Petrochemical crunch hits supply chains across Asia

More than 11 weeks into the US-Israeli war against Iran, economic disruptions are reverberating across Asia's industrial supply chains as shortages of petrochemical products, including naphtha, deepen in the region.

Before the war, "almost 100 percent of the Middle East's naphtha exports land in Asia", said Darryl Xu, Singapore-based principal analyst for base chemicals and feedstocks at ICIS Analytics.

Middle Eastern supplies make up almost 65 percent of Asia's naphtha imports, but disruptions in the Strait of Hormuz have effectively cut off most shipments, with alternative sources unable to fully bridge the gap, Xu said.

A key petroleum derivative, naphtha is widely used to produce solvents and resin for printing ink. Supply shortages could affect sectors ranging from packaging and consumer goods to medical supplies and infrastructure materials.

Japanese snack maker Calbee said last week that it would switch some potato chip products to minimalist black-and-white packaging marked "packaging for conserving petroleum materials".

"The company will revise the packaging specifications of some of its products as an interim measure, with the highest priority placed on ensuring a stable supply of products," Calbee said on Tuesday.

However, Japanese Deputy Chief Cabinet Secretary Kei Sato said the government had received no reports of immediate disruptions to naphtha or printing ink supplies and believed the country had secured sufficient volumes, Reuters reported.

In the Republic of Korea, concerns are also rising in the food packaging industry, with the government working to stabilize supplies. Companies said material costs have soared 40 to 50 percent since the war began.

The ROK and Japan are among the most vulnerable economies in Northeast Asia to naphtha supply shocks, said Kwon Seok-joon, an associate professor of chemical engineering in Sungkyunkwan University.

In the first half of this year, the ROK imported about 45 to 47 percent of its naphtha, with more than three-fourths of those imports coming from the Middle East, he said.

'Structural weakness'

However, the bigger problem is the structural weakness of the ROK's petrochemical industry, which is centered on refining naphtha, Kwon said.

While Japan is also highly exposed, the ROK's vertically integrated petrochemical sector is more dependent on naphtha refineries, leaving downstream industries such as plastics, rubber, packaging and paints especially vulnerable, he said.

"If the current situation continues for several more months, the sustainability of these industries could become very fragile," he said.

Even if the Strait of Hormuz returns to normal now, naphtha supplies will not immediately recover to prewar levels because of shipping delays, permanently higher freight and insurance costs, and mismatches between existing Middle East contracts and new alternative supplies, he added.

Xu said buyers were paying premiums of up to $150 per ton for naphtha after the crisis started, while Asian producers of plastics and olefins — the building blocks of the industry — were being forced to run at minimum rates, which could still mean more than 150,000 tons of naphtha for a large olefins producer.

Kwon said the crisis would likely push Asian countries toward long-term adjustments.