The Chinese oil company facing new sanctions from the United States is unlikely to have the financial assets to import more crude oil from Iran, which could lead to continued decline of Beijing's imports of Iranian oil, experts told Sputnik
MOSCOW (Pakistan Point News / Sputnik - 24th July, 2019) The Chinese oil company facing new sanctions from the United States is unlikely to have the financial assets to import more crude oil from Iran, which could lead to continued decline of Beijing's imports of Iranian oil, experts told Sputnik.During a speech on Monday, US Secretary of State Mike Pompeo announced the Trump administration's decision to place Chinese state-owned oil trader Zhuhai Zhenrong under new sanctions, for allegedly violating US restrictions on imports of Iranian crude. The Chinese oil company and its chief executive, Li Youmin, have been both added to the US Treasury Department's Specially Designated Nationals List, which prohibits US companies from doing business with the sanctioned entities and individuals.
Zhuhai Zhenrong has become the first company to face new US sanctions, after the United States ended waivers on May 2 that allowed some countries, including China, to continue importing Iranian oil. As the Chinese oil company faced similar US sanctions in 2012 for Iran-related violations, the latest sanctions are unlikely to have a huge impact on the company's business, which is primarily focusing on importing crude oil from Iran to China.
However, oil industry analysts pointed out that Zhuhai Zhenrong is unlikely to have the financial strength to make up for the lost import volumes of Iranian oil from other bigger Chinese oil companies, which are more vulnerable to US sanctions.
"Basically, it's about who in China can take [Iranian oil] without being impacted by the [US] sanctions. Obviously, Sinopec cannot do it, PetroChina cannot do it. That's because they have a global system, they can't do it. That's why the volumes [Iranian oil to China] dropped. At the end of day, you need the financing to be able to do it [make up the volumes left by Sinopec and PetroChina], because the volumes have dropped by more than 50 percent. If you're talking about 2.5 million tonnes [of crude oil] a month at today's price of $63 per barrel, that's over $500 million a month [to make up for the lost volumes]. Do they [Zhuhai Zhenrong] have the financing to do it?" Yaw Yan Chong, director of Refinitiv Oil Research in Asia, told Sputnik.
According to Yaw, China's imports of Iranian oil fell from 2.3 million tonnes per month during January-April to 874,000 tonnes per month during May-June. Ship tracking data showed that three vessels loaded with Iranian crude oil reached Chinese ports including Tianjin and Jinzhou in June, carrying an estimate amount of 670,000 tonnes of oil, the analyst added.
Although there is no clear evidence that Zhuhai Zhenrong is the Chinese company involved in trading Iranian oil, the lack of bonded storage facilities for crude oil at the port in Jinzhou indicated that the Iranian oil had to be taken by a Chinese company after being unloaded at the port, Yaw explained.
"In Jinzhou, there's no bonded storage [for crude oil]. That means there was an end receiver [of the Iranian oi]. I would not be surprised if they [Zhuhai Zhenrong] did it, but we have no evidence that they're doing it. The fact that the United States has chosen to sanction them, it means the United States believes they're doing it, right?" he said.
Nevertheless, the Singapore-based analyst explained that the new US sanctions would have limited impact on Zhuhai Zhenrong's businesses, as the previous sanctions have probably forced the company to figure out ways to complete business transactions with Iran without relying on US Dollar dominated payment systems in the global crude oil trade.
"With regards to the payment, since the first round of sanctions, the Iranians have set up a system where they could be paid in Euros or RMB [Chinese Currency also known as yuan] among other currencies. You must remember that the end buyer is not the guy who deals directly with the Iranians. Somebody bought from the Iranians and sold to them. We believe that it's probably the entity that bought from the Iranians would probably be a Chinese entity and it's likely they paid with RMB. What happens is that they would do the deal in US Dollars and agree on a figure on the exchange rate between US dollars and RMB. And then they would pay in RMB," the analyst said.
However, other Chinese industry analysts argued that it would be difficult for even Chinese companies like Zhuhai Zhenrong to get around the international payment systems for global crude oil trade dominated by US dollars and US financial institutions.
"Almost all the commodity trade in the world is settled in US dollars and rely on US financial institutions to complete the transactions. If Zhuhai Zhenrong could settle the trade [with Iran] through RMB, the United States would not bother to sanction it. The crude oil trade between China and Russia is settled in RMB or Rubles. But this is a unique exception. When Chinese state-owned companies do business with oil suppliers from the middle East, they still mostly rely on the US-dominated payment system," Zhu Guangming, an oil market analyst at Shandong-based industry researcher SCI99, told Sputnik.
It is unlikely for China's RMB to replace US dollars in the global commodity trade in the near future, the Chinese analyst added.
"In the 1970s, the United States and Saudi Arabia established a global crude oil trade settlement system based on the US dollars. That's why US dollars became widely accepted in many countries, while RMB faced troubles to be accepted. When it comes to currency exchange rates, the value of the US dollars is also much more transparent. It's difficult for currencies like the RMB to break this circle in the next 10-20 years," he said.
The analyst explained that concerns over possible US sanctions led to major Chinese oil companies and local refineries had stopped importing Iranian oil since April.
"Although China imports Iranian oil at the state level, Chinese oil companies and refineries also did not dare to take oil from Iran. Since April, the three big Chinese oil companies [Sinopec, PetroChina and China National Offshore Oil Corporation] and many local refineries have stopped importing Iranian crude oil. It's true that a lot of Iranian oil has arrived in China. But the oil went into the bonded storage, instead of being used at local refineries. Such oil could not be counted as China's oil imports, because it did not go through customs clearance," he said.
Once the Iranian oil went through Chinese customs, the Chinese company involved in such a transaction could face US sanctions, Zhu suggested.
"The best example is Zhuhai Zhenrong. Once the Iranian oil goes through Chinese customs, it would be counted as China's oil imports. When I went to a meeting in Beijing earlier, all the three big Chinese oil companies said they had all stopped importing Iranian oil, because they have much bigger overseas operations than Zhuhai Zhenrong and would definitely be more worried about US sanctions. They would be much more prudent," he said.
According to Yaw from Refinitiv Oil Research, Saudi Arabia became the biggest beneficiary of China cutting crude oil imports from Iran, as its monthly oil exports to Beijing jumped from 4.3 million tonnes in 2018 to 6.3 million tonnes in the first half of 2019.
