The impact of the Middle East conflict on the chemical sector is more pronounced than during the conflict in December of last year. The primary transmission mechanism lies not only in the cost pass-through following rising crude oil prices but, more importantly, in the effect of raw material shortages on the supply of domestic chemical products. Current price trends for domestic chemical products reflect this situation.

Supply Chain Disruption

Domestically, China imports approximately 50% of its crude oil from the Middle East. Recently, many domestic refineries, including the largest, Sinopec, have implemented preventive production cuts. Overseas, facilities in the Middle East have also reduced output. As major chemical suppliers in East Asia, Japan and South Korea, which are more reliant on Middle Eastern seaborne crude, have recently seen production reductions.

The duration of the current blockade of the Strait of Hormuz has far exceeded market expectations. Given the present situation, there remains significant uncertainty regarding when the conflict will end. The disruption to domestic chemical supply is already a reality, and its impact on the chemical industry chain will gradually transmit downstream. Market balance will be achieved through higher prices suppressing demand, creating a hard balance.

Downstream Performance

Seasonally, this period marks the post-holiday resumption of operations. However, the sharp short-term increase in raw material prices has led to a slower-than-expected recovery. Overall, operations across midstream and downstream sectors have been suppressed. Among chemical products, purely oil-based varieties, such as aromatics, have experienced the most significant impact. Olefins, which have some support from coal chemical alternatives, are less affected. For other sectors, substantial increases in energy costs and disruptions to shipping have raised both processing and logistics expenses, pushing price centers upward to varying degrees.

Risk Factors

Key risks involve the duration of the conflict and the extent to which end-demand is suppressed. The intensity of the warfare and the navigational status of the Strait are critical points to monitor closely.