Huatai Securities: Decline in Oil and Gas Processing Volumes Leads to Sulfur Supply Deficit, Multiple Impacts on Chemicals and Metals

Huatai Securities report states that approximately 60% of global sulfur comes from sulfur, 30% from by-products of metal smelting, and 10% from sulfur iron ore acid production. The main sources of sulfur production are crude oil refining and natural gas processing. According to Kepler, by 2025, nearly half of the sulfur exported through the Strait of Hormuz will be from this route. Combined with limited crude oil supply leading to decreased load expectations at East Asian refineries, and the relatively low sulfur content in North American shale oil and gas, the supply gap in sulfur becomes more apparent after reduced supply from the Middle East. Huatai Securities believes that the mid-term supply and demand contradiction of sulfur may be difficult to reverse. According to S&P Global, about 58% of global sulfuric acid is used for phosphate fertilizers, with the rest for processing metals such as nickel, copper, uranium, and for manufacturing titanium dioxide, nylon, dyes, and lithium battery cathodes. As sulfur supply tightens and prices remain high, chemical projects with differentiated production routes such as gypsum acid, ferrous oxalate for iron phosphate, and chloride process titanium dioxide are expected to benefit.

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Huatai | Middle East Natural Gas Supply Stagnation Impacts Chemical Market

Key Points

Since the conflict between the US, Israel, and Iran at the end of February 2026, control of the Strait of Hormuz has disrupted transportation of key fertilizers and chemical raw materials such as urea, LNG, methanol, and sulfur. Additionally, several natural gas plants in Iran and around the Persian Gulf have reduced or halted production due to the conflict, triggering a rapid increase in global prices of related products since March. The Persian Gulf region, a major source of urea and LNG supply, is close to the northern hemisphere planting season. We believe that international urea supply shortages may push up global grain prices in the second half of 2026. China, as a major fertilizer consumer, has sufficient domestic urea supply, so the impact of overseas price increases may be limited. The gap in methanol supply has driven up prices of Asian methanol, acetic acid, and DMF, and has also led to increased prices for biodiesel in Southeast Asia. The mid-term sulfur shortage may be difficult to reverse, putting pressure on downstream products such as titanium dioxide, lithium iron phosphate, nylon, and phosphate fertilizers. We believe that Chinese alcohol-ammonia coal chemical enterprises with high strategic value and those producing chemical products via differentiated routes that consume less sulfur are likely to benefit. US and Russian chemical enterprises involved in gas-based processes may also benefit.

Conflict has disrupted urea transportation and reduced natural gas production, and rising urea prices will impact global grain prices in the second half of 2026.

Based on 2025 global urea trade estimates, the US, Israel, and Iran conflict has caused about one-third of global urea transportation through the Strait of Hormuz to be disrupted. The decline in natural gas production around the Persian Gulf also significantly impacts urea production in the Middle East, South Asia, and Southeast Asia. Countries like India, Pakistan, and Thailand, which depend heavily on Middle Eastern natural gas, may see reductions in urea output due to the conflict. According to Bloomberg, on March 18, CFR urea prices in Southeast Asia had already increased by 45% compared to late February. As the current urea price rally approaches the planting season in Europe and America, followed by the peak planting season (rainy season June-October) in South and Southeast Asia, rising costs and fertilizer shortages may lead to insufficient crop yields locally, triggering a global rise in grain prices.

China continues to promote domestic urea supply security, highlighting the strategic importance of fertilizers.

In China, with the continued enforcement of urea export inspection laws since 2026, fertilizer supply during spring planting remains sufficient. The impact of overseas urea price increases on China is limited. As of March 18, domestic urea prices averaged 1,902 yuan/ton, up 2% from late February, with a relatively small overall increase. Domestic urea mainly uses coal as raw material, with over 80% capacity from coal-based processes in 2025. The capacity is ample and not reliant on imports. Under the backdrop of global urea supply shocks caused by the US-Israel-Iran conflict, fertilizers like urea are fundamental to food security, emphasizing their strategic importance. After the spring fertilization period, domestic producers are expected to seize export opportunities. Currently, the price difference between domestic and international urea exceeds 2,500 yuan/ton. We recommend leading Chinese urea companies.

Middle East methanol shortage impacts East Asia, pushing up downstream product prices.

According to Kepler, Iran, as the second-largest methanol producer and the largest exporter globally, has experienced reduced methanol output and transportation disruptions through the Strait of Hormuz due to the conflict, potentially causing a supply gap in East Asia. Customs data shows that in 2025, China’s methanol import dependency was 13%, with about 70% coming from Middle Eastern countries like Iran and Saudi Arabia. The decline in imported supplies mainly affects methanol supply in East China, leading to higher prices for downstream products such as acetic acid and DMF. Meanwhile, tight methanol supply in Southeast Asia has increased costs for bio-diesel production. Since China’s methanol operating rate was only 82% in February, with ample capacity and relatively stable costs for coal-based processes in western regions, we expect China’s methanol supply resilience to remain intact. We recommend coastal Chinese methanol producers.

Decreased oil and gas processing capacity causes sulfur shortages, impacting chemical and metal industries.

Approximately 60% of global sulfuric acid is derived from sulfur, 30% from by-products of metal smelting, and 10% from sulfur iron ore acid production. The main sources of sulfur are crude oil refining and natural gas processing. According to Kepler, in 2025, nearly half of the sulfur exported through the Strait of Hormuz will be from this route. Combined with limited crude oil supply, this leads to decreased capacity at East Asian refineries. North American shale oil and gas have relatively low sulfur content, and after reduced supply from the Middle East, the global supply gap becomes more evident. S&P Global reports that about 58% of global sulfuric acid is used for phosphate fertilizers, with the rest for processing metals such as nickel, copper, uranium, and for manufacturing titanium dioxide, nylon, dyes, and lithium battery cathodes. As sulfur supply tightens and prices remain high, chemical projects with differentiated production routes such as gypsum acid, ferrous oxalate for iron phosphate, and chloride process titanium dioxide are expected to benefit.

Risk warnings: Uncertainty in supply impact due to conflicts; significant demand decline risks.