Huatai Securities: Over a month of control of the Strait of Hormuz has deepened supply disruptions in the Asian petrochemical chain

A Huatai Securities research report states that over a month of control over the Strait of Hormuz has led to widespread reductions in operating rates across the Asian petrochemical industry chain due to disruptions in oil supply. Rising costs and tightened supply have driven broad increases in product prices. The crack spreads for international diesel and marine gas oil (VGO) have surged significantly, while the ethylene/propylene chain has faced difficulties in maintaining price increases due to insufficient demand, and the aromatics chain has shown differentiated performance depending on the resilience of demand for various products. Asian countries face varying risks owing to differences in their strategic petroleum reserve levels and alternative energy sources; China’s risk of supply chain disruption is relatively lower. Meanwhile, reductions in industry capital expenditures and the “dual carbon” policy will promote the optimization of the supply structure, and this supply disruption is expected to accelerate the restructuring of the Asian petrochemical landscape. As uncertainty in the situation diminishes over time, downstream inventory replenishment demand is expected to be released, potentially improving the profitability of chemical products. In the long term, this event will accelerate China’s strategic move toward energy independence and controllability. The development of substitution routes such as modern coal-to-chemicals, green hydrogen, and new energy is expected to accelerate, gradually reducing reliance on imported oil and gas.

Full text as follows

Huatai | Deep Chemical Insights: Over a Month of Strait Control Deepens Supply Disruptions in Asia’s Petrochemical Chain

Over more than a month of control over the Strait of Hormuz, disruptions in oil supply have caused a general reduction in operating rates across the Asian petrochemical industry chain. Rising costs and tighter supply have driven broad increases in product prices. The crack spreads for international diesel and marine gas oil (VGO) have surged by 427% and 398%, respectively. The ethylene/propylene chain has faced price-increase obstacles due to insufficient demand, while the aromatics chain has shown differentiated performance based on the demand resilience of various products. Asian countries face different risks due to disparities in their strategic petroleum reserves and alternative energy sources; China’s risk of supply chain disruption remains relatively low. Meanwhile, the contraction of industry capital expenditures and the “dual carbon” policies will promote supply structure optimization, and this supply interruption is expected to accelerate the reshaping of Asia’s petrochemical landscape. As uncertainty in the situation decreases, downstream inventory replenishment demand is expected to be released, which could improve the profitability of chemical products. In the long term, this event will accelerate China’s strategic push toward energy independence and controllability. The development of substitution routes such as modern coal-to-chemicals, green hydrogen, and new energy is expected to speed up, gradually reducing dependence on imported oil and gas.

Key Points

Amid the US-Israel-Iran conflict, China’s supply disruption risk is relatively controllable; long-term energy independence and controllability may accelerate

According to Kpler, by 2025 approximately 31% of global crude oil seaborne freight will pass through the Strait of Hormuz. East Asia and South Asia are highly dependent on this route for crude oil and refined product exports. China’s risk of supply disruption is relatively low due to high crude reserves and available technological substitutes, whereas Japan, South Korea, and India—due to excessive import reliance or insufficient reserves—face higher risks of supply chain disruption. If uncertainties regarding Iran’s situation decrease later, combined with downstream inventories already drawn down to relatively low levels, global demand for chemical product replenishment could drive a recovery in industry conditions. On the supply side, since 2025, industry capital expenditures have declined, and policies such as “anti-overcapacity” and “dual carbon” are accelerating the arrival of a supply inflection point; chemicals may enter a new market cycle. In the long term, this event could accelerate China’s strategic move toward energy independence and controllability, with rapid development expected for substitution routes like modern coal-to-chemicals, green hydrogen, and new energy.

Cost-driven increases will lead to a broad rise in chemical product prices, with potential shortages in sulfur, olefins, and aromatics

According to BaiChuan YingFu and Longzhong Information, on March 27, sulfur, propylene, ethylene, and pure benzene prices increased by 39%, 37%, 68%, and 43%, respectively, compared to the end of February; the crack spreads for Singapore diesel and VGO increased by 427% and 398%. Due to declines in crude oil processing capacity in key regions and tighter trade, international refined product crack spreads have widened significantly. Because some countries are implementing policies to “maintain oil supply while reducing chemical output,” overall operating rates in petrochemicals have decreased. For propylene, China’s PDH units—accounting for 35% of capacity—are over 60% dependent on Middle Eastern propane imports; simultaneous reductions in gas-based and oil-based propylene production have led the industry into shortages. For ethylene, the overall reduction in Asian ethylene capacity has significantly improved profitability for coal-based and gas-based ethylene. However, since China still relies on about 25% imports for ethylene in 2025, the risk of shortages along the domestic ethylene chain has increased. For pure benzene and PX, China’s continued dependence on imports into Japan and South Korea means the shortage risk remains high. For sulfur, the decline in natural gas and crude processing volumes caused by the US-Israel-Iran conflict has led to a significant reduction in co-product resources.

Differing from market expectations

The market fears that China may face raw material supply disruptions. We believe that China’s high crude reserves and available technological substitutes make the risk of raw material supply disruption manageable. Some segments of the industry may experience structural tightness if import sources are blocked, but overall domestic production systems provide supply security. The market worries that high oil prices will suppress global demand. We believe that, influenced by the volatile US-Israel-Iran situation earlier, downstream procurement has shifted toward caution and contraction; with inventories continuing to decline, they will reach relatively low levels. If the US-Israel-Iran situation stabilizes later, the chemical industry is likely to enter a new cyclical upswing driven by replenishment demand.

Investment conclusions

Substitution routes based on coal and gas feedstocks are expected to benefit from improved crack spreads driven by rising oil prices. Under the framework of long-term energy autonomy and controllability, new energy sources are expected to become key strategies to reduce China’s external energy dependence, with upstream phosphorus resources continuing to benefit. Overseas regions such as Japan, South Korea, and Europe face significant competitive pressures due to high energy costs and shortages of oil and gas resources; leading Chinese companies capable of providing stable energy supplies are expected to benefit. The profitability of major chemicals may have already bottomed out, with the capacity expansion cycle arriving, and supply optimization combined with replenishment demand is expected to accelerate the bottoming and rebound of commodity product price spreads.

Risk warnings: risks of oil and gas resource shortages; downstream demand falling short of expectations; development of substitution routes falling short of expectations.

(Source: People’s Finance News)