Iran’s polymer exports to Asia surge

Exports are on the rise despite US-sponsored economic sanctions as buyers and sellers navigate around obstacles. However, capacity delays continue

Prema Viswanathan and Bee Lin Chow Singapore

The imposition of tougher economic sanctions against Iran in mid-2010 by the UN, the US and the EU, in a bid to halt the country’s nuclear program, has had a minimal impact so far on Iran’s petrochemical exports to Asia.

Iranian exporters have mostly managed to bypass the sanctions, braving seemingly insurmountable hurdles, supported by a growing appetite for Iranian products in Asian countries, notably China, Pakistan and India.

The measures, which resulted in a clampdown on financial transactions between the EU, the US and Iran, initially p

Photolibrary/Gareth JJ Burgess

laced Iranian exporters in a bind. Countries such as Pakistan, Japan and South Korea also complied with the UN directive and instructed their local banks to stop issuing letters of credit (LCs) to state-owned companies in Iran. However, the exporters soon found ways to get around the newest regulations and barring a few hiccups, it was mostly business as usual.

In the first six months of the Iranian calendar year, which started on March 21, 2010, Petrochemical Commercial Co. (PCC), Iran’s main trading and marketing firm, exported 7.2m tonnes of chemical and petrochemical products, according to Reza Hamzehlou, CEO of PCC. This was an increase of 33% year on year.

China, the largest importer of Iranian polyolefins, saw a surge in imports from Iran this year. Iran is a major exporter of polyethylene (PE) to China, with its high density polyethylene (HDPE) exports up by 33% year on year from January to September 2010 to around 350,000 tonnes, while its shipments of linear low density polyethylene (LLDPE) increased by 15% to 50,000 tonnes over the same period, according to Chinese customs data.

THREE-FOLD INCREASE

Iran exported 187,819 tonnes of low density polyethylene (LDPE) to China in the first nine months this year, almost triple the quantity exported in the same period a year ago, China Customs data showed. Iran’s polyolefins exports used to be handled solely by PCC, a key target of the sanctions. The Iranian government recently divested 55% of its stake, turning it into a private company – a fact that is being used as an argument by CEO Hamzehlou, to question the legitimacy of the sanctions against PCC.

PCC’s status as the sole exporter of polyolefins diminished somewhat when fully privatized companies, such as Amir Kabir Petrochemical Co, Arak Petrochemical Corp. and Jam Petrochemical Co. were established. Iran’s exports to China increased markedly earlier this year when the privatized companies started exporting through local traders, who, in turn, sold the cargoes to foreign traders.

After the US and UN stepped up the sanctions against Iran in June, Japanese and South Korean traders stopped trading in Iranian products. Hence, Amir Kabir’s LLDPE disappeared from the China market. Cargoes from Arak and Jam are sometimes offered, but in very small volumes.

The South Korean banks plan to allow local companies to settle payment for Iranian product in Korean won, but such a facility has yet to be set up. PCC is still exporting to China because its customers are major Chinese traders who pay in euros. Payment is made to PCC’s accounts in Chinese banks. The Bank of China is the only one not accepting payment for Iranian products.

PCC recently obtained a license to sell polyolefins in yuan in China. This yuan-denominated payment facility is targeted at plastic processors. PCC will continue to sell in euros to Chinese buyers. PCC has identified HDPE as one of its core export to China in the long term.

PAKISTAN RAMPS UP IMPORTS
Pakistan, another major importer of polyolefins from Iran, has witnessed a growing acceptance of Iranian cargoes, despite the sanctions. “Iranian offers are at least $30-40/tonne [€23-31/tonne] lower than offers from other Middle East suppliers, which makes it attractive for buyers to purchase from Iran,” says a trader based in Karachi, Pakistan.

Imports from Iran into Pakistan are now diverted through Dubai, the United Arab Emirates, where some local banks are still willing to open LCs for Iranian product. “Earlier, I used to do all my business sitting in Karachi, only making occasional trips to Tehran, but from July this year, Dubai has become my weekly port of call. I do all my financial transactions through Dubai banks,” says the trader.

Indeed, Iran’s PE and polypropylene (PP) exports to Pakistan are estimated to surpass 70,000 tonnes in fiscal year 2010, say market sources. This would be a jump from the 63,000 tonnes imported in 2009, according to Pakistan customs data. And this is despite the fact that Iran offers only 60 days credit, whereas other Middle East suppliers offer 90 days.

INDIA IMPORTS SNOWBALL
Dubai also acts as a conduit for polyolefins trade between Iran and India. “There are several Iranian companies besides PCC through whom LCs can be opened without violating the sanctions,” says a Dubai-based trader who sells into India.

India’s imports of PE and PP from Iran are also snowballing, and are expected to total around 30,000 tonnes in fiscal year 2010, say Indian traders and end-users who have ­continued to import from Tehran, braving the sanctions.

“There are some Indian banks that are still willing to facilitate financial transactions with Iranian companies, so we haven’t faced major problems so far,” says a polyolefins trader based in Mumbai, India.

A strong incentive for Indian buyers is the fact that Iranian cargoes are around $20-30/tonne cheaper than material from other countries. The price gap offsets any delays in delivery of cargoes, which used to deter buyers from procuring Iranian cargoes, note market sources.

“Actually, we find these days that Iranian cargoes arrive faster than consignments from other Middle East countries, as Iranians open LCs only after the containers are loaded,” says an Indian end-user.

Quality concerns about Iranian product have also disappeared, and “some of their HDPE grades are extremely popular with customers,” says another Indian trader.

Iranian polymer exporters are gearing up to overcome any further trade barriers that may emerge in the coming months.

“We are looking at several strategies to continue doing our business which we ­cannot disclose at the moment – after all, we are experts at dealing with crises, having faced one onslaught after another,” says an Iranian exporter.

As well as polymers, Iran exports significant volumes of methanol, olefins and other products to Asia.

MORE DELAYS FOR IRANIAN PROJECTS
The timely completion of Iran’s many petrochemical projects remains a distant dream. The latest sanctions are yet another obstacle to the country’s plans to add value to its huge oil and gas reserves.

With European and American companies barred from doing business, and many others hesitant to risk business, Iran’s choices have become extremely restricted when it comes to sourcing technology, equipment, capital and expertise.

Even projects that have been under implementation for a few years are finding it difficult to achieve completion. For instance, the commissioning of Amir Kabir Petrochmical Co’s low-density polyethylene (LDPE) plant has been delayed yet again into next year. A source close to the company says there appears to be some issue “over the fine-tuning of the plant which is related to the sanctions.”

Incidentally, the technology licensor for the plant is Netherlands-based LyondellBasell Industries, which, in August, decided to cut all business ties with Iran.

Despite these hurdles, Iranian companies have not abandoned their investment plans and are working patiently to find creative solutions.

The challenge is immense because Iran has six cracker projects with a total ethylene capacity of around 5m tonnes/year, while the methanol pipeline has nine projects with a total capacity of more than 15m tonnes/year.

One of the options being pursued by Iranian companies is to look for technology and partners from countries such as China and Russia.

For instance, National Petrochemical Co. is said to be in talks with a Chinese company for a methanol joint-venture (JV) project.

Under the proposed JV, the Chinese company would provide financing and equipment for building a methanol plant in Iran, and be compensated with a free offtake contract for a number of years.

The sanctions are threatening not only future projects but also operations at existing plants with companies finding it increasingly difficult to source catalysts and spare parts.

“We have spare catalyst in stock for the next change but we don’t know how or from where we will source in the future,” admits a source from an Iranian aromatics producer.

Additional reporting by Malini Hariharan in Mumbai

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