Iran PE trade flows to China to be altered

China’s polyethylene (PE) imports from Iran are expected to decrease as US sanctions take effect from 5 November. Many shipping lines have announced that they have suspended businesses in Iran since May 2018, when the US decided to pull out of the Iran nuclear deal.

On the plastics exports front, Hafiz Darya Shipping (HDS), part of Islamic Republic of Iran Shipping Lines (IRISL), Iran’s national maritime carrier, and Emirates Shipping Line (ESL) are major transportation service providers.

ESL has been updating its booking rules, regulating Iran’s export booking and raising freight rates. A Chinese trader said the freight rates using ESL are $30-40/tonne higher than those of the HDS Line.

With the sanctions taking hold, talk was heard in the market that ESL will suspend the transportation of Iranian cargoes from 5 November.

Some participants said this may affect Iran’s PE exports to China.

TRANSPORT CAPACITY

If the talk is correct, the transport capacity of plastics out of Iran is expected to decrease by around 20%, said a source from a Chinese shipping agency.

Iran exported 2.12m tonnes of low density PE (LDPE) and high density PE (HDPE) in January-August 2018, 1.59m tonnes of which were shipped to China, accounting for 75% of the total, according to market sources.

Therefore, some market participants believe that Iran’s PE inventories are set to pile up once there are significant drops in transportation capacity from Iran to China, forcing Iranian PE producers to adjust their run rates.

However, as the Iranian government has clearly required local producers to use the HDS Line from this year, the impact is expected to be limited.

Market participants should pay attention to import arrivals from Iran in December, said traders based in east China.

PAYMENTS ISSUE

On the payment issue, although China remains a party in the Iran nuclear deal, the Bank of Kunlun – a key Chinese conduit for transactions with Iran – was heard in October to stop accepting Iranian payments to China from 5 November onwards. Participants said this will end China’s exports to Iran.

Some industry sources said that it has been difficult for domestic trade companies engaged in exports to Iran to receive payments since August.

Meanwhile, Iran has imposed an import ban on products that could be produced within the country, as an attempt to prevent currency outflows.

Apart from livelihood needs, imports of other products into Iran require a special declaration.

OTHER COUNTRIES IMPACTED

China is not the only nation affected by the sanctions. Exports from other other countries to Iran are expected to be terminated in the near term.

South Korean traders said they had sold plastic pipe materials from South Korea and the Middle East to Iran, but that the business was fully closed in October on the announcement of the sanctions. With regard to payments for imports from Iran, domestic traders said few of them use the Bank of Kunlun service due to high charges.

To avoid sanctions, Iranian suppliers mostly set up accounts in China in the name of non-Iranian companies to facilitate payments from Chinese traders. This has allowed them to temporarily shrug off the impact on Iranian imports.

However, with an increasing trade deficit, it will 
be difficult for Iran to take money back from its 
Chinese accounts.

PAYMENTS IN YUAN

Many Iranian suppliers have asked Chinese customers to pay in euros or dirhams. But if regulation continues to tighten in the future, Iranian suppliers and Chinese buyers have prepared to make settlement in Chinese yuan.

A small amount of imports from Iran are currently settled in Chinese yuan, but the proportion is very small, mainly because of the high risks posed by the exchange rate, said a trader in east China.

Customs data show that China imported $1.9bn worth of products under the HS code 39 series (plastics and finished plastics products) from Iran during January-September 2018, while the export value to Iran under the same series was only at $0.43bn, creating a trade deficit of $1.47bn. The deficit is expected to increase further in 2019.

China imported 1.51m tonnes of PE from Iran in January-September 2018, a rise of 2.5% over the same period of 2017, with LDPE and LLDPE making a sharp increase, according to China customs.

Market participants attributed the increase to Iran’s new LDPE capacity and a production switch between LLDPE and HDPE.

The potential decreases in imports from Iran caused by shipping or payment issues will boost PE prices in the China domestic market to some extent, the industry participants said.