Naphtha Prices Double in Two Months

The Korean petrochemical industry is facing a supply chain crisis as naphtha prices—a key raw material for petrochemicals—have surged dramatically due to the Middle East conflict. According to Korea National Oil Corporation, naphtha prices rose from $56.38 per barrel on January 2 to $127.95 on March 17, representing a 127% increase in approximately two and a half months.

The upward trajectory has been particularly steep in March. While naphtha traded stably in the $60 range during January and February, the March average soared to $92.6 per barrel. Between March 2 and March 10, prices jumped $33.9 in just seven days, entering an abnormal surge phase.

NCC Production Shutdowns Becoming Reality by End of March

As raw material supply disruptions materialize, major petrochemical companies are scaling back production. Lotte Chemical plans to halt operations at its Yeosu naphtha cracking center (NCC) as early as March 31. Yeosu NCC has already reduced its operating rate to 65%.

According to industry sources, crude oil that can be processed into naphtha is expected to run out by the end of this month. The 22.46 million barrels of strategic reserves the government plans to release represents only 7-8 days of domestic crude oil consumption (approximately 2.8 million barrels per day). Considering that naphtha yield from crude oil averages around 20%, this translates to approximately one week's worth of additional naphtha production at about 560,000 barrels per day—less than half of Korea's daily naphtha consumption (approximately 1.3 million barrels).

An industry official expressed concern, stating, "If things continue this way, the petrochemical industry won't be able to maintain normal production and will barely be keeping alive."

Why This Happened: Hormuz Blockade and Middle East Dependency

The direct cause of this crisis is the Strait of Hormuz blockade following the Middle East conflict that erupted on February 28. Supply from the Middle East, which accounted for approximately 60% of Korea's naphtha imports, has been effectively cut off. Naphtha is a representative petrochemical raw material with high Middle East dependency, making it particularly sensitive to geopolitical risks.

More fundamentally, structural problems in the petrochemical industry underlie the crisis. With weak industry conditions and supply oversaturation making it difficult to raise product prices, companies cannot reflect increased raw material costs, severely deteriorating profitability. This situation resembles the circumstances during the 2022 Russia-Ukraine war.

Government and Political Parties Launch Emergency Response

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho announced at an emergency economic ministers' meeting on March 18 that "naphtha will be temporarily designated as an economic security item." The government will secure alternative import sources, implement supply stabilization measures including export restrictions, and establish a 'Middle East Damage Response Special Support' program to provide financial support totaling 1.5 trillion won.

On March 19, the Democratic Party's Euljiro Committee held a meeting with LG Chem, Hanwha Solutions, Lotte Chemical, and Yeosu NCC to discuss responses to the raw material supply crisis. The plan is to support affected companies with alternative import cost differences and emergency operating funds, while offering preferential interest rates of up to 2.3 percentage points to companies handling economic security items.

Concerns About Spread Across Manufacturing Sector

The naphtha shortage is likely to extend beyond the petrochemical industry to manufacturing overall. Naphtha is a core raw material that is converted into basic petrochemicals such as ethylene and propylene through NCCs, then processed into synthetic resins and intermediates before becoming final products. If ethylene supply disruptions materialize, they could have cascading effects on packaging materials, consumer goods, construction materials, tires, automotive and electronic components.

While large corporations are known to have secured raw material inventories for more than two months through long-term supply contracts, the situation is more severe for small and medium-sized companies. According to industry sources, some companies are even considering factory dismantlement or 'scrapping.'

Yellow Envelope Law Variable Adds to Complications

The petrochemical industry faces a 'triple crisis' with rising raw material costs compounded by concerns over the implementation of the Yellow Envelope Law (Trade Union Act). If the law is implemented, labor-management issues could arise during mergers and acquisitions (M&A) or business restructuring processes, creating burdens for corporate decision-making.

The government is reviewing restructuring plans for the Yeosu region following the reorganization of the Daesan petrochemical complex, and is showing movement toward fundamental industry improvement, including consideration of factory closures at Yeosu NCC. However, concerns have been raised that the Yellow Envelope Law could slow the pace of such restructuring.

Future Outlook [AI Analysis]

In the short term, naphtha supply instability is likely to persist unless the Strait of Hormuz blockade is resolved. While the government's strategic reserve releases and financial support may provide temporary relief, fundamental solutions will be difficult without the resumption of Middle East supply.

In the medium to long term, this crisis is expected to accelerate restructuring in the petrochemical industry. The sector has already faced consolidation pressure due to oversupply and deteriorating profitability, and with raw material supply instability added to the mix, the retirement of inefficient facilities appears inevitable.

However, labor-management variables such as the Yellow Envelope Law could affect the pace of restructuring, making government policy coordination critical at this juncture. For the 'war supplementary budget' and industrial support measures announced by Deputy Prime Minister Choo to be effective, analysis suggests a two-track strategy simultaneously pursuing short-term supply stabilization and medium-to-long-term structural improvement will be necessary.