INSIGHT: Iran goes to the polls; nuclear deal fate still uncertain

SINGAPORE (ICIS)–Iran goes to the polls on Friday to elect a new president, while the world is waiting with bated breath on the outcome of recent talks on the revival of the nuclear deal between the country and the world powers, with the US back on board.

The revival would pave the way for lifting of sanctions that have been pinning the Middle Eastern economy down since 2018.

As an actual deal may still be a long way off after a series of informal discussions with US officials in recent weeks, initial hopes of increased crude and petrochemical exports from Iran are being dialed down.

The sanctions have prevented Iran from beefing up shipments to the rest of the world, with nearly all of its exports flowing to China for selected petrochemicals.

There are concerns about the deal – officially called the Joint Comprehensive Plan of Action (JCPOA) of 2015 – when incumbent moderate reformist Iran President Hassan Rouhani is replaced by conservative Ebrahim Raisi.

Raisi, who is currently Iran’s chief justice, is expected to win over three other contenders in the 18 June elections for the top post in Iran.

Rouhani is serving his second term as president and is not allowed by law to run again for the same position.

The incumbent president was Iran’s chief negotiator on the nuclear deal in 2015, under which international sanctions were lifted in exchange for a commitment to curb its nuclear enrichment program.

By August, Iran will have a new president, one that may take a tougher stance against western powers.

POLITICS ALWAYS AT PLAY
Efforts to revive the deal – thrown out of the window by the US in 2018 at the start of Donald Trump’s administration – began soon after Joe Biden assumed US presidency this year.

Biden was US vice president when the original JCPOA was inked in 2015.

“I think from a petrochemicals perspective, even if the nuclear comes back to life, it won’t make much difference,” ICIS Asia consultant John Richardson said.

“The divisions in US politics mean that it is perfectly possible Trump is re-elected for second term and the nuclear is unstitched again.  Whether Iran has a radical or moderate president wouldn’t affect this risk,” he said.

“It [Iran] would obviously be very happy with a renewed deal, but it would still leave it vulnerable to back to the future after 2024,” he said.

WITH A NUCLEAR DEAL …
In a recent positive turn, raising hopes that a nuclear deal in the offing, Iran has regained its vote in the United Nations General Assembly on 11 June.

This was made possible as the US allowed Iran to use funds frozen in South Korea to pay some $16m it owed to the UN, according to media reports.

Reviving the nuclear deal would open up more export markets for Iranian crude and petrochemicals, which in recent years, have mostly flowed into China.

China, on the other hand, may have to brace for reduced volumes and higher cost of some petrochemical cargoes from Iran when a nuclear deal comes back into force, as the Middle Eastern country will have the option to sell to other markets.

“A US-Iran deal will enable Iranian crude exports to regain lost market shares in China,” ICIS senior analyst Jean Zou said.

“Since the sanctions on Iran were ere imposed, crude exports from Saudi Arabia, UAE and Iraq have increased. The total crude exports from these three supply origins rose by nine percentage points last year, compared with 2017,” she said.

The US Energy Information Administration (IEA) on 8 June forecast that oil production this year would average 26.9m bbl/day, reflecting an assumption that Iran’s production will continue to increase, along with other OPEC members, in response to higher global demand.

For liquefied petroleum gas (LPG), China’s import cost of Iranian material could potentially increase.

“Iranian LPG exports to China have been priced at a discount to other supply sources due to the sanctions,” ICIS senior analyst Wang Yan said.

“A US-Iran deal will enable Iranian LPG exports to catch up with global market prices. It will also open up more export destinations to Iran, hence Iranian LPG exports to China may fall, but the declines will be limited because China is still the strongest demand centre for LPG,” she said.

For petrochemicals butadiene, methanol and high density polyethylene (HDPE) and linear density PE (LDPE) in the 13 months to April 2021, China’s share of Iran’s total exports ranged from above 80% to 100% of Iran’s exports, according to ICIS Supply and Demand Database.

In the first four months of 2021, Iran accounted for 18% of China’s total HDPE imports and 11% of its LDPE imports, ICIS analyst Amy Yu said.

“I expect it will not have big impact on trade flow in the short term as the high uncertainty outlook on the revival of nuclear deal,” she said.

While lifting the international sanctions would open up more export markets for Iran, China’s role in its trade is unlikely to be diminished.

“For methanol, India should be the top priority. Indian buyers paid more than other countries and regions in the past years as only small buyers are able to buy lower-priced Iranian cargoes,” ICIS analyst Ann Sun said.

India imports about 80% of its methanol requirements from Iran.

“Indian buyers have had expected the sanctions relief when [US President] Biden took office. This is expected to impact the terms negotiation for the next year,” Sun said.

If the nuclear deal is back in place, available Iranian cargoes for China could fall.

Iran accounts for 40% of China’s methanol imports in 2020, most of which procured a relatively lower cost and goes into methanol-to-olefins production, she said.

“The sanctions relief might push up the cost, but the progress should be gradual as long-term good relations of cooperation,” Sun said.

For butadiene, China procures a fifth of its annual requirements from Iran. The volume could fall as South Korea could again start importing Iranian cargoes when the sanctions are lifted, she said.

Over a 13-month period to April 2021, all of Iran’s BD exports at 91,068 tonnes went to China, according to ICIS Supply and Demand Database.

“But huge capacity expansion are expected in the two big BD importers [China and South Korea], Iranian sellers may have to offer discounts to keep the buyers,” Sun said.

WITHOUT A NUCLEAR DEAL …
Iran’s Supreme Leader Ayatollah Ali Khamenei has insisted in March that the US will have to lift the sanctions first before Iran will reverses its steps on uranium enrichment taken since 2019.

The International Atomic Energy Agency (IAEA) currently has an agreement with Iran that up to 24 June 2021, the agency would be able to recover and re-establish the necessary continuity of knowledge on its monitoring of Iranian uranium enrichment activities.

On 7 June, IAEA director general Rafael Mariano Grossi in a report to the agency board of governors cited “lack of progress in clarifying the Agency’s questions concerning the correctness and completeness of Iran’s safeguards declarations” preventing it from providing assurance “of the peaceful nature of Iran’s nuclear programme”.

In the US, the fluidity and unpredictability of shifts in the country’s political landscape may have prompted Iran to work out a major economic deal with China early in the year, Richardson said.

The deal “proposes no less than $400bn of investments by China in Iran,” which “includes $280bn investments in Iranian oil, gas and petrochemicals”, Richardson said.

“This could potentially result in major investments in stalled Iranian polyethylene imports by China, leading to a major shift in trade flows,” he added.

“If sanctions are lifted, it will help to invest in new capacity in Iran in long term view, considering its energy advantage,” Yu said.

Based on data from the US’ Energy Information Administration (IEA), Iran has the world’s fourth-largest and second-largest reserve of oil and natural gas, respectively, as of end-2017.

Iran also ranks among the world’s top 10 oil producers and top 5 natural gas producers, the data showed.

“From China’s perspective, it would get cheap imports it requires as its economy struggles to cope with an ageing population; and from Iran’s perspective, it would unlock some of the stranded value of its huge natural gas reserves,” Richardson said.

In the absence of a nuclear deal with major world powers, a status quo would remain and forge a greater bond between Iran and China.

Insight by Pearl Bantillo

With contribution from Kite Chong