Iran petchems hopeful sanctions to be fully lifted in late July

Focus story by Muhamad Fadhil

TEHRAN (ICIS)–Petrochemical players in Iran are hoping for a full lifting of international sanctions after 20 July, upon determination by six world powers the country has fully complied with limits set on its uranium enrichment program, and is deemed not developing a nuclear weapon, industry sources said on Friday.

More than four months since the suspension of some sanctions imposed by the US and EU, Iran’s petrochemical sector has yet to feel its benefits.

Hopes of improved exports to its key European market failed to materialise and procurement of spare parts necessary to repair domestic facilities remains restricted, they said.

In November 2013, Iran agreed to curb its uranium enrichment program that paved the way for the temporary relaxation of international sanctions on the country from 20 January this year.

Suspicions that Iran is developing a nuclear weapon had prompted the US and EU to tighten the sanctions on the country from end-2011, until the milestone deal achieved late last year in Geneva, in talks between the country and the P5+1, which comprises the US, Russia, China, the United Kingdom, France and Germany.

Iran has maintained that it is not developing a bomb and asserted that its uranium enrichment activities are strictly for energy generation.

The temporary suspension of sanctions, however, have had “minimal or no impact” on trade of petrochemicals, according to a Saudi-based petrochemical source.

In end-2011, the US introduced sanctions against Iran’s financial sector, while in July 2012, the EU issued a freeze on assets of Iran’s central bank and banned trades of Iranian products.

Banks in Europe continued to refuse to clear petrochemical transactions originating in Iran amid fears of legal repercussions from the US.

“There is a lack of clarity. European banks were not sure how to proceed. What if they cleared a transaction and then they were punished for it? Most banks are taking a wait and see approach,” the Saudi source said.

Compounding the problem is the difficulty in finding insurance covers for the Iranian cargoes, a source close to a UAE petrochemical distributor said.

“Getting insurance remains a huge problem. Insurers, like banks, feared taking on Iranian material because of an absence of guidelines. They did not know how to handle payments, indemnities, premiums or claims,” the source said.

Europe is a major market for Iran’s petrochemicals output.

With no markets to absorb their production, a number of petrochemical companies in Iran are keeping low run rates at their facilities so as not to incur losses, a Middle East-based distributor said.

“Over the years, millions of tonnes of petchems were bound for Europe. But now, due to declining exports to Europe, suppliers need to scale back on production to avoid making losses,” the distributor said.

In some cases, the scaling back of production at some Iranian plants was being done not by choice, but out of necessity since the facilities are in need of new spare parts that could not be procured with the sanctions still in place, a UAE-based trader said.

“Production is often hit. When plants shut down, they take a long time to get up and running again,” the trader said. 

Iran’s inability to procure much-needed spare parts is preventing repairs of its battered and ageing petrochemical plants, industry sources said.

Meanwhile, the Middle Eastern country looks to China to absorb more of its petrochemical products such as polyethylene (PE) and methanol, with the European market not fully open to receiving Iranian products. But this comes at a cost.

“To be competitive, Iran needs to slash prices by at least $50/tonne, according to a Qatari source close to a major global shipping company.

“Why else would China buy from Iran?”

The sharp depreciation of the Iranian rial in the foreign exchange market, however, works to the advantage of exporting domestic producers, as they generate better netbacks on US dollar-denominated sales, a source close to a Saudi petrochemical supplier said.

The rial has been hovering above 25,000 to the US dollar since the start of the month, an almost 60% gain in value over a period of 16 months amid optimism over the eventual lifting of sanctions.

The currency recovered from an all-time low of 40,000 in February 2013, when the sanctions on Iranian banks took its toll, making payments for exports extremely difficult, according to petrochemical traders active in Iran.

The election of a political moderate Hassan Rohani as Iran’s new president in August 2013 was pivotal in the strengthening of the rial, as it signalled the country’s willingness to sit down and talk with the world powers on its nuclear programme.

Rohani formerly held the position of a top nuclear negotiator for Iran.

“Rohani is a break away from [Mahmoud] Ahmadinejad, who always picks fights with the West. The new president is definitely engaging with the West in a completely different way [as compared to his predecessor],” a source close to a Middle Eastern producer said.

Still, Iran will need to convince the West of its commitment to curbing its nuclear enrichment program before the international sanctions could be fully lifted.

To achieve this, the Rohani administration will need to avoid political brinksmanship, according to a source close to a domestic supplier.

“There is huge anticipation in Iran. A complete lifting of sanctions will [kick start] the petchem industry. Iran can export without restrictions and get valves from Europe,” said a source close to an Iran oil producer.

In 2013, the country generated nearly $12bn from petrochemicals exports, down from about $14bn made in 2011 – before the US-led sanctions were imposed, according to the Iranian news agency Fars.

“Iran lost a lot of oil and petchem [revenue] because of the sanctions. Producers are nervous and want to get back to pre-sanction days,” according to a UAE-based analyst.

Iran aims to bump up total petrochemical production capacity to 100m tonnes/year by end-2015 from 60m tonnes/year in 2012, data from state-owned National Petrochemical Company (NPC) showed.

“The country needs to recover lost ground and look to restart its petchem sector,” the source close to an Iranian supplier said.

Among major projects due to be completed in the next two years include Kavian Petrochemical’s 2m tonne/year ethylene plant in southern Iran, and Kordestan Petrochemical’s 312,000 tonne/year PE unit in the western part of the country.

Iran’s re-entry into the global petrochemical scene in full force, once the international sanctions are fully lifted, will toughen up competition among Middle East producers, industry sources said.

“The GCC [Gulf Cooperation Council] countries, whether they admit it or not, do not want Iran to come back because it would mean petrochemical prices will plunge,” a UAE-based end-user said.

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

However, any decline in petrochemical prices upon Iran’s comeback into the market would be “temporary and limited” as the country will likely stop selling material below market prices, according to a GCC-based shipping analyst.

“Iranian producers won’t sell material … cheap anymore. They will look to improve their margins. The rial will appreciate significantly once sanctions are fully lifted. This will push producers to offer material at higher levels,” the analyst said.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections