Iran may divert up to 20% PE, PP volumes from Asia to Europe

(recasts, clarifying reference to Istanbul in 11th paragraph)

LONDON (ICIS)–Iran may decide to divert up to a fifth of its annual polymer exports to Europe from Asia amid weakness in its key China market, when international sanctions on the Middle Eastern country are lifted, market sources said on Thursday.

Germany, Italy and Spain are Iran’s target markets, that suppliers in the Gulf Cooperation Council (GCC) are bracing for tougher competition in the western region.

The GCC comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE.

“We expect stiff competition from Iran. Once the sanctions are lifted, we know the Iranians will come to Europe aggressively,” according to a Saudi Arabia-based polymer supplier.

It is not yet clear when the actual lifting of Iran’s sanctions will happen following the breakthrough deal reached between the country and the six world powers in July that was meant to curb Tehran’s nuclear programme.

Iran will likely push more volumes to Europe “due to the promise of higher netbacks and a weakening China,” said a separate Saudi polyethylene (PE) supplier based in Riyadh.

China, which is the world’s second largest economy and a major polymer-importing market in Asia, continues to show signs of weakness, with growing concerns that actual average GDP growth this year may fall short of its government’s 7.0% target.

“Our intelligence tells us Iran is already ramping up production ahead of the lifting of sanctions. GCC suppliers will be affected by a resurgent Iran,” the Saudi supplier said.

Iran is expected to re-join the Society for Worldwide Interbank Financial Telecommunication (SWIFT) services network by the end of the year or early next year, paving the way for the resumption of petrochemical and crude trades with Europe.

The SWIFT banking services were denied in Iran when international financial sanctions tightened on the Middle Eastern country on suspicion that it was developing a nuclear weapon.

Post-sanctions, Iran may ship out the bulk of its produce to neighbouring Turkey, where Istanbul could be a gateway for sales into Europe, according to a major polypropylene (PP) supplier based in Tehran.

“We are waiting for SWIFT, so that’s why at the moment we can’t send huge cargoes [to Europe],” the supplier said.

According to Eurostat, UAE, Qatar, Kuwait and Saudi exported about 14m tonnes of PE and 2.3m tonnes of PP into the European Union (EU) in 2014.

“Iran is a major PE and PP exporter so any small shift of volumes to Europe will likely be felt,” a Dubai-based trader said.

Iran’s petrochemical nameplate capacity currently stands at 59m tonnes, the bulk of which are polymers, according to the country’s National Petrochemical Company (NPC). No exact estimate on PE and PP production was available.

At the height of the international sanctions imposed on Iran, operating rates at its petrochemical plants could not be more than 60%, industry sources said.

Although keen on reclaiming their share of the European market after years of financial sanctions, Iranian producers will make sure that supply will be available to China, its main export destination during a difficult time.

“We will remain loyal to our Chinese customers who supported us during the time of the sanctions. We can never abandon China,” said a source close to an Iranian polymer supplier, who currently ships out about 85% of its overall exports to Asia.

Meanwhile, downstream converters in Europe are concerned about the possible long lead time in getting the actual cargoes from Iran, citing massive congestions at the Bandar Abbas and Bandar Imam Khomeini (BIK) ports.

Iran is also returning to the European market at a time of price volatility and buyers are expected to weigh the merits of buying from abroad, since imports have become expensive with the weakening of the euro.

The euro depreciated against a number of major currencies, including the US dollar, since 2014 and continues to remain volatile.

A European buyer said: “Imports are not cheap enough. Why should I take that kind of risk?”

European traders are currently buying small volumes of polymers and taking a cautious approach given as prices could decline before their ordered cargoes arrive,  industry sources said.

Focus article by Muhamad Fadhil

Additional reporting by Linda Naylor and Matt Tudball