Trade And Sanctions At Play – Market Commentary

[London, May 2018] – This month President Trump withdrew from the nuclear peace programme because he says Iran weren’t making the changes agreed upon in the deal. The Joint Commissions Plan of Action was signed by the USA, the European Union, Russia, China in 2015 whereby Iran agreed to limit its nuclear development programme in return for the end of economic sanctions. Now that the US has pulled out of the agreement, Trump is imposing, what he describes as even tighter sanctions, but there currently isn’t a clear roadmap for their implementation. However, the UK, Germany and France are still very keen to keep the nuclear deal in place with Iran. In fact, the EU is pushing back a bit and has begun reviving legislation that will allow European companies to continue doing business with Iran despite the US sanctions. An updated version of the 1996 “blocking statute” is likely to come into force early August which will prohibit European companies from complying with the penalties and per compensation for affected firms.​ However, the reality is, even though Europeans are now saying that their companies will continue to work with Iran, they will eventually have to subject themselves to the sanctions as their interests with the US are much larger than those with Iran, especially as the US dominates the financial markets (thanks to the dollar’s position). We have already heard that Total plans to unwind its operations by November in Iran with its $5Bn deal to develop the world’s largest gas field in the country in jeopardy, unless the US grants a waiver. We’ve also heard of similar situations in other industries. ​ In general, this means Iran will face some difficult times. According to reports, Iran’s oil and gas exports are expected to decline by 40%. Iran is the world’s fifth largest oil producer, pumping 4M bpd, which dropped to 2.5M bpd when the last US sanctions were imposed. Its economy grew 3.5% in 2017, and it exported 1.3M bpd last year, a figure that was set to double once the necessary infrastructure was built. ​Iran is also a huge exporter of Methanol. Iran was set to bring some 4M mtpa of MEOH capacity in 2018 and had plans to bring online 25M mtpa by 2020, however the sanctions could delay the implementation of these projects. We have already seen product prices increase and prices could potentially firm further if there is a shortage of MEOH. Countries that need MEOH could have an issue, and we’re likely to see a two-tier market with Iranian MEOH trading at a discount from product sourced elsewhere. Even with these discounts and the depreciation of Iranian currency, it may be insufficient to incentivise buyers that have exposure to the US market.​ This two-tier market is also likely to be reflected in freight rates, much like from 2012-2015 when we saw vessels willing to go into Iran commanding significantly higher rates than those ships ex-AG. Understandably shipowners are also worried, as this will exacerbate excess capacity in an already tough market.​ [May 2018, SPI Marine]