only two are felt to have a realistic chance of winning.

* Incumbent President Hassan Rouhani, a moderate reformist cleric and proponent of normalized relations between Iran and the rest of the world.

* Conservative cleric Ebrahim Raisi, a former prosecutor general close to Iran's Supreme Leader Ali Khamenei.



Unofficial polls have consistently shown Raisi as running a distant second to Rouhani, but the race drew closer Monday when a rival conservative candidate, Tehran's hard-line mayor Mohammed Qalibaf, threw in the towel and called on his supporters to back Raisi.


THE PLATFORMS


Rouhani is credited with negotiating Iran's July 2015 nuclear agreement with the P5+1 group of international powers and the January 2016 lifting of international nuclear sanctions against the country.

He has promised further outreach to the world if re-elected and to have other non-nuclear sanctions against Iran lifted within the next four years. Raisi claims to represent Iran's poor, who suffer from continued economic stagnation. Shunning foreign investment, he would seek to bolster indigenous industry through trade tariffs and other means.


THE ECONOMY, NUCLEAR DEAL


Friday's vote is being viewed largely as a referendum on Rouhani's economic performance amid widespread disappointment that the promised benefits from foreign engagement have been slow to trickle down to ordinary folk. Tensions in US-Iranian relations have become more fraught since US President Donald Trump was elected last November.

Rather than seeking to diffuse such tensions by sticking with the current nuclear deal, Raisi has talked of renegotiating it if elected. In practical terms, that could mean rescinding the agreement. In the most extreme scenario, Raisi might even seek to rekindle national pride by reviving Iranian nuclear arms ambitions.

Breaking news on May 17: Trump to extend Iran sanctions, still developing US policy


IMPLICATIONS FOR THE OIL SECTOR


Rouhani's team has been building capacity. During the run-up to the election, Iranian oil minister Bijan Zanganeh inaugurated a slew of new oil and gas projects including a new development phase at Iran's flagship South Pars gas and condensate field; the start of production from the South Pars oil layer overlying the vast offshore gas field; the long-awaited start-up of 120,000 b/d first phase of the Persian Gulf Star condensate refinery.

But significant expansions in production capacity need international investment, and Iran has yet to unveil its new contract model for upstream development deals: the much ballyhooed Iran Petroleum Contract.

The new contract model is designed to offer more flexible fees for services than the unpopular earlier "buyback" contracts, with additional incentives for partners willing to take on complex or high-risk projects.

Even so, potential investors may be awaiting the results of the election, among other things, before making costly commitments.

Rouhani may be counting on the first contract awards to make a splash in his second presidential term.

A Raisi win could stop the petroleum sector's momentum in its tracks with a strongly negative shift in investment sentiment.

Raisi is keen to make Iran economically self-sufficient and sees no need for foreign investment, technology or expertise.

While all candidates have endorsed the nuclear deal, Raisi is seen as more likely to support more provocative policies that could either violate the agreement or prompt the US to impose more sanctions, according to analysts.

"We continue to contend that Iran is one of the most under-appreciated upside oil price risks in the oil market," said Helima Croft, an analyst with RBC Capital Markets.


IMPLICATIONS FOR GAS DEVELOPMENT


Rouhani is seen leading an export drive.

Iran has gas reserves of 34 trillion cubic meters, the world's second largest after Russia, yet it is barely a net gas exporter, with imports from Turkmenistan offsetting about two-thirds of its current limited exports to Turkey, Azerbaijan and Armenia.

Rouhani pledged in 2013 to boost Iran's gas production from the current 240 Bcm/year -- a necessary step if the country is to realize its ambition of becoming a major gas exporter within the next four to five years.

He has already overseen a significant boost in output from South Pars.

Analysts forecast a further medium-term ramp-up in South Pars capacity to 270 Bcm/year and Iran has other major gas fields awaiting development. Analyst estimates of the country's future gas output range from 340 Bcm/year by 2020 to 460 Bcm/year by 2021, much of which could be made available for export.

A second presidential term for Rouhani could ease the way for Iran to push ahead with planned gas pipeline links to Iraq, Oman, Kuwait and Pakistan, and even to fill an existing undersea pipeline to the UAE, which has sat empty for more than a decade.

Raisi's focus on domestic economic stimuli points to incremental Iranian gas output being directed inward to state-subsidized industries including Iran's petrochemicals and agricultural sectors. If gas subsidies were to be raised, this would exacerbate Iran's historical tendency to consume nearly all its production. In any case, the possibility of less foreign investment in Iran's petroleum sector under Raisi would limit the gas production upside.


IMPLICATIONS FOR STEEL


Most Iranian observers view the performance of Iran's steel, auto and petroleum industries under Rouhani as acceptable.

In the last Iranian year ended March 20, the country's steel output increased 11% year on year to 18.46 million mt and exports jumped 40.6% to 5.53 million mt. Auto exports rose 37% year on year.

With new steel production capacity coming online, one private steel producer said Iranian steelmakers need export markets more than ever, and Rouhani has tried to make that part of his legacy. For the first time, Iranian steel products were shipped to China and Brazil.

Further increases are seen if Rouhani wins a second term.

Raisi's inward-looking economic approach could stimulate domestic steel consumption but at a hefty cost, as the government would need to subsidize Iranian steelmakers.

NEXT SUPREME LEADER


Khamenei, at age 77, may be viewing Iran's coming presidential election, and the ensuing presidential term, as a test of one or both candidates' abilities to succeed him in a handover that could shape the country's economic trajectory for decades.

Both Rouhani and Raisi, as clerics and political figures approved by the Guardian Council, are constitutionally qualified to assume the country's most powerful position.

Rouhani may not be Khamenei's favorite, but his international experience could be invaluable in confronting unpredictable situations thrown up by the Trump administration, among others. Conversely, an election defeat for Raisi would deal a heavy blow to his prospects for taking Khamenei's crown.

--Tamsin Carlisle, tamsin.carlisle@spglobal.com
--Stuart Elliott, stuart.elliott@spglobal.com
--Edited by Irene Tang, irene.tang@spglobal.com, and Mriganka Jaipuriyar, mriganka.jaipuriyar@spglobal.com