Iran deal sways chems
US President Donald Trump’s decision to pull out of the 2015 nuclear deal with Iran will have a lot of consequences for the global chemical industry, as well as for Iran’s domestic sector.
The most immediate impact was felt in the weeks leading up to Trump’s decision, as oil markets anticipated his move.
Fear of increased conflict in the Middle East as well as less access to Iranian oil pushed the price of Brent crude to $78/bbl by 10 May from the mid $60s/bbl in March of this year.
It had jumped when the president announced his decision and then further still after Israeli jets bombed Iranian military sites in Syria late on 9 May.
The prospect of oil prices maintaining these levels shifts chemical feedstock economics back towards the days prior to the big oil price crash of 2014, which brought prices down from over $100/bbl. Elevated oil prices raise petrochemical prices in general because of the link back to oil.
Naphtha prices in particular are very closely linked to oil, so as it rises, so does the cost of naphtha. This puts naphtha-based producers – which predominate in Europe and parts of Asia – at an increasing disadvantage to those using ethane, who are mainly in the US and Middle East.
On the face of it then, this decision has come at an opportune moment for owners of the current wave of new shale gas-based crackers and expansions in the US. Their production costs will remain low, giving them a competitive advantage over other regions. And with chemical prices spiralling up in line with oil, they should enjoy marvellous margins.
However, with US domestic demand not expected to rise spectacularly, the vast majority of this production will be looking for export markets. China is an obvious target, as it will account for 46% of all global polyethylene (PE) deficits from 2018-2025, according to ICIS Consulting forecasts.
With relations between China and the US souring, and the prospect of 25% tariffs on US exports of low-density PE (LDPE) and linear-low density (LLDPE), Iran’s polymer producers may sense an opportunity.
Indeed, as ICIS consultant John Richardson points out in his blog, Iran has already increased its share of total PE exports to China from 0.4% in 2007 to 16% in 2017.
Some within the US industry do not share these concerns about finding export markets, at least publicly.
For example DowDuPont Material Science segment chief operating officer Jim Fitterling said in his first-quarter financial results call that with global GDP “running north of 3% right now...we’re running north of 4.5% growth on plastics” (see page 24).
This level of demand growth requires four or five worldscale crackers to be built and started up each year, whereas for the next three years there are around three in total due on stream, he added.
Sustained high oil prices can lead to demand destruction as people with less disposable income have to make hard decisions about what they can and cannot afford.
International eChem chairman Paul Hodges believes oil is already at levels which caused this in the past and that the second half of the year is therefore likely to disappoint in terms of volumes and margins.
He adds: “In terms of petchems and polymers, it means that today’s global supply chains are under major threat. This is bad news for the US expansions now coming online, as their business model assumed that one could locate new plants close to advantaged feedstock sources, and then simply export the product around the world.”
IRAN PROJECT IMPACT
Iran has a large slate of chemical projects at various states of advancement. Many have already been delayed by the lack of access to international sources of funding and technical expertise.
After the nuclear deal was struck in 2015 we waited for international banks, chemical companies and engineering groups to rush into the country.
But despite an initial spate of international visits and contacts into Iran, there were few, if any, major deals done in chemicals for projects to supply finance or technical expertise.
Many Iranian chemical companies have links back to Iran’s Islamic Revolutionary Guard Corps (IRGC), which controls a fair portion of the country’s economy.
Sanctions against this group had not been lifted and were tightened under the Donald Trump administration.
With so little international involvement post-2015, existing and future chemical projects were already subjected to delays, and these will now likely lengthen.
According to KPMG global head of chemicals Paul Harnick: “US sanctions had never snapped back fully so global chemical majors had not been able to go back and invest in Iran as they would have liked to. In Iran they were waiting for Western chemical companies to help them upgrade their production facilities. That never really happened.”
Companies in China tend to be less entwined with the US and will therefore be less troubled by the re-imposition of sanctions.
With its abundant natural resources Iran is very attractive to China as it seeks to secure access to resources.
In particular the country could benefit if Total is forced to withdraw from its investment in South Pars, the world’s largest gas field in which it holds a 50.1% interest.
Chinese state-owned oil and gas company CNPC holds 30% and might be eager to swallow Total’s holding.
Post-2015 Iran did successfully ramp up chemical exports from around 15m tonne/year to over 20m tonnes/year. The new sanctions could threaten that trade unless China keeps the doors open.