Auto to Oil Shipping Companies Poised to Profit From Iran Accord

Auto to Oil Shipping Companies Poised to Profit From Iran Accord... 25/11/2013 Economy

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By Indira A.R. Lakshmanan November 24, 2013
French automakers PSA Peugeot Citroën (UG) and Renault SA (RNO) and companies that transport Iranian oil are among those standing to benefit from the six-month accord to rein in Iran’s nuclear program while easing sanctions on trade with the Persian Gulf state.

The deal struck yesterday in Geneva among Iran and six world powers, including the U.S. and its European Union partners, also will ease restrictions on petrochemicals, aviation parts, gold, and insurance for oil cargoes. In addition, it will let Iran continue exporting oil at current levels instead of forcing further reductions.

In exchange, the agreement requires Iran to curtail sensitive nuclear activities, reduce its stockpile of enriched uranium and agree to increased international inspections of its nuclear facilities.
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The initial commercial benefits from the Geneva agreement may be modest, and they depend upon Iran keeping its end of the bargain and the Obama administration fending off congressional pressure to impose tighter sanctions. American companies don’t stand to profit because almost all U.S. trade with Iran other than food and medicine has been banned for decades.

Other major industries such as oil and banking will be left out, too. The deal won’t loosen the restrictions that affect most Iranian banks and make it almost impossible for Iran to regain access to the global financial system.

Nor will it be a boon to multinational oil companies such as Total SA (FP) of France, Eni SpA (ENI) of Italy or Statoil ASA (STL) of Norway because the restrictions on Iran’s energy sector and the EU oil embargo on Iran will remain in place.
First Step

The agreement’s greatest significance may be that it’s the first break in a pattern of ever-tighter sanctions on Iran and a potential first step toward Iran’s return to the international economy.

“This is good news for us, as Iran is an important market for Renault,” Florence de Goldfiem, the director of communications for the automaker based in Boulogne-Billancourt, said in a telephone interview yesterday. “We’re waiting to see what the conditions of redeployment of our activities in the country may be.”

Along with Renault, France’s second-biggest carmaker, the accord may crack open the door to trade with Iran for potential beneficiaries including gold traders in Turkey, oil refiners in India and shipping insurers in London.
Comprehensive Deal

Energy executives say they hope the first-step agreement will lead to a comprehensive deal paving the way for their return. Christophe de Margerie, chairman and chief executive officer of Paris-based Total, said on Nov. 10 that he hoped it “won’t take too much time” for France’s energy giant to return to Iran if sanctions are lifted.

Over the next six months, U.S. Secretary of State John Kerry and his partners from the U.K., France, Germany, China and Russia will pursue a final agreement that would yield a far-reaching easing of sanctions.

Sanctions have cost Iran $120 billion in lost revenue since the U.S. and EU started imposing tough penalties on energy, ports, insurance, shipping, banking and other transactions in 2010, according to U.S. Treasury estimates. The American sanctions penalize other nations that trade with Iran, including U.S. allies.

Even the limited easing of sanctions now will produce tangible benefits. Easing the auto sanctions would restore $500 million in lost trade to Iran over six months, according to Obama administration officials who asked not to be named describing details of the package.
Spare Parts

Paris-based Peugeot, Europe’s second-largest carmaker, sold 457,900 vehicles to Iran in 2011 as spare parts kits that are assembled into vehicles in the country. That made Iran Peugeot’s second market in volume after France. Sales fell 68 percent last year to 145,000 vehicles as the company halted shipments to abide by restrictions.

“Any indication that we could resume doing business with our partners in Iran goes in the right direction,” Peugeot spokesman Jean-Baptiste Thomas said yesterday. “We’ll of course welcome the re-opening of the Iranian market.”

Peugeot suspended its sales of automotive kits to Iran in February 2012. That cost the company’s earnings 10 million euros a month, Chief Financial Officer Jean-Baptiste de Chatillon said on April 25, 2012.

Peugeot and KIA Motors Corp. (000270), based in Seoul, were the two largest foreign automakers in Iran before sanctions isolated the country’s economy, and are among the companies that stand to benefit most from an easing, said Peter Fuss, a partner at Ernst & Young GmbH in Frankfurt.
‘Interesting Market’

“It’s an interesting market with growth prospects, and potentially a promising stepping-stone into the whole region for car manufacturers,” Fuss said in an interview yesterday.

The continuing sanctions on Iranian oil exports, the country’s biggest source of revenue, create pressure that supporters of the initial agreement say will encourage the country’s leaders to accept a comprehensive deal halting their suspected quest to become a nuclear weapons power.

Iran, the second-biggest producer in the Organization of Petroleum Exporting Countries before oil sanctions took effect in July 2012, has fallen to sixth place.

While the U.S. sanctions that reduced Iran’s crude exports by 60 percent since last year will continue, the deal eases some rules so buyers of Iranian oil can maintain their purchases at current volumes instead of cutting them further, the White House said in announcing the deal. Brent crude futures still fell as much as 2.3 percent after the deal was announced.
China, India

The agreement to allow crude exports at current levels benefits China, India, South Korea, Japan, Turkey and Taiwan, the only nations still buying Iran’s oil. Those countries have complained to U.S. officials that the push to reduce Iranian crude imports by an additional 15 percent every six months was straining their economies. Iran had 23 crude oil clients before sanctions in July 2012; now it has six.

Companies that transport Iranian oil also are potential beneficiaries of the agreement. The lifting of an EU ban on insuring tankers carrying Iranian crude also will ease the process of importing the Persian Gulf state’s oil to countries including India and Turkey.

Officials of Indian Oil Corp. (IOCL) and Hindustan Petroleum Corp. (HPCL), both based in Mumbai, and Mangalore Refinery & Petrochemicals Ltd. (MRPL) said removing restrictions on shipping coverage will enable them to purchase contracted volumes more easily. The firms said they nonetheless don’t intend to buy more Iranian oil than planned.
Insurance Ban

Lifting the EU insurance ban on Iranian cargoes will benefit ship owners and companies that cover them for risks such as spills, said Andrew Bardot, secretary of the International Group of P&I Clubs in London.

With the ban lifted, it would again be legal for P&I insurance clubs and reinsurance companies such as Lloyd’s Banking Group Plc (LLOY), Munich Re, and Swiss Re Ltd. (SREN) to insure Iranian oil cargoes if they choose to do so.

Lifting petrochemical sanctions will permit $1 billion in exports for Iran, according to U.S. officials close to the talks. Iran may not feel an immediate impact because it’s been able to ship materials such as polyethylene resins to China in violation of sanctions, Paul Hodges, chairman of International eChem, a London-based consulting firm, said in an interview.
Trickle Down

Any future increase in Iranian supplies of oil and gas would trickle down to Europe’s chemical industry, creating a potential game-changer for energy-intensive industries, including those making polyvinyl chloride, the plastic known as PVC, said Hodges, a former executive of Imperial Chemical Industries.

“You’d have a traditional major producer coming back into the market and desperate to sell,” said Hodges. “This has suddenly the potential to change the whole outlook as there’s someone out there who wants to sell and also needs to sell. Every single olefin refiner, chemical plant in Europe would benefit.”

That would be a bonus for companies from German plastics maker Bayer AG (BAYN) and synthetic rubber supplier Lanxess AG (LXS) to Arkema SA (AKE) of France and Solvay SA (SOLB) of Belgium, he said.

Linde AG (LIN) of Germany, whose industrial and specialty gases are used by petrochemical customers worldwide, said it’s too early to say if the company will seize on the lifting of sanctions.
Waiting Game

“We withdrew a few years ago from Iran because of the political situation,” Uwe Wolfinger, a spokesman for Munich-based Linde, said by telephone. “We’d need to wait a bit before deciding whether it’s worth returning.”

The deal also would give Iran access to replacement parts for civilian aircraft, allowing the country to maintain its aging commercial fleet. Iran has been an aviation backwater for decades, with a small fleet of outdated aircraft in need of repair, so it’s not likely to produce a windfall for Western companies.

“The main deal would be engine maintenance and parts, and probably some consumables such as tires, brakes, etc.,” said Joel Johnson, executive director, international at the Teal Group, a Fairfax, Virginia, consulting firm. “Bottom line is we are not talking serious money.”

“Of course, if sanctions were lifted in the future, and Iran was selling oil again, it would be a serious market for new aircraft, as their fleet has aged considerably and is probably not in good repair. But that would take a full-fledged deal, probably involving complete cessation of their enrichment program and dismantling of some plant and equipment,” Johnson said in an interview.
Gold Sanctions

The interim deal would temporarily lift sanctions on gold and precious metals trade with Iran. Potential beneficiaries include gold traders in Turkey and the United Arab Emirates, with whom Iran did the most gold trade before sanctions.

Iran has purchased gold as a hedge against a looming balance-of-payments crisis brought on by the decline in its exports, the falling value of its currency, the rial, and tight limits on its access to dollars and euros.

Gold imports shot to a high of more than $1.5 billion a month from Turkey alone in mid-2012 as Iranians bought gold to safeguard against inflation and the tanking rial. The Iranian currency strengthened more than 2 percent after the deal in Geneva.

The trade has been largely under the table, with gold moving from Turkey to Iran in hand luggage. While a revived trade is unlikely to net any corporate winners, it would help Turkey’s economy.

“For a brief period of time, Iran was able to receive payment for much of its oil exports via transfers of gold, routed via Turkey,” said Nic Brown, head of commodities research at Natixis SA (KN) in London. “The gold would be circulating between buyers of Iranian oil, Iran itself and sellers of exports to Iran.”


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