Asia's Chemical Industry Under Middle East Conflict: Japan and South Korea on Brink of Shutdown, China Maintains Resilience

The escalation of the Middle East situation is pushing a structural crisis in the industry to a tipping point. The disruption of naphtha supplies combined with long-term overcapacity has put Japanese and Korean petrochemical industries under shutdown pressure, and industry consolidation is expected to accelerate.

On March 13, the Financial Times reported that the Strait of Hormuz is nearing blockade, causing a sharp tightening of Asian naphtha supplies. Naphtha, a core raw material for plastic production, is refined from crude oil. According to S&P Global Energy data, naphtha prices have surged over 50% since last month.

Supply shortages have quickly propagated to the production side. South Korea’s largest single ethylene producer, Yeochun NCC, announced force majeure last week and is currently operating at minimum capacity; Lotte Chemical and LG Chem have also warned customers that they may be unable to fulfill contracts. In Japan, Mitsubishi Chemical and Mitsui Chemicals have cut production, while Idemitsu Kosan warns that if shortages persist, two of its facilities may shut down.

Inventories approaching warning levels, crisis in naphtha supply in Japan and Korea

Both Korea and Japan are highly dependent on Gulf region naphtha, making them particularly vulnerable to this shock. According to data from commodity information agency Sparta Commodities, about two-thirds of their naphtha depends on imports, with Korea importing approximately 60% and Japan about 70% from the Gulf region.

Inventory levels are also concerning. Korea’s Ministry of Trade said that current naphtha inventories are only enough to last about two weeks; Citibank estimates Japan’s inventories are around 20 days, comparable to the levels typically held by petrochemical producers. Korean Trade Minister said on Friday that Korea will restrict naphtha exports to prioritize domestic supply.

Citibank analysts in Japan warn that if market conditions do not improve by mid-April, “multiple ethylene units will face reduction or shutdown risks,” and downstream derivatives such as ethylene, propylene, and butane will also be affected.

China’s supply resilience stands out

As this supply crisis erupts, the Korean and Japanese petrochemical industries have long been facing structural difficulties. High raw material and electricity costs, ongoing domestic demand contraction, and a weak local currency have all made their industry foundations fragile.

In contrast, China has demonstrated greater resilience in this round of shocks. Its strong domestic crude oil refining capacity and relatively stable raw material supply system have effectively buffered external supply fluctuations.

Beyond supply-demand conflicts, the structural shortcomings of naphtha itself have also intensified market tensions. ICIS analyst Ajay Parmar pointed out that naphtha storage conditions are harsh, and since it is not a primary refinery product, refiners tend to prioritize high-value products like jet fuel and diesel when allocating capacity, further limiting effective naphtha supply.

Industry consolidation accelerates, policy responses underway

The supply shocks are accelerating the consolidation of the Korean and Japanese petrochemical industries, a process that had already begun before the conflict erupted. In January, Mitsubishi Chemical, Mitsui Chemicals, and Asahi Kasei reached an agreement to form a new company to integrate ethylene production in western Japan. In Korea, Seoul has been pushing for restructuring petrochemical companies since August last year, aiming to cut industry capacity by a quarter.

Sparta Commodities’ chief naphtha analyst Jorge Molinero described the current situation as “a sinking ship hitting an iceberg again,” and pointed out that “the escalation of the Iran situation adds substantial pressure on an already fragile foundation.”