SINGAPORE (ICIS)--China’s petrochemical imports from Iran are not expected to take a major hit upon the US’ re-imposition of sanctions against the Middle Eastern country.
Even before the landmark 2015 Iran nuclear deal, the world's second-biggest economy has been procuring heavy volumes of polyethylene (PE) and methanol, as well as crude, from Iran.
Their trade ties may even be reinforced as Iranian cargoes would have to seek alternative export outlets, when the US sanctions are reinstated.
“In the medium term, the new sanctions may change the trading flow to some extent – more Iran cargoes … may target [the] China market, but which may be limited by some factors,” said Amy Yu, olefins & polyolefins analyst at ICIS.
Payment terms do not pose a problem as settlement of Chinese transactions with Iran are limited to telegraphic transfer(TT), cash or euro credit, although some restrictions were introduced in 2017 on the use of letters of credits (LCs) on Iranian transactions.
But traders and end-users in China will have to contend with higher freight cost when dealing with Iran as shipping capacity will be limited amid international sanctions, she said.
“Iran producers usually sell cargoes [on a] FOB [free on board] basis”, with the freight cost borne by buyers, Yu said.
In some cases, to go around the sanctions, some Iranian cargoes had to be re-routed to the UAE before heading to China, resulting in higher shipping cost, she said.
Over the past four years, Iran accounted for an average of 8.1% of China’s crude imports; 17.5% of its PE imports; and 35.6% of methanol imports, according to official data.
For China, the looming trade war with the US – the world’s biggest economy – is deemed a much bigger problem.
Continuing trades with Iran could potentially sour relations between China and the US, which has been embracing increasingly protectionist trade policies under President Donald Trump.
China, along with the US, UK, France, Germany and Russia, were the six world powers that signed the nuclear pact with Iran three years ago, which was aimed at curbing Tehran’s uranium development.
Trump on 8 May announced the US decision to withdraw from what he views as a “defective” pact, noting that the sanctions to be re-imposed are targeted at critical sectors of Iran's economy, such as energy, petrochemical and financial sectors.
Once the US sanctions are put back in place, companies and countries will have 180 days to reduce their consumption of Iranian oil or face penalties from the US, according to analysts.
The possibility of having to cut oil imports from Iran should not hurt China as much, amid a glut in domestic supply of oil products, said She Jianyue, chief analyst at state-owned China National Offshore Oil Corp.
“Oil is not a big problem. For one, China can switch to other suppliers to replace Iran quite easily, particularly Russia. For another, China may not need to import that much of oil at all,” She said.
“We are exporting more and more gasoline and diesel, which means our refineries have processed too much oil into those transportation fuel. So, cutting imports from a single supplier will not be a problem,” he added.
Crude has been trading at their highest levels since November 2014 due to a combination of output cuts by OPEC and other major producers, except the US; strong demand amid the global growth recovery; as well as the heightened geopolitical tensions in the Middle East.
The upward pressure intensified following the US’ decision to withdraw from the Iran deal. On 9 May, both the US and Brent crude futures surged by more than $2/bbl on 9 May, with strong expectations that the gains would continue.
“Oil prices are finally on a clear upward trend, while strong global growth is boosting demand for regional goods,” Spain-based research firm FocusEconomics said in its May Consensus Forecast report for the Middle East & North Africa (MENA).
In the short term, crude’s strong gains may filter through the downstream petrochemical markets, ICIS aromatics analyst Jenny Yi said.
Prices of aromatics such as benzene and toluene, as well as those of petrochemical feedstock, naphtha, tend to follow crude movement closely.
Focus article by Fanny Zhang and Pearl Bantillo
Additional reporting by Tahir Ikram, Susan Kong, Dora Xue and Yvonne Shi
Picture: Port and oil refineries in Asaluyeh at the Pars Special Energy Economic Zone in Iran. Zagros Mountains in distance. (Source: FLPA/REX/Shutterstock)