FocusTighter sanctions fail to deter Iran methanol exports to Asia

30 August 2012 07:03  [Source: ICIS news]

By Heng Hui

SINGAPORE (ICIS)--Iran is expected to continue exporting methanol into Asia in spite of the tightened West-led international sanctions to the Middle Eastern country over a suspected nuclear weapons programme, because the region needs the Iranian material, industry sources said on Thursday.

While recent statistics from China showed that its imports of Iranian methanol has slowed to a trickle, official data may not be capturing the true volume of shipments as market players have resorted to ingenious means, including hiding the origin of the cargoes to get around the sanctions, industry sources said.

Official data showed that China’s methanol imports from Iran dwindled to 46,700 tonnes, down by 72% from January. (Please see table below)

In May, insuring ships that will call on Iranian ports were prohibited in the EU, stifling trades between Iran and its major customers, which include China, in the months that followed.

The US Congress, on the other hand, issued fresh sanctions in late July against Iran’s petrochemical, shipping and financial industries.

But most methanol market players expect product shipments from Iran to continue flowing into Asia in spite of the tightened sanctions, with some drawn to current attractive freight rates from Iran, notwithstanding the risks.

Freight rates from Iran to China nearly doubled to $100-110/tonne (€80-88/tonne) in June and July from $55-60/tonne in May, market sources said, whereas shipping cost from the Middle East Arabian Gulf to northeast Asia was just at around $50-55/tonne.

“I have heard freight rates of up to $105/tonne, which is equivalent to olefins transport and I am willing to pay this, if the Iran suppliers factor this freight cost into their FOB [free on board] selling ideas,” a China trader said.

Freight rates from Iran to India have also gone up to more than $40/tonne in June from $35/tonne in May.

Since the sanctions led to difficulty in processing payments and in shipping out Iranian methanol, producers in Iran might be keen to sell on a free-on-board (FOB) basis to move volumes, shouldering the high freight costs to entice buyers.

“Sometimes it is better this way because we don’t have enough vessels,” a supplier said.

In the case of China, continuing imports of Iranian methanol is a necessity as the northeastern Asian country is unlikely to find an alternative source that can supply the huge volume it requires, market sources said.

Methanol is a construction chemical, with huge application in formaldehyde, which is commonly used in permanent adhesives for plywood or to make paints and explosives. In China, methanol is also used as fuel for vehicles.

Based on official data over the past seven months, China’s monthly methanol imports averaged 390,000 tonnes. But actual volumes declined 35% from January to roughly 260,000 tonnes in July, with the share of Iranian material to total declining to 18% from 41% over the same period. (Please refer to table below)

Market players are currently taking great care to ensure the origin of methanol is not traced back to Iran. Some of the means cited by industry sources include shipping Iranian cargoes in vessels flying a different flag, or mixing the product with those of other countries.

Iranian cargoes are heard to be being loaded into Indian and Chinese ships for delivery, they said.

Product mixing may explain the spot methanol offers coming from India that are baffling to market players, since domestic supply is currently short to cover its own requirement, they said.

Notwithstanding the international sanctions, India and China – Asia’s biggest emerging market economies – continue to provide insurance for ships calling on Iranian ports, underscoring the importance of the Middle Eastern country as a supplier of raw material for the region’s industrial production.

The region’s highly industrialised countries – Japan and South Korea – on the other hand, have ceased trading methanol from Iran, in deference to the latest round of sanctions, industry sources said.

A Northeast Asian market participant had recently activated his exit clause in a contract – drafted early in the year – with Iranian supplier, as the international sanctions tightened.

Meanwhile, buyers may stand to benefit from the payment processing difficulties posed by Iran sanctions, as these afford them a leeway to negotiate for lower prices.

Iranian products are often offered in tenders, and bought by traders with a view to re-sell the material in the spot market.

Traders are placing a high priority on assurance that the cargoes from Iran will be shipped before trying to re-sell, hence are not making offers until the cargoes are loaded onto ships for delivery.

International sanctions against Iran intensified in November 2011 following a report from the United Nations’Atomic Energy Agency that the country has tried and may still be working toward developing a nuclear bomb.

While the sanctions have had serious repercussions on Iran’s trades, market players have been finding ways slip through them, partly out of necessity.

Some methanol buyers have resorted to using alternative currencies, such as the euro, the Japanese yen and the UAE dirham, for letters of credits to pay for Iranian cargoes, trumping the US dollar.

Most payments are being coursed through Dubai via telegraphic transfer (TT), while some buyers opt to pay in cash to avoid complicated transactions although only a few are able to settle trades in this manner.

In India, the rupee may possibly be used as an alternative currency of trade for methanol between the country and Iran, as it is done with crude oil transactions.

Iran produced 17.6m tonnes of petrochemicals in the five months to August, and exported 7.3m tonnes valued at $5.3bn over the period, according to local media quoting the National Iranian Petrochemical Organisation.

Apart from methanol, shipments of base oils, ethylene and fertilizers are being affected by the sanctions but have not stopped altogether.

The UAE continues to receive Group I base oils cargoes from Iran, while India’s imports have stopped, market sources said.

Meanwhile, Chinese traders are working on bringing Iranian ethylene into China with the settlement to be done via a barter system because of the tightening of sanctions. The last ethylene shipment recorded from Iran to China was in end-May.

On the fertilizer front, only a Turkey-based trader can ship ammonia cargoes out of Iran, while other traders could not get insurance for their vessels, according to market players. An 18,600-tonne spot shipment of Iran-produced ammonia was loaded on a ship by the trader for delivery to India.

In the polyethylene (PE) and polypropylene (PP) resins markets, trades of Iranian material also came to a standstill.

China methanol imports January-July 2012

Methanol	Jan-12	Feb-12	Mar-12	Apr-12	May-12	Jun-12	Jul-12
Total imports (tonnes)	399,959	391,407	491,539	500,029	421,044	267,401	259,237
From Iran (tonnes)	165,500	167,700	214,700	273,800	162,000	38,400	46,700

Source: China Customs

($1 = €0.80)

Additional reporting by Helen Lee, Gabriela Wheeler, Andrea Heng

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections
Request a free ICIS sample report for the latest prices and development in the Asian petrochemical markets

By: Heng Hui
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