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Feature: Risks to Iran's methanol industry after Trump sanctions decision

London (Platts)--9 May 2018 553 pm EDT/2153 GMT


Reintroduction of US sanctions against Iran could delay implementation of Iran's ambitious methanol projects on the back of technology and capital bans, and hinder the country's methanol exports amid banking and currency restrictions, according to industry sources.


  • Iran's new methanol projects under a question mark
  • Two-tier market likely to develop once again
  • Buyers concerned about banking and currency restrictions

It is expected that the sanctions could result in a re-emergence of a two-tier market, with Iranian methanol cargoes starting to trade again at a discount to the material from elsewhere.

Related feature -- Iran Sanctions: Global Energy Implications

"[When] Iran sanctions kick in, countries who need methanol and honor the sanctions could be in trouble," a US-based trader source said. "It will put a big premium on the other countries of origin."

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The discounts and the depreciation of Iranian currency could prop up the country's methanol exports, but these might be insufficient to incentivize buyers that also have exposure to the US market.

In the meantime, a spike in the crude oil prices means a relative improvement in the methanol-to-olefins economics versus naphtha cracking.

Crude prices jumped to a three-and-half year high Wednesday in the wake of the announcement, with ICE Brent futures assessed at $77.15/b at 16.30 London time.

The spot methanol market reacted to the news with some concern.

"Sentiment was definitely hit today with methanol prices surging due in part to the sanctions news," a Chinese trader said.

China methanol prices rose in the immediate aftermath of the announcement, with East China domestic methanol price up Yuan 40/mt day on day to Yuan 3,500/mt, and CFR price up $8/mt to $408/mt over the same period, according to S&P Global Platts data.


NEW PROJECTS UNDER QUESTION MARK


Iran is set to bring online more than 4 million mt/year of methanol capacity in 2018. Major projects, some of which were delayed from 2017, include Kaveh Methanol's 2.31 million mt/year plant in Dayer Bushehr and Marjan Methanol's 1.65 million mt/year unit in Pars. In total, Iran has been planning to add around 25 million mt of methanol capacity by 2020. The onset of sanctions could delay the implementation of these projects.

Such delays are unlikely to leave the world short of molecules with the capacity expansions simultaneously happening in other countries, such as US, China and Russia.

The US, in particular, has increased its capacities from 2.25 million/mt year in 2015 to 5.75 million mt/year, with capacity set to grow to 7.5 million mt/ year by end 2018, on the back of cheap and abundant natural gas and is shifting from importer to exporter, with Europe and Asia within its sights.


EXPORTS TO EUROPE COULD EBB AGAIN


The details of the sanctions remain patchy with no clear roadmap for their implementation. With the UK, Germany and France keen to preserve the nuclear deal with Iran, it remains to be seen how severe the sanctions' impact on Europe will be.

"The concern is the restriction of currency options to trade Iranian methanol. If the EU joins the resumption of sanctions and disallow the use of the Euro for trade with Iran, that will be a major impact," he said. "But we don't see that happening as EU, especially France and Germany, have publicly disagreed with the new US policy," an Asian trade source said.

Still after a gradual recovery of transaction volumes, secondary sanctions could see Iranian methanol supplies to Europe ebb once again.

According to the latest data from statistical agency Eurostat, imports from Iran totaled 128,942 mt in 2017, with a monthly average of around 11,000 mt. This was a 43% year-on-year increase and the highest level since 2011, though still only a fraction of the high of just under 921,000 mt imported in 2008.

Italy accounted for the bulk of Iranian methanol imports in the past few years, according to Eurostat.

"Not sure what will happen but Europe only imports a small quantity of methanol every year from Iran," a source said. "It all depends on trade relationships with Asian countries."


IMPACT ON CHINA


Chinese buyers are citing banking difficulties as a potential hurdle that could lead to a change in the trade flows. The country remains the biggest importer of Iranian molecules, having imported 2.5 million mt in 2017, according to China Customs.

China, which has major methanol-to-olefins capacities, is a natural target market for Iranian supplies. Its top five importers account for 60% of Iranian methanol supplies to China, with three of them purchasing molecules for the production of olefins.

"The main impact to our methanol business is how this will affect Chinese banks, and whether wire transfers [between China and Iran] will be affected," a Sinopec senior manager said, adding that it is too early to tell of any long-term impact.

If Iranian methanol is not available to us in the future, or decreases in volume, China will source globally and methanol prices may rise as a result, a Shenghong Petrochemical Group executive said.

Shenghong Group operates the Jiangsu Sailboat's MTO plant, which has a nameplate capacity of 385,000 mt/year of propylene, 315,000 mt/year of ethylene, and 100,000 mt/year of C4/C5, and consumes about 2.4 million mt/year of methanol in the process. It has 11 olefin downstream plants such as ethylene oxide, EVA to PE swing units, ACN, SAP and MMA.

"Our downstream is relatively diverse, and our Iranian sourced methanol is a small part of our portfolio, so we have less concern," the executive said. "End-users most impacted will probably be ones with a higher share of Iranian-sourced methanol and less competitive product mix -- such as PP or MEG."

--Daria Campbell, daria.campbell@spglobal.com
--Lara Berton, lara.berton@spglobal.com
--Yi-Jeng Huang, yi.jeng.huang@spglobal.com
--Maria Tsay, maria.tsay@spglobal.com
--Edited by Richard Rubin, richard.rubin@spglobal.com




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