China’s Iran petchem imports at risk; payment delays may worsen

07 July 2017 06:44 Source:ICIS News

Containers at Qingdao port, China 7 July

(recasts fourth paragraph for clarity)

SINGAPORE (ICIS)--China’s imports of Iran petrochemicals may slow down further amid expectations of a worsening of payment delays, as foreign trades are subject to stricter scrutiny as part of an anti-money laundering drive in the world’s second-biggest economy, industry sources said.

Transactions with Iran, which exports almost half its annual petrochemical output to China, are susceptible to such minute inspections since the Middle Eastern country is still under some international sanctions related to its nuclear programme, they said.

In terms of products, polyolefins and methanol top the list of Iran’s exports to China.

Based on China Customs data for January to May 2017, Chinese imports of polyethylene from Iran were down 15% from the previous corresponding period, while the monthly methanol imports had fallen below 200,000 tonnes in March and April.

China’s key petrochemical imports from Iran in Jan-May 2017
(in tonnes)

  17-Jan 17-Feb 17-Mar 17-Apr 17-May
Styrene 4,296 12,312 6,042 11,956 0
Methanol 217,500 252,200 198,100 174,000 243,600
MEG 51,689 36,054 34,429 22,843 5,019
DEG 5,049 6,253 7,100 0 2,000
Source: China Customs

Iran’s data showed that the first four months of 2017 saw a 66% surge in overall exports of non-oil commodities to China to 11.6m tonnes.

But processing payments in China for Iranian cargoes have turned increasingly difficult since the start of the year.

China’s State Administration of Foreign Exchange has started requiring Chinese companies in May to submit customs clearance information to banks when making payments for foreign cargoes, while cutting in half to $100,000 the minimum transaction amount subject to prudent review of customs documents.

In late December 2016, China’s central bank has decreed that every financial institution in the country must develop their own transaction monitoring rules due for implementation by July.

The financial institutions are being required to file reports about any activities considered suspicious regardless of the amount involved, according to a note by auditing firm KPMG.

The threshold for suspicious high-value cash transactions was cut by 75% to yuan (CNY) 50,000, while that of cross-border transactions settled in yuan was set at CNY200,000.

“With China scheduled to undergo its FATF [inter-governmental body Financial Action Task Force] mutual evaluation in 2018, we are expecting the pace of China’s AML [anti-money laundering] regulatory development to quicken from 2017 onwards. This includes having more regulatory guidance, stricter supervision and stronger enforcement,” KPMG said.

Transactions with Iran are particularly susceptible to increased scrutiny as Chinese banks consider them risky exposure, forcing Chinese importers to find alternative means to pay off their purchases, a China-based banking source said.

Importers used to clear their payments via overseas offices, or make payments to Iranian sellers via their accounts in other countries, the source said.

With the changed regulations on 1 May, Chinese banks will more likely avoid transactions involving shipments originating from Iran, while smaller banks are not willing to go through the hassle of reporting Iranian transactions to the authorities, the banking source said.

Previously, Chinese importers just referred to Iranian cargoes as “Mideast cargoes” on all import documents, and the banks will not probe for further details on the product’s origin, according to industry sources.

But since May, four major state-owned Chinese banks - the Bank of China (BOC), the China Construction Bank (CCB), the Agricultural Bank of China (ABC), and the Industrial and Commercial Bank of China (ICBC) - have been declining issuance of letters of credits (LCs) on transactions involving cargoes possibly originating in Iran, they said.

So far, the impact on petrochemical trade has been minimal, according to industry sources.

A Chinese producer said that payments for petrochemicals from Iran are still going through as it is a creditable client at a big bank, but admitted that every payment now requires customs clearance documents.

“We have always followed the foreign trade procedures and made customs declaration as required,” a trader said.

Another Chinese petrochemical producer said: “We are creditable client and we have big financing volumes business with the banks. Our Iran-origin trade payment through Chinese banks are not affected.”

Still, some importers may face payment issues on small-volume trades without proper documents, the trader said.

The non-issuance of LCs by banks have largely hit second-tier traders in China but the impact is not as pronounced among first-tier traders, which directly buy from Iranian producers and pay for the cargoes using via a telegraphic transfer (TT) route, industry sources said.

Some sources said the tighter scrutiny on Iranian transactions in China may have been prompting some players to declare a different origin for their cargoes.

"The Iran cargoes are sometimes named Kuwait and this is a practice for a long time, not just recently,” a trader said.

In Iran, producers will look to divert their cargoes elsewhere for now and will sell at lower prices to entice buying, but acknowledged that no market can entirely replace or substitute Chinese demand.

Despite the lull in market activity after the Eid ul Fitr holiday that marked the end of the Muslim fasting month of Ramadan, Iran’s sales are currently being ramped up in Turkey, Iraq and the Commonwealth of Independent States (CIS) countries, industry sources said.

Focus article by Nurluqman Suratman and Yvonne Shi

($1 = CNY6.80)

Additional reporting by Angie Li, Fanny Zhang, Chow Bee Lin, Muhamad Fadhil, Sam Liang and Tina Zhang

Picture: A container ship at Qingdao port in China's Shandong province (Source: Sipa Asia/REX/Shutterstock)

By Nurluqman Suratman