Tokyo [Japan], March 22: The Middle East war is forcing petrochemical giants in two key Asian economies to cut production as the conflict rattles supplies of a crucial oil-derived component used to make a range of plastic goods.
The scarcity of naphtha -- a liquid distilled from petroleum that is essential for making ethylene, a key ingredient in everything from plastic grocery bags to food packaging -- risks a knock-on effect across many industries.
The petrochemical sector in Japan and South Korea, an important part of both countries' economies, depends on the Middle East for their naphtha supplies -- with 74 percent of Japan's imports coming from the region.
But supplies are drying up, with a vital shipping lane for oil from the Middle East, the Strait of Hormuz, virtually paralyzed.
The price of naphtha shipped into Asia has soared 60 percent since the war began."We estimate that naphtha inventories currently stand at around 20 days" in Japan, the world's fourth-biggest economy, analysts at Nomura warned last week.
"And if the Strait of Hormuz remains closed for two to three weeks, this could have a major impact" on naphtha production, they said.
That impact is already creeping in.Last week, Japanese giant Mitsubishi Chemical started cutting production capacity of its steam cracker, a facility that converts naphtha into ethylene and propylene, which it runs as a joint venture.
"We concluded that a reduction in naphtha imports was inevitable. Our goal is to avoid a suspension of our operations," a company spokesperson told AFP.Mitsui Chemicals, another leading Japanese chemicals firm, started cutting ethylene output at two plants last week because of concerns over naphtha supply, a company spokesperson told AFP.
Half of Japan's 12 ethylene plants have already reduced production, Bloomberg reported, just two weeks after US-Israeli strikes on Iran ignited the war.
That slowdown increases the likelihood of knock-on effects across other industries.
Shin-Etsu Chemical will hike the selling price of polyvinyl chloride (PVC) -- which is used to make window frames, floor covering, pipes and cable insulationin the Japanese market from April "The price of ethylenea key raw material for PVChas surged, and we have been subjected to supply volume restrictions by our suppliers, compelling us to curtail our production output," the company said in a statement.
The crisis has also hit South Korea, one of Asia's biggest economies."We informed our customers last week that we might declare force majeure on one of our products, dioctyl terephthalate" -- which is used in everything from cosmetics to clothes, a representative of LG Chem told AFP.
In a sign of how critical the situation has become, the South Korean government said Tuesday that it would restrict naphtha exports.
"We will designate naphtha as an item related to economic security by the end of the week," Finance Minister Koo Yun-cheol said.
"The government will work to resolve the difficulties through export restrictions and other necessary measures." The shockwave is spreading across Asia, with Singapore's PCS -- a producer of ethylene and other petrochemicals -- announcing on March 5 that it had issued a formal force majeure notice to its customers.
The global supply of polyethylene -- a derivative of naphtha that is ubiquitous, particularly in plastic packaging, bottles and pipesis also disrupted, with countries in the Middle East major exporters.The paradox, noted BloombergNEF analyst Philip Geurts, is that major polyethylene producers like South Korea or Singapore "could have an advantage" given strong demand in other markets and rising prices.
But "it's very hard to benefit from that if you can't produce the chemicals in the first place," he stressed at a briefing, because "the feedstock (naphtha) dependence on the Middle East is just extraordinarily high".
Source: Qatar Tribune
