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.
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 trade flows to some extent – more Iran cargoes … may target [the] China market, but 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.
TRADE WAR MORE SIGNIFICANT
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.
IRAN BASE OILS UNCERTAIN
Iran’s base oils market outlook is clouded with uncertainties following the US’ decision to re-impose sanctions on the country.
Prices are still among the highest levels for Group I Iran base oils since ICIS began tracking the data in November 2015.
“Let’s see what happens from here,” said a source in the UAE. “Surely initially it will be difficult to make payments to Iran. [It] will result in shortage of [base oil] cargo.”
Iran is a major producer and exporter of Group I base oils and counts the UAE and India as major export markets. Its biggest base oils producer is Tehran-based Sepahan Oil Company, which has the capacity to produce a total of 420,000 tonnes/year of Group I base oils.
Iran is OPEC’s third-largest crude producer and its output currently stands at about 3.8m barrels per day, making up around 4% of global oil supply.
“It’s impossible to decipher what will really happen,” said an industry source in Asia who actively conducts business in Iran.
“We can probably expect further devaluation of currency and panic in the market.”
The Iranian rial was battered in the foreign exchange market a full month before Trump’s decision, which did not come as a surprise to most market players. The US sanctions will target critical sectors of Iran’s economy, such as its energy, petrochemical and financial sectors. Companies doing business in Iran will have to wind down operations there.
“As you know, we were in [the] same situation before, so it is not new,” said a source in Iran. “But considering [the] effects needs more time.”
It is also unclear how the other countries in the deal, the UK, France, China, Russia and Germany, will respond to the US decision to withdraw from the pact.
Some media reports said Iran and the European countries involved in the deal were keen on continuing to comply with it.
“The import and export situation in reality has still not freed up but maybe we can see something now the long-awaited decision has been revealed,” said the source in Asia.
But even before Trump’s announcement, market players in Iran had largely discounted any long-term impact on the re-imposition of sanctions. Iranian players said their businesses have systems that were in place that could facilitate payment methods dating back to the years before the sanctions were lifted.
“We are used to conducting business even with sanctions in place,” said another Iranian source. “Of course we are concerned but these [sanctions] are not new to us.”