FocusIran oil, petchem embargo unlikely to affect Europe polymers

31 January 2012 15:29  [Source: ICIS news]

By Cuckoo James

LONDON (ICIS)--An EU embargo on Iranian oil and petrochemicals is unlikely to significantly affect European polymer supply or prices, analysts and market players said on Tuesday.

In this continually-evolving scenario, attention has shifted to 'Article 3B' of the latest EU document, which - dated 23 January - spells out details of the embargo on Iranian petrochemicals.

Industry sources point to the document, which says: “The import, purchase or transport of Iranian petrochemical products shall be prohibited. The Union shall take the necessary measures in order to determine the relevant items to be covered by this provision."

A market player said: "The second para of 3B is vague. The EU states they will clarify, and until they do, there is nothing else to consider for the time being."

Analysts in the petrochemical industry also highlight European polymer producers' relatively low level of dependence on Iranian oil, but add that high oil prices could put upward pressure on polymer prices.

EU foreign ministers last week formally adopted an embargo on Iranian oil and petrochemicals, to put pressure on the country to halt its suspected nuclear weapons programme.

The ban on Iranian petrochemicals is due to become effective on 1 May 2012, while the embargo on oil will be phased in by 1 July.

Even when the list is finalised, the impact of the embargo will be minimal on petrochemical production – especially that of polymers, said Leonidas Dokos, chemicals research director at consultancy Frost & Sullivan.

"Of course, we could see some producers taking advantage of the sentiment for spot market increases. Yes, the embargo will have an effect on energy, but not on the production of PE or other petrochemicals."

The embargo on oil is expected to hit southern European states such as Greece, Spain and to a lesser extent Italy, that are more dependent on Iranian oil.

Italy is a key PE market, with good levels of production and consumption.

"However, the impact even there might be less than many think. We saw this with the Arab spring - Italy was very directly involved. It was much more of a drastic political change. But even this scenario did not impact the chemicals and plastic manufacturing industry in Italy," said Dokos.

Apart from potential production cutbacks in Europe due to a loss of Iranian oil, any loss of direct PE supply from Iran could create interesting changes in import dynamics into Europe, a PE buyer pointed out.

"One interesting question is where will all the polymer from Iran go? If it is presumably going to China, it will then displace the Middle East PE going to China into Europe," said a PE buyer, adding that this will ensure the market in Europe is well-supplied.

However, market players and analysts were quick to identify an indirect effect on polymer prices, if the embargo succeeds in keeping oil prices up.

"If oil prices remain high for a long time, it is inevitable that non-integrated polymer producers [companies that buy the raw materials such as naphtha and ethylene] will reduce output, and eventually the supply will tighten leading to increase in price," said Gaurav Vyas, chemicals research analyst at Frost & Sullivan.

"A similar concept applies to other high-volume polymers such as PS, PET and PVC [polystyrene, polyethylene terephthalate and polyvinyl chloride]," he said.

Dokos added: "Politics plays a large part here, so it could go both ways. Behind the scenes, so much diplomacy is going on. Reading the newspapers, you would think it is a stand-off between US. and Iran. But lately, US. helped rescue some Iranian soldiers from pirates. Sometimes, people tend to read too much into this situation."

By: Cuckoo James
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