Sanctions Relief in Iran: Assessing the Impact

The media has been awash in recent weeks over the interim agreement reached between Iran and the P5+1 (US, UK, Russia, China, France & Germany) in Geneva. The agreement between these global powers and Iran, which has long shunned the diplomatic spotlight as it follows its own goals, has been hailed as a major geo-political and possibly, a geo-economic breakthrough for world trade. The deal gives the Iranian Government $7 billion in sanctions relief and in return the government will scale back and stop its nuclear programme by ceasing to enrich uranium. For a country that has been at logger heads for the past thirty years with the rest of the world and has been subject to comprehensive and crippling economic sanctions, this deal is nothing short of a major coup by the P5+1 and testament to the change in attitude of the new Iranian government of President Rouhani.

One of the key sanctions imposed on Iran by the US and UN has been the prohibition of the sale of oil and petrochemical products. Before the sanctions Iran produced 10% of world oil output and totalled 21% of OPEC’s production, last year it produced just 3.7 million barrels per day, equal to 4% of the world output and 10% of OPEC’s. Oil exports have fallen by 60% to 1 million barrels per day compared to 2.5 million before, with China being the main importer. In terms of petrochemical products, the sanctions relief could release more than $1 billion worth of petrochemicals to the export market. Before the sanctions, Iranian petrochemical exports totalled 5.8 million tonnes in 2011. During the sanctions this decreased to 4.7 million, a reduction of 1.1 million tonnes. Clearly these figures show that this agreement could have an impact on Specialised Products markets in the region, particularly if a more permanent solution is agreed by the end of the six month interim period. It is no secret that many owners who serviced the Iranian chemical export trade had to change tack after sanctions were introduced with some being faced to exit the trade completely for legal reasons thus leading to structural shift to owners with Chinese ties. Now, with a possible end to sanctions there could be fresh opportunities for owners to return to the fray. What other areas might this affect? Well, ICIS reports that it believes the European chemical industry could reap much of the benefit as with a major traditional producer coming back into the market; it will be looking to sell and indeed, will need to sell. Thus with these volumes now returning to the open market the likelihood of more being imported from the Middle East into Europe along with cheap feedstocks derived from US shale gas is quite high. For now, all of this is speculative. The interim agreement is less than a month old with commentators noting that any real noticeable change could take a month or more to filter through. That being said, the agreement is by no means binding and either side could back out thereby throwing all of these hypothetical ideas down the drain. This is before any potential permanent solution has been agreed which will ultimately determine Iran’s place in the commodity export market in years to come. All this being said, there is no doubt that it will be a welcome change to the Specialised Products market but with cynical critics queuing up there is no question that there is a massive hurdle to overcome. After all, it could all just be gesturing and shadow games as Israeli Prime Minister, Benjamin Netanyahu, has said: is Iran ‘a wolf in sheep’s clothing?’

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