Strait of Hormuz set to reopen fully, raising hopes for business normalization

Reverse-lagging effect to trigger inventory losses in near term

Raw material costs expected to stabilize over medium to long term

Reduced Middle East crude dependence marks supply diversification gains

Drivers refuel at a gas station in Seocho-gu, Seoul, on Sunday, as weekly average prices for gasoline and diesel at domestic filling stations edged down for the fourth consecutive week. [Yonhap]
Drivers refuel at a gas station in Seocho-gu, Seoul, on Sunday, as weekly average prices for gasoline and diesel at domestic filling stations edged down for the fourth consecutive week. [Yonhap]

The war between the United States, Israel and Iran effectively ended after 106 days of fighting. With the full reopening of the Strait of Hormuz — a critical chokepoint accounting for roughly 20 percent of global seaborne oil shipments — now imminent, South Korea's refining and petrochemical industries are growing cautiously optimistic about a return to normal operations. Both sectors endured raw material procurement crises and earnings volatility over the past three months.

US President Donald Trump announced Sunday on his social media account that "negotiations with Iran are now complete," adding that he was approving the "toll-free" opening of the Strait of Hormuz and the immediate lifting of the US Navy's maritime blockade. Pakistan, which brokered the ceasefire talks between Washington and Tehran, also confirmed the deal and announced that a formal signing ceremony between the two countries would take place in Switzerland on Thursday. Iran officially confirmed the signing of a ceasefire memorandum of understanding and the Switzerland ceremony.

With the agreement officially announced, South Korea's energy industry expects relief from what had been its most acute pressure point: a crude oil supply crunch. When the Strait of Hormuz was effectively closed in the immediate aftermath of the Middle East war's outbreak in late February, domestic refiners took a direct hit. More than 70 percent of Middle Eastern crude entering South Korea passes through the strait, and the resulting rerouting of shipping lanes around the Cape of Good Hope — combined with a surge in very large crude carrier freight rates — drove a sharp rise in raw material import costs.

Throughout that period, the refining industry experienced a severe distortion in its reported earnings. In the first quarter of this year, South Korea's four major refiners — SK Innovation, GS Caltex, S-Oil and HD Hyundai Oilbank — posted a combined operating profit of 5.9635 trillion won (approximately $3.92 billion). The figure was inflated by large inventory-related gains as crude purchased at relatively lower prices before the conflict was revalued upward. Industry officials cautioned, however, that the gains were purely accounting profits. "When the war ends and oil prices fall, handing back the first-quarter profits in their entirety will be unavoidable," one refinery official said.

At the same time, despite the surge in international oil prices, the government introduced a petroleum price cap to contain inflation, preventing refiners from selling domestically the products they had refined from expensively procured crude at market rates. With input costs soaring and selling prices capped, the industry's cumulative real operating losses are estimated to exceed 4 trillion won.

Petrochemical companies also posted surprise earnings in March thanks to a lagging effect from raw material input timing, but a reversal driven by the high cost of feedstocks purchased during the war is widely anticipated. After the conflict began, naphtha prices — the key feedstock for petrochemical products such as base olefins — soared in tandem with rising international crude prices. Petrochemical firms have already exhausted the cheaper naphtha stockpiled before the war and are now feeding higher-cost spot-market naphtha into their production processes.

The raw material burden has compounded an already difficult environment marked by a global economic slowdown and a supply glut in commodity chemicals driven by large-scale capacity expansions from China and the Middle East. The ethylene spread — a key profitability gauge calculated by subtracting the naphtha price from the ethylene price — briefly exceeded the breakeven threshold of $250 per ton during the war. As the conflict dragged on and ethylene prices gradually stabilized, however, the spread has fallen back below $100 per ton.

The industry now acknowledges that while the worst uncertainty has lifted as the war moves toward a close, near-term financial deterioration is unavoidable. Analysts expect the paper profits of several trillion won recorded in the first quarter to reverse sharply into large inventory valuation losses and negative lagging effects, as products made from expensive crude must now be sold at lower market prices. Companies are expected to begin giving back those paper gains as soon as next quarter.

Over the medium to long term, however, the normalization of logistics networks and a downward stabilization of input costs are seen as positives. In particular, if the petroleum price cap — which has weighed heavily on refiners — is lifted alongside stabilizing oil prices and domestic inflation, the industry expects to restore normal refining margins from the second half of this year. Petrochemical firms will also benefit from easing cost pressure as naphtha prices decline. "There will obviously be an earnings hit from the reverse-lagging effect, but the most important thing is for the Strait of Hormuz to return to normal as quickly as possible," one industry official said.

The conflict has also prompted what observers describe as a structural improvement in South Korea's energy supply chain. The country's dependence on Middle Eastern crude had long drawn criticism, with the import share hovering around 70 percent, but the crisis accelerated a rapid diversification of supply sources. According to Ministry of Trade, Industry and Energy data, the share of Middle Eastern crude in South Korea's imports plunged from roughly 70 percent to 48.5 percent based on volumes scheduled for delivery between May and July this year.

The shift reflects an aggressive push to bring in alternative crude from North America and other non-Middle Eastern sources, and analysts say it has reduced the risk of production disruptions should geopolitical volatility flare up again. In a recent report, Hana Securities noted that "Asian companies have used the Hormuz crisis as an opportunity to cut back on Middle Eastern crude and expand non-Middle Eastern imports," adding that "Asian buyers now find themselves with significantly greater negotiating leverage in crude oil dealings with the Middle East than they had before."


keg@heraldcorp.com