INSIGHT: Iran sanctions impact on methanol will be global

18 April 2012 14:15  [Source: ICIS news]

By Ross Yeo

LONDON (ICIS)--Western-led sanctions imposed on Iran over its nuclear programme have already contributed to a tightening of the European methanol market and an increase in prices. Now the sanctions have started to impede the movement of Iranian methanol to the Asian markets, with potential global consequences.

On 23 January, the EU broadened existing sanctions against Iran to include the import of oil and petrochemicals, as well as the export of related equipment and technology.

Prior to this, non-US companies operating in the European market were free to deal with Iranian methanol, providing they could find a bank willing to process the deal.

At this stage, around 500,000 tonnes of methanol were being brought to Europe from Iran annually, out of a total effective production capacity in the country of approximately 4m tonnes/year.

While the sanctions stipulate that any petrochemical supply contracts concluded before 23 January may be executed until 1 May, market sources say Iranian methanol has already effectively disappeared from the European market.

Out of a total market size of around 7m tonnes/year, 500,000 tonnes/year is a not insignificant loss. Since 23 January, the average of European spot prices has increased by 11%. And although other factors have undoubtedly been in play, such as an unexpected improvement in demand since the fourth quarter of 2011, sanctions have had an effect, both physically and on market sentiment.

“Iranian methanol [brought to Europe] was mainly uncommitted, so it was an important part of the liquidity of the European spot market. Now there is hardly any free spot availability. If you want spot you need to pay a high price,” said a major European buyer.

Many players believed the impact of the missing 500,000 tonnes/year would be temporary. Given that the methanol market is global, and the majority of Iranian product was already being sold to Asia, it was reasoned that a simple readjustment of trade flows would replace the lost volumes in Europe. With the total global production volume unchanged, any disruptions would be of a logistical nature and only temporary.

Indeed, many players still hold this view.

However, there have been increasing reports in the past few weeks that difficulties are being encountered when trying to move material from Iran to China, India, and southeast Asia.

Initially, these problems consisted of buyers showing a preference for non-Iranian product, despite not being subject to the EU/US sanctions.

This resistance stems from associations with European and American companies, which are themselves unable to touch the material, and also payment problems, with international banks unwilling to finance deals or process payments.

More recently, the difficulties have extended to the shipping market. Both vessel owners and insurance providers are increasingly unwilling to get involved with Iranian product as the influence of the sanctions widens.

Suddenly, it is not just a case of redistributing 500,000 tonnes/year, but of finding a home for 4m tonnes/year and a way of transporting it in increasingly difficult conditions.

Many players do not believe the impact on the global market will be long term. One European producer thinks a likely scenario will be a short-term price spike, first in China then globally, followed by rebalancing of conditions as high-cost Chinese production kicks in.

“This could have a huge impact for prices in China on a fairly short term, and since China is setting the prices for the rest of the world, prices in Europe and the US will follow. In the long run it will have a more modest effect…a price spike will trigger more [Chinese] production and perhaps even slightly reduce demand. But this will take some time, so prices will overshoot until the market finds its balance again.”

And the European buyer above simply believes buyers in Asia will find a way around the logistical obstacles. “The Chinese will solve it, they will switch to Chinese vessels and insurance. The methanol will find a home in either India, China or southeast Asia,” the European buyer said.

However, a trader and distributor with offtake agreements from Iran does not believe these solutions will work and thinks the shipping problems will result in Iranian tanks filling up, at which point the plants must be shut down.

While it is widely acknowledged that little more than 50% of China’s total methanol production capacity is utilised, the trader does not believe it is a simple case of firing up the higher-cost units when prices are sufficiently high enough, as is often suggested.

“A lot of plants can’t run due to lack of feedstock or location or unreliability, anything that can run is already pretty much flat out.”

On the suggestion of using alternate vessels whose owners are willing to ship Iranian material, the trader’s view was simple: “There aren’t enough boats.”

China imports approximately 6m tonnes/year, so a loss of around 3.5m tonnes/year from the wider Asian market will be keenly felt, and the trader believes the global market is going to get very tight.

“China losing 20-40% of imports will be a huge problem. The [global] market has to ration demand to offset the lower production, until such time additional production comes from new plants or plants coming back from shutdown.”

While there are no new plant additions expected in the near term, there are two plants which could return from long-term shutdowns at some point in this quarter.

These are the 750,000 tonne/year plant in Beaumont, Texas - owned OCI Nitrogen, part of Egypt’s OCI group - which has been shut since 2004, and two 330,000 tonne/year plants in Marsa El-Brega, Libya, owned by the Libyan national Oil Corporation, which have been off line since February 2011.

However, not only do uncertainties surround both of these returns, the volumes contributed will not balance out the Iranian material which has been lost from the market. Furthermore, there is a clutch of planned turnarounds taking place now or in the coming months.

Of course, the one event which would mean the resumption of normal methanol production and trade flows is the removal of the sanctions.

Senior Iranian officials last week met representatives from the US, Russia, China, Britain, France and Germany for the first time in over 15 months, for a possible resumption of the on-off talks regarding Iran’s nuclear programme.

 ($1 = €0.76)

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By: Ross Yeo
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