Iran war causes naphtha shortage, forcing several Japanese petrochemical companies to cut production, potentially affecting many downstream industries.

Even though market chatter may point to a possible crude oil shortage, Japan’s industrial supply chain is facing a more urgent shock: a little-known petroleum byproduct called naphtha.

Several Japanese petrochemical companies announced production cuts recently, citing concerns that the Middle East conflict could tighten the supply of naphtha, a key feedstock used to produce plastics.

Signs of these production cuts suggest that this brewing crisis may weigh on output and put pressure on profitability across multiple industries, from food to technology. Naphtha is refined from crude oil and has a wide range of uses—from plastic bottles to construction materials and electrical equipment. Naphtha can also be further processed into gasoline.

Mateen Chaudhry, founder and managing director of the consulting firm BCMG, said: “The market hasn’t truly worked out the cascading effects that a naphtha supply disruption could trigger. This could be a warning sign, and unfortunately, Japan’s exposure level is very high.”

Data from the Japan Petroleum and Petrochemical Industries Association show that about 60% of Japan’s naphtha relies on overseas supply, and more than 70% of that comes from the Middle East. This makes Japan highly sensitive to disruptions in shipping through the Strait of Hormuz. Since the outbreak of the Iran War, shipping disruptions have driven naphtha prices up by about 66%.

In a statement released on Tuesday, the association said that, based on domestic inventory conditions, it has not yet seen an “immediate risk” of naphtha supply difficulties.

At the same time, the association said it is “very concerned” about the situation in the Middle East and is trying to find alternative naphtha sources outside the Persian Gulf.

Japan’s naphtha reserves available for buffering are limited. Citi analyst Yuta Nishiyama noted that Japan’s crude oil reserves could cover about 250 days, but naphtha reserves are only about 20 days. Even if the relevant reserves are used, “it still isn’t enough to make the petrochemical industry immediately optimistic,” because most naphtha may be prioritized for gasoline production.

Japan’s neighboring countries (including South Korea) are also highly dependent on importing Middle East naphtha. By contrast, the United States is less affected because a large portion of its petrochemical industry uses ethane as an alternative feedstock.

Japan’s refiner Idemitsu Kosan Co., Ltd., headquartered in Tokyo, became the latest Japanese company to announce production cuts on Monday, as it expects naphtha supply to decline. A company representative told Bloomberg that it will reduce ethylene production in its two plants in Chiba and Tokuyama that use naphtha as a feedstock.

Idemitsu Kosan joined Mitsubishi Chemical, Mitsui Chemicals, and Cosmo Energy Holdings in the group of companies adopting similar measures announced last week. Only two weeks after the outbreak of the Iran War, 6 of Japan’s 12 ethylene plants have already started production cuts.

Analysts say the risk of constrained naphtha supply will affect not only the petrochemical industry, but also plastic manufacturers, and even automobile manufacturers. This week, electronics materials maker Shin-Etsu Chemical Co., Ltd. said it will raise Japan’s domestic polyvinyl chloride (PVC) price due to rising ethylene costs.

Joel Scheiman, a senior analyst at stock research firm Pelham Smithers Associates, said: “The number of downstream-affected companies will be very large. This time, it really rings the alarm bell and highlights just how dependent we are on oil derivatives.”

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