By Niluksi Koswanage
KUALA LUMPUR (Reuters) - Malaysian palm oil exporters have stopped supplying Iran with most of the 30,000 tonnes of the food staple the Middle Eastern country buys each month, or about half its demand, as Western financial curbs on Tehran stymie payments, two trading sources said.
The halt in Malaysia's palm oil exports to Iran, which the traders said started late last year, is the latest sign that sanctions aimed at persuading Tehran to abandon a suspected nuclear weapons program have started to bite.
The sanctions, spearheaded by the United States and European Union, have made it difficult for Iranian palm oil buyers to use letters of credit and make payments via middlemen in the United Arab Emirates (UAE) to Malaysian exporters.
Malaysia is the world No.2 producer of palm oil, used to make products from bio-diesel to cooking oil. It is a key supplier of Iran's palm oil, along with Indonesia, the world's top producer.
"Most of the companies selling palm oil to Iran have stopped since the end of last year," one trader with direct knowledge of the deals told Reuters on Wednesday.
"Payments are not coming through and no palm oil shipper wants to risk sending the cargoes to Iran with such a tense political situation," added the trader, who declined to be identified due to the sensitivity of the issue.
Malaysia's Commodities Ministry and the Malaysian Palm Oil Council (MPOC) -- the country's key marketing agency for the tropical oil -- were not immediately available for comment.
The United States slapped fresh sanctions on Tehran from the start of this year, targeting financial institutions that deal with the central bank, hoping to stem Iran's oil revenues.
U.S. President Barack Obama tightened sanctions on Iran another notch this month, again targeting its central bank and giving U.S. banks new powers to freeze assets linked to Tehran. The European Union has agreed to ban Iranian oil imports, a measure expected to take full effect within six months.
Iran, with a population of 74 million people, is finding it difficult to repatriate the hard currency from crude oil exports -- the major earner of the foreign currency it needs to pay for shipments of food and other imports.
Iranian buyers defaulted on payments for about 200,000 tonnes of rice from their top supplier India, exporters and rice millers told Reuters on Tuesday.
Ukrainian and European traders said they were no longer booking Ukraine grain shipments to Iran because of the payment difficulties.
Despite the halt in palm oil exports, traders in Kuala Lumpur said some Iranian buyers had continued to make enquiries, mostly for crude palm oil cargoes.
"They keep asking in the spirit of Muslim brotherhood. The last I heard was an enquiry for 5,000 tonnes for February or March delivery, but no one wants to take that risk now," a second trader said.
IRAN SEEN AS IMPORTANT MARKET
Last year Malaysia exported 342,256 tonnes directly to Iran, equivalent to a month's volume of shipments to China, data from industry regulator the Malaysian Palm Oil Board (MPOB) show. At current market prices, that would be valued at $376 million.
Iran is seen as an important market as it has forked out more than half a billion dollars annually for edible oil shipments from Southeast Asia and South America.
This prompted the Malaysian Palm Oil Council to ask Malaysian palm oil firms to consider setting up refineries, packaging plants and bulking installations in the Iranian port of Bandar Abbas to avoid "the hassles of importation."
The second trader said, "To date, no Malaysian company has taken up that offer although a state plantation company might be looking at it. No one in their right mind wants to be caught there if things go belly-up."
Before the export halt, Malaysian palm oil firms would either sell directly to Iran or ship via Dubai, where edible oil would be stored in warehouses and repackaged before heading to the Bandar Abbas port.
About 90 percent of the UAE's imports of palm oil are marked for re-export, with Iran as a key destination, traders said. In 2011, the UAE imported about 400,000 tonnes of palm oil products, according to MPOB data.
Iranian buyers may still be buying cargoes via intermediaries, an official of a Singapore palm oil firm with refineries in Malaysia said.
"We sell to the different parties and they may or may not take it to Iran," said the official in Singapore. "I am saying we keep selling, so I don't know if it goes or does not go to Iran."
(Additional reporting by Chew Yee Kiat in SINGAPORE; Editing by Stuart Grudgings and Himani Sarkar)