The Strait of Hormuz. [Reuters]
The Strait of Hormuz. [Reuters]

Naphtha prices, which had been falling in the second half of the year, have surged again as the risk of renewed conflict in the Middle East mounts. The petrochemical industry faces growing pressure on raw material costs, with concerns that earnings damage will persist well beyond the anticipated second-half "reverse lagging" effect.

According to Korea National Oil Corp.'s Petronet, the international naphtha price stood at $82 per barrel as of Monday — up 3.7% from <style ref="s0">$79 on Friday</style> and <style ref="s1">24.2% above the June low of $66 recorded on June 25</style>. Naphtha, a key feedstock for petrochemical products such as ethylene, is a closely watched indicator of cost pressure for the industry.

Naphtha had traded at around $60 at the start of the year before spiking immediately after the outbreak of the Middle East war, reaching $141 on March 31. Iran's blockade of the Strait of Hormuz — the world's busiest crude oil shipping lane — disrupted supply and drove the surge. Prices remained above $100 through May before easing to around $70 in June as hopes for an end to the conflict grew, only to reverse course again.

The renewed climb reflects <style ref="s2">a fresh standoff between the United States and Iran</style> after the two countries had appeared close to a ceasefire agreement. Iran attacked a merchant vessel passing through the Strait of Hormuz on July 6, prompting the US to launch four airstrikes against Iran between July 7 and July 11. Iran subsequently declared it would re-close the strait, breaking a bilateral agreement under which both sides had committed to 60 days of negotiations and an open waterway.

A petrochemical complex in Yeosu, South Jeolla Province. [Yonhap]
A petrochemical complex in Yeosu, South Jeolla Province. [Yonhap]

Earnings uncertainty for South Korea's petrochemical companies has also deepened. In the early stages of the Middle East conflict, the firms benefited from a "lagging" effect — the time gap between raw material procurement and product sales. In March and April, they sold products made from cheap naphtha purchased earlier in the year at elevated prices amid supply shortages, enjoying a war-driven windfall. But analysts had already warned that the sector would swing back to losses in the second half.

Adding to those woes, naphtha prices — which had briefly appeared to stabilize — are swinging sharply again in the wake of the strait's re-closure. "We had expected the first-half lagging gains from the war to be clawed back in the second half, and then for the market to stabilize once the conflict ended," an industry official said. "But the uncertainty keeps dragging on. It's hard to predict how long this latest naphtha price rise will last — or whether it will be the last one."

Structural reform of the petrochemical sector has also been pushed back indefinitely. The industry had been accelerating its restructuring drive, submitting business reorganization plans to the government and securing final approval for Daesan Project No. 1 — a merger of HD Hyundai Oilbank and Lotte Chemical. Progress stalled after the Middle East war broke out, however. Beyond Daesan Project No. 1, restructuring is also pending for a second Daesan project and for sites in Yeosu and Ulsan, yet none of the three has submitted a final plan.


klee@heraldcorp.com