The State of the Asian Chemical Industry Amid the Middle East Conflict: Japan and South Korea on the Verge of Shutdown, China Remains Resilient

The escalation of the Middle East situation is pushing an industry-wide structural crisis to a tipping point. The interruption of naphtha supply, together with long-term overcapacity, has put pressure on the petrochemical industries in Japan and South Korea to halt production, and industry consolidation is expected to accelerate.

On March 13, according to the UK Financial Times, the Strait of Hormuz is close to being blocked, causing a sharp tightening in naphtha supply to Asia. Naphtha is a key raw material for the production of plastic products and is refined from crude oil. According to S&P Global Energy data, naphtha prices have soared over 50% since last month.

Tight supply has quickly transmitted 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 clients they may not be able to fulfill contractual obligations. In Japan, Mitsubishi Chemical and Mitsui Chemicals have cut production, while Idemitsu Kosan warned that if the shortage persists, two of its facilities may shut down.

Inventory Nears the Warning Line, Naphtha Supply Crisis Brewing in Japan and South Korea

Japan and South Korea are highly dependent on naphtha from the Gulf region, making them particularly vulnerable to this shock. According to commodity information agency Sparta Commodities, about two-thirds of naphtha in the two countries is imported, with South Korea importing around 60% and Japan about 70% from the Gulf region.

Inventory levels are also worrisome. The Korean Ministry of Trade says the country’s current naphtha inventory is only enough to sustain about two weeks; Citibank estimates Japan’s inventory is about 20 days, roughly in line with the normal stock levels held by petrochemical producers. On Friday, Korea’s Trade Minister told reporters that Korea would restrict naphtha exports to prioritize domestic supply.

Citibank's Japan-based analyst warned that if market conditions do not improve before mid-April, “multiple ethylene plants 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

When this supply crisis erupted, the Japanese and South Korean petrochemical industries were already in structural difficulties. High raw material and power costs, persistent domestic demand contraction, and weak local currencies have all intertwined, leaving the industrial foundation quite vulnerable.

In contrast, China has shown greater resilience in this round of disruption. Its local crude oil refining capacities excel, and its raw material security system is relatively solid, effectively cushioning external supply fluctuations.

Beyond supply and demand imbalance, naphtha’s own structural shortcomings have further tightened the market. ICIS analyst Ajay Parmar pointed out that naphtha requires strict storage conditions and is not a primary refinery product; refiners tend to prioritize aviation fuel, diesel, and other higher value-added products when allocating capacity, further limiting effective naphtha supply.

Industry Consolidation Accelerates, Policy Response Sought

The supply shock is speeding up the consolidation process of the Japanese and Korean petrochemical industries, a process that had already begun before the conflict broke out. In January this year, Mitsubishi Chemical, Mitsui Chemicals, and Asahi Kasei reached an agreement to set up a new company to integrate ethylene production in western Japan. On the Korean side, Seoul has been pushing petrochemical enterprise restructuring 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 ship already capsizing that then hits an iceberg,” and pointed out that “the escalation of the Iran situation has added real pressure to an already fragile foundation.”

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