28 November 2011 12:43 [Source: ICIS news]
By Franco Capaldo
LONDON (ICIS)--US moves to impose further sanctions on Iran’s petrochemical sector will stifle already difficult trade with one of the largest export-oriented producers in the Middle East and hamper domestic production over the longer term.
In targeting petrochemicals, the US administration is tightening the screw on those who are still willing or able to trade with Iran. The new sanctions target non-US firms doing even minimal business with Iran. Tightened sanctions on banks found to be handling transactions with Iran will hit the trade in goods and services still further.
The US State Department last week identified a threshold on dealings in goods, services, technology or support to Iran of $250,000 (€187,500) in a single transaction or $1m in a series of transactions over a 12-month period.
The government also said it had “begun a worldwide diplomatic campaign to encourage governments and companies that purchase petrochemicals from Iran to switch to alternate sources of supply”.
The European External Action Service (EEAS) has said that the EU is working on extending its sanctions against Iran, following the conclusions reached by the most recent European Council meeting and, more recently, the Foreign Affairs Council meeting of 14 November.
“We will substantially update the list of individuals and entities subject to sanctions at the next Foreign Affairs Council [meeting] on 1 December as a first step,” an EU spokesman said.
Once an EU decision is formally approved, European companies will be banned from doing business with Iran-listed firms and organisations, while individuals continuing to do business with Iran will be subject to asset freezes.
Alastair Hensman, a manager with Nexant’s ChemSystems consultancy, said it had been clear for some time that sanctions would escalate unless Iran changed course.
“I am sure many Western contractors have already severely reduced or halted work in the country, especially those who also want to work in the US or with US companies,” he said.
Data from the European Commission show that in 2010, the EU imported a total of 828,265 tonnes of organic chemicals (largely mainstream petrochemicals) from Iran, while its organic chemicals exports were 65,174 tonnes.
A number of European chemical companies, including Germany-based major BASF, have business interests in Iran.
BASF Iran has a sales office based in Tehran and also two small production facilities northwest of the city, consisting of a supplier of polyurethane (PU) systems and a production plant for construction chemicals. The company said it supplies products that are not subject to trade restrictions and that BASF "complies strictly with all national and international legal requirements".
Switzerland-headquartered INEOS also said it continues to comply with all legal requirements and trade sanctions with Iran as it acquires feedstocks in the open market. However, group communications manager Richard Longden said the company expects that there will be a rebalancing of trade flows as a result of these sanctions.
Germany-based industrial gases firm Linde decided to stop all activities in Iran in September 2010, while in August last year LyondellBasell ended its business operations in the country to avoid possible US trade violation penalties. LyondellBasell said its decision meant the company would stop all licensing of its proprietary technology and services to Iranian petrochemical companies.
There is a possibility that fresh sanctions on Iran could cut operating rates in the country’s petrochemicals and plastics industry, as well as hamper plans to expand its polyethylene (PE) and polypropylene (PP) capacities.
If European chemical majors exited Iran, the country would be cut off from much-needed chemical engineering services and technology, as well as large amounts of catalysts, additives and specialty polymers not produced in the country.
In turn, this would have a negative impact on Iranian petrochemical manufacturing and plant operating rates and expansions, particularly in PE and PP.
However, according to Iranian state-owned media organisation Mehr News Agency, the sanctions will not stop Iran from exporting petrochemicals to the EU.
"The export of Iran's various petrochemical products to Europe will continue under any circumstances," Mehr quoted Iran deputy oil minister Abdolhossein Bayat as saying, according to Reuters.
How much the fresh sanctions against Iran will hamper chemicals trade with Europe and other parts of the world depends greatly on the details of the restrictions, but trade will continue through third parties who have little or no interest in conducting US business. Nevertheless, fewer and fewer banks will be willing to offer credit lines for the purchase of Iranian products.
Iran exports significant quantities of certain petrochemicals and the US moves to discourage trade could hit methanol and benzene supply. How global markets react remains to be seen.
Importers of some products in countries such as Turkey, China and India may still be willing to handle material or act as intermediaries. But there have been reports that Chinese importers of Iranian polyethylene (PE) are scouting for alternative suppliers, citing the likely impact of the new US sanctions.
A sizeable chunk of China's PE imports is at risk because of growing international pressure to isolate Iran, while trade financing has tightened for PE and PP going in and out of Iran, ICIS reported last week.
Restrictions on the supply of equipment and technology will delay PE and PP construction projects in Iran, pushing back start-up dates, industry players say.
The most damaging impact over the long term will be on procurement and maintenance across the sector.
($1 = €0.75)
Additional reporting by Nigel Davis, Joe kamalick and Will Beacham
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