Thursday, 7th February 2019

Iran fears loss of Chinese trade as Beijing keeps an eye on US relations

Tehran’s insistence that it can continue selling its crude oil to customers across the globe is being tested – not least by signs that its once-staunch ally China may be wobbling under pressure from the United States. Conventional wisdom had it that Beijing’s strategic interests in Iran would compel it to challenge the US sanctions regime. However, Sino-Iranian trade seems to have dropped sharply since Washington imposed further sanctions on Iran in early November.

Iran has struggled to keep crude sales flowing to its main Asian oil buyers, including China, in recent months. Crude exports to China, India, Japan and South Korea amounted to 1.3m b/d in 2018, down 21% on the previous year and the lowest level since 2018, according to data published by Reuters. In October, exports to China dropped as low as 300,000 b/d, before rising above 500,000 b/d in December. However, the export volume is likely to fall again as China is only meant to import an average of 360,000 b/d under Washington’s 180-day sanctions waiver.

Trade in other areas shows an even more dramatic slowdown. According to Iran-focused consultancy Bourse & Bazaar, Chinese exports to the Islamic Republic fell from about $1.2bn in October to just $400m in December. The consultancy concludes that China may be abandoning its policy of sustaining trade with Iran in order to avoid posing a direct challenge to US sanctions.

There are broader reasons for Tehran to fear that worse is to come. In October, Bank of Kunlun Corporation Ltd. (formerly Karamay City Commercial Bank) has been a conduit for considerable Chinese trade with Iran. However, Kunlun – whose name means ‘great momentum’ – has announced a pause in transactions with the Islamic Republic. In December, the Karamay City, Xinjian-based bank – whose largest shareholder is state-owned China National Petroleum Corporation through its CNPC Capital Limited Company – said it would only clear Iranian payments for humanitarian and other non-sanctioned goods and services. This reticence reflects the increased exposure of large Chinese corporates to the US. Well-placed Iranian sources who trac crude flows indicate that Chinese companies are concerned about losing access to the US market should they continue to import large volumes of crude from Iran.

CNPC is already reported to have halted its investment in the South Pars gas field development following pressure from the US. This is seen as an attempt to avoid exacerbating tensions with Washington at a time when the world’s two biggest national economies are locked in a trade war. Head of consultancy SVB Energy International Sara Vakshouri has noted that China’s oil imports from the US were 60% higher in calendar year 2018. Meanwhile Iran’s difficulties are creating opportunities for its regional rivals. Saudi Arabia is keen to capitalise on Iran’s predicament; in November, Saudi Aramco announced five new crude supply contracts with Chinese customers that will increase its exports to 1.7m b/d, up from an average 1m b/d in 2018.

China hasn’t completely abandoned Iran: indeed, it may be using the sanctions issue as a way to create leverage. Beijing is understood to be negotiating hard for discounts on Iranian crude deliveries, mindful that Tehran has few other options to hand. Much of Iran’s output is already sold at a discount to the lighter and sweeter Brent. According to one Iranian source, Tehran is offering discounts of more than $1.50/bbl on crude. Discounts on condensate are running higher at $4-5/bbl, reflecting Iran’s more urgent need to find a home for excess condensate, whose output it finds harder to regulate as a by-product of gas produced for the domestic market. China is willing to store large amounts of Iranian condensate, which is especially helpful given that South Korea – which previously accounted for 70% of Iranian condensate purchases – has started buying more from the US. Indeed, the higher shipment volumes going from Iran to China in December may be because of condensate rather than crude.

There may yet be some more relief for Iran from the international squeeze on Venezuela’s President Nicolás Maduro. Like Iran, Venezuela is a large producer of heavy crude grades; if trade with Caracas is restricted the market will need to look elsewhere for supplies. A tighter market for heavy crude might prompt the US to extend its waivers on Iranian oil sales. In the meantime, Iranian officials are adopting a ‘wait and see’ approach until the next US presidential elections in November 2020. “There is just a year and a half left, and despite the substantial hit taken they feel they can manage the situation,” an Iranian analyst told GSN. “They found from bitter experience with [former president Barack] Obama that it didn’t help to negotiate with a president that has less than two years left in office.”

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