China sure to benefit from Iran sanctions

opinion May 21, 2018 01:00

By Suwatchai Songwanich
Chief executive Officer,
Bangkok Bank (China)

2,496 Viewed

As ever, crisis equals opportunity for China with the US pullout from the Iran nuclear deal at the beginning of this month. Donald Trump’s decision has created a crisis in the relationship between the United States and its European allies as the US prepares to reimpose sanctions on Iran and put pressure on European companies to do the same.

The 2015 nuclear agreement between Iran and six nations included China, and Beijing says it doesn’t intend to pull out of the deal or join the sanctions.

This means it has many opportunities to enhance its energy security under favourable circumstances. Reflecting this, immediately after the US pulled out of the agreement, Iranian foreign minister Mohammad Javad Zarif flew to Beijing along with a large political and economic delegation to discuss the repercussions of the US withdrawal.

Oil sales would certainly have been high on the agenda of the talks since China is the biggest global buyer of Iranian crude oil, taking one quarter of its total production. And under the new sanctions Iran will be more dependent than ever on the Chinese market, especially since yuan-denominated oil futures were launched earlier this year on the Shanghai International Energy Exchange. The futures contracts will give Iran a means to bypass the use of US dollars, which are subject to sanctions, and the contracts may be used not only by China but other trading partners. Not surprisingly, immediately after the US decision was announced there was a sharp rise in trading volume on the exchange: daily trading more than doubled, and the Shanghai futures contract rose to 12 per cent of the global oil market, up from 8 per cent the previous week.

The sanctions also present an opportunity for China to secure other energy supplies such as natural gas. French energy company Total, which holds a 50.1 per cent shareholding in the giant Iranian South Pars gas field, may have to sell its stake to comply with the sanctions. If this happens, China’s state-owned energy company CNPC is the probable buyer. This would give CNPC an 80.1 per cent stake in the world’s largest natural gas field, with the balance of 19.9 per cent held by the Iranian national oil company.

There will be pressure on China to comply with the sanctions, as we have recently seen with companies like Huawei and ZTE which have made it difficult for them to sell or source products in the US. However, China is likely to find a way around the sanctions as it is determined to strengthen rather than diminish its relationship with Iran, which represents not only a $430 billion economy but an integral part of China’s Belt and Road Initiative. Late last year China opened a $1.7 billion (Bt138 billion) line of credit for a new railway that will link eastern Europe with Turkey via Iran, and earlier this month an inaugural freight service set off from Mongolia to Teheran carrying a cargo of 1,150 tonnes of sunflower seeds.

Foreign companies have been given 90 days to comply with the US sanctions or face penalties. Whatever they decide, you can be sure China will be ready to step in and make the most of its opportunities.