One month ago, when discussing the shift in Iran's oil customer base as a result of Trump's withdrawal from the 2015 Nuclear treaty and the potential blowback from China, we noted that in a harbinger of what's to come, an executive from China's Dongming Petrochemical Group, an independent refiner from Shandong province, said his refinery had already cancelled U.S. crude orders. "We expect the Chinese government to impose tariffs on (U.S.) crude," the unnamed executive said. "We will switch to either Middle East or West African supplies," he said. We also said that China may even replace most if not all American oil with crude from Iran: "Chinese importers are not going to be intimidated, or swayed by U.S. sanctions."
And sure enough, today Reuters reported that Chinese buyers of Iranian oil are starting to shift their cargoes to vessels owned by National Iranian Tanker Co (NITC) for nearly all of their imports to keep supply flowing amid the re-imposition of economic sanctions by the United States.
To safeguard their supplies, state oil trader Zhuhai Zhenrong Corp and Sinopec Group, Asia’s biggest refiner, have activated a clause in its long-term supply agreements with National Iranian Oil Corp (NIOC) that allows them to use NITC-operated tankers, according to four sources with direct knowledge of the matter.
The expected shift demonstrates that China - Iran’s biggest oil customer with India and the EU in 2nd and 3rd spot - will keep buying Iranian crude despite the US sanctions .
It also means that NITC will be shipping the oil to Chinese shores direct, keeping its customers' information secret to avoid US retaliation although it would be pretty simple to track where the bulk of Iran's tanker fleet is going. It was the same tactic used by China before the sanctions on Iran were lifted in 2016.
According to the report, in July all 17 tankers chartered to carry oil from Iran to China are operated by NITC. In June, 8 of 19 vessels chartered were Chinese operated.
Furthermore, China appears to also be importing more product: in July, those tankers were loaded about 23.8 million barrels of crude oil and condensate destined for China, or about 767,000 barrels per day (bpd) a 20% surge from June, when the loadings were a more modest 19.8 million barrels, or 660,000 bpd. Both month were higher than China's 2017 numbers when it imported an average of 623,000 bpd from Iran.
With the new shipping arrangement, Iranian oil cargoes to China are expected to stay at recent levels through October, said Reuters sources.
However, there is a problem: insurers, which are mainly U.S. or European based, and which are complying with the US sanctions, have already begun winding down their Iranian business to comply with the sanctions. This is also why the price for the oil under the long-term deals was changed to a delivered ex-ship basis from the previous free-on-board terms, meaning that Iran will cover all the costs and risks of delivering the crude as well as handling the insurance, the sources said.
But, as Reuters notes, it was not immediately clear how Iran would provide insurance for the Chinese oil purchases, worth some $1.5 billion a month. Insurance usually includes cover for the oil cargoes, third-party liability and pollution.
“This is not the first time companies exercised the option... Whenever there is a need the buyers can use that,” said a Reuters source, a senior Beijing-based oil executive.
As for where Iran will get the money, it simply has no choice, unless it is willing to risk losing its biggest customer. This leaves another option: China may simply front the funding needs to Iran in the way it arranged oil deliveries from Venezuela: by arranging a vendor financing in which China gets a steep discount, or is paid in kind, which would mean that even more of Iran's oil production will be meant for China.
Finally, there is the question of how the US will respond when Beijing is once again openly flouting - as it did during the last Iran sanctions - Trump's threats to all Iranian oil customers, and whether China's oil imports from Iran will be a sensitive issue in the upcoming China-US trade talks.