The spread between the CFR Korea and CFR China methanol prices could more than double this year because of imposition of sanctions against Iran, which is making South Korean imports more expensive, market sources said Tuesday.
The typical premium of $5/mt could rise to as much as $10-15/mt as supply to South Korea tightens, with South Korean companies reducing imports from Iran to avoid US sanctions. China is still buying Iranian cargoes.
In January, Iran delivered 165,544 mt methanol to China, up 1.6% on month, while it exported only 18,379 mt to South Korea, down 30.2% from December.
Traders said that the typical industry premium for CFR Korea compared with CFR China was $5/mt before the sanctions came into effect and this was because of differences in freight and market size. But the additional tightness in supply could push the spread to as much as $10-15/mt this year, they added.
South Korea is a little further than China from the Middle East, the main methanol producing region. But shipbrokers said the difference in spot freight from the Middle East to China or South Korea ranges from zero to around $2/mt. This is less than what traders are paying for term shipments. One Singapore-based trader with a major said the company had a term contract with freight to South Korea costing a little over $2/mt more than freight to China.
Market size and liquidity, however, play a bigger role in the value of the premium, traders said.
"There are limited [number of] buyers in South Korea ... and smaller tanks, compared to China, which has so many ports and terminals," the Singapore-based trader said.
The price of the cargo depends on when it arrives, especially for South Korea, said a trader with a Middle Eastern producer. "If you're the only vessel arriving in that particular window, you can go even higher," he said.
SELLERS SEEK PREMIUM OF AT LEAST $10/MT
Most traders are now seeking a premium of at least $10/mt for CFR Korea cargoes.
"It could possibly even be $15/mt. That would not come as a surprise," said a source at another Middle Eastern producer, who estimated that South Korea typically buys around 400,000-500,000 mt of Iranian methanol in a year. With South Korea cutting its imports from Iran, the shortfall would be large enough to push up the premium to $15/mt.
But, a Japanese trader warned that "if the spread is bigger than $15/mt, then some players can re-export from China to South Korea."
Some traders, however, see the spread widening further after May 1, when EU-regulated protection and indemnity clubs will no longer provide insurance for ships that load from Iran.
Insurance typically covers broad, indeterminate risks such as third-party liabilities, which include a carrier's liability to the owner of a cargo for damage to the cargo, the liability of a ship after a collision, environmental pollution and war risk insurance.
"If the Chinese can take no insurance and cargo loss risk, then the spread will really widen. The spread could even hit $20/mt," said a trader based in Singapore.
According to Platts data, the CFR Korea-CFR China spread has been fluctuating from flat to $14/mt since January, with weak domestic demand in South Korea containing the premiums so far.
