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 industry crisis to the brink. 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, according to the Financial Times, 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. Data from S&P Global Energy shows that naphtha prices have surged over 50% since last month.

Supply shortages have quickly propagated to the production end. 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 reduced production, while Idemitsu Kosan warns that if shortages persist, two of its facilities may shut down.

Inventories approaching warning levels, Japan and Korea’s naphtha supply crisis intensifies

Both South 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 relies on imports, with Korea importing approximately 60% and Japan about 70% from the Gulf region.

Inventory levels are also concerning. South Korea’s Ministry of Trade states that current naphtha inventories are only sufficient for about two weeks; Citibank estimates Japan’s inventories at around 20 days, comparable to the levels typically held by petrochemical producers. South Korea’s trade minister told reporters on Friday that the country will restrict naphtha exports to prioritize domestic supply.

Citi 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 becomes evident

As this supply crisis unfolds, the Korean and Japanese petrochemical industries have long been facing structural difficulties. High raw material and electricity costs, persistent domestic demand decline, and a weak local currency have all weakened industry fundamentals.

In contrast, China has demonstrated greater resilience in this round of shocks. Its strong domestic crude 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 worsened market tensions. ICIS analyst Ajay Parmar pointed out that naphtha storage conditions are demanding, 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 measures seek responses

The supply shocks are speeding up the consolidation of the Korean and Japanese petrochemical industries, a process already underway 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,” noting that “the escalation of Iran tensions adds substantial pressure on an already fragile foundation.”

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