Recent military conflict between the US, Israel, and Iran has led to a suspension of shipping traffic through the Strait of Hormuz, leaving over a hundred vessels stranded and disrupting approximately 21% of global seaborne oil flow. The situation remains tense. The Strait of Hormuz is a critical chokepoint for global energy security and a focal point of geopolitical tensions. As the only sea passage connecting the Persian Gulf with the Indian Ocean, it facilitates about one-fifth of global crude oil trade, and its operational status directly impacts the world's economic lifeline.
Following Iran's closure of the Strait, a significant gap in global crude oil supply has emerged, driving Brent crude futures prices higher repeatedly. Analysts predict that a prolonged closure could push prices above $120 per barrel. In the shipping sector, with over a hundred vessels stranded, daily tanker charter rates have surged by nearly tenfold. LNG transport has been paralyzed due to halted exports from Qatar, causing European natural gas futures to spike by 50%. Major shipping giants have suspended transit through the strait, rerouting via the Cape of Good Hope, which increases voyage distances by 40%. This has led to substantial rises in freight costs and war risk insurance premiums, while operations at Middle Eastern ports have been hampered.
The chemical industry is experiencing significant impacts from raw material supply disruptions. Exports of key chemical feedstocks like methanol and urea from the Middle East are blocked. China relies on the Middle East for 30-35% of its methanol imports and over 50% of its sulfur imports, a crucial raw material for phosphate fertilizer production. Prices for these related products have skyrocketed, imposing massive cost pressures on relevant companies. Downstream industries, including automotive and textiles, are facing synchronized cost increases.
Currently, China's chemical market continues to feel the effects of the Strait's closure. However, China's self-sufficiency rate for bulk chemicals has improved rapidly in recent years, and its contingency strategies are relatively robust. Consequently, price fluctuations in the domestic market are primarily driven by influences from the international market. In contrast, the chemical markets of Japan and South Korea are severely affected by the closure. Data indicates that approximately 80% of oil tankers from Japan and South Korea must pass through the Strait of Hormuz.
In the oil sector, crude oil imports for Japan and South Korea are expected to be severely hindered. Japan depends on the Strait for over 95% of its crude oil from the Middle East, while South Korea relies on it for more than 70% of its imported crude. Japan's national strategic petroleum reserve covers approximately 146 days, and South Korea's about 206 days. While these reserves can provide short-term relief, a prolonged blockade would lead to a continuously widening supply gap, potentially causing catastrophic damage to the oil-dependent industries of both nations. Rerouting tankers via the Cape of Good Hope is projected to increase freight costs by 50-80% for Japan and South Korea. Combined with potential international oil prices soaring to $120-$130 per barrel, this would significantly inflate their oil import costs, triggering imported inflation and inflicting substantial economic losses.
Regarding the chemical industry, Japan and South Korea face cascading effects from raw material shortages. Their petrochemical sectors are highly dependent on feedstocks like naphtha, refined from Middle Eastern crude. Shortages are forcing refiners and chemical producers to reduce output or even halt operations. South Korean companies such as Lotte Chemical and LG Chem have already reported losses. Furthermore, Japanese refineries are configured for Middle Eastern crude and cannot easily switch sources in the short term, further exacerbating capacity constraints. Downstream chemical products in both countries, including plastics and chemical fibers, are likely to see sharp price increases. This will raise costs for terminal industries like automotive and electronics, potentially eroding the export competitiveness of Japanese and Korean chemicals and forcing a restructuring of their industrial landscape.
Recent price volatility in Japanese and Korean chemical markets has been intense due to the Strait's closure. In Japan, prices for electronic materials and industrial gases have risen sharply. Companies like Resonac and Mitsubishi Gas Chemical have increased prices for products like CCL by over 30%, while prices for gases like those from air separation units have risen by more than 10%. In South Korea, the price spread for bulk chemicals like ethylene has fallen below the break-even point due to soaring costs and pressured demand, worsening corporate losses. Products like TDI have seen price hikes coinciding with plant maintenance schedules.
Analysis suggests that due to Japan and South Korea's high dependence on the Strait of Hormuz for crude oil, a long-term closure would lead to tight supplies of feedstocks like naphtha. Refinery operating rates would decline significantly, leading to a further reduction in traditional bulk chemical production capacity. Under such a trend, Japan's chemical industry might strengthen its monopoly in advantageous fields like semiconductor materials, while simultaneously increasing crude imports from sources like Australia and Russia to reduce reliance on the Middle East. South Korea's chemical industry may be forced to scale back bulk chemical capacity and shift focus towards high-end sectors such as high-performance polymers and battery materials. It would also need to adapt its refining facilities to process non-Middle Eastern crudes to alleviate feedstock challenges.
What impacts would such shifts in the Japanese and Korean chemical industries have on China's sector? In the short term, China would face compressed profit margins for refiners and rising costs for downstream industries like plastics and fibers due to soaring import costs for crude and chemical feedstocks, particularly for materials like methanol, for which 45% of imports rely on Iran. Small and medium-sized enterprises would be under significant pressure. Long-term, however, China could leverage its advantage in diversified raw material imports to fill the void left by shrinking bulk chemical capacity in Japan and South Korea, expanding its market share in Asia and alleviating competitive pressure on domestic traditional chemicals. Simultaneously, restricted exports of high-end materials from Japan and South Korea could accelerate domestic substitution in China for products like photoresists and high-end polyimides, pushing the industry towards higher-value transformation. Nevertheless, China would need to manage the inflationary pressures from rising oil prices and risks associated with global supply chain volatility.