Rising naphtha prices driven by Middle East geopolitical risks have pushed South Korea’s petrochemical industry into a “negative margin shock,” with feedstock costs overtaking product prices and losses mounting the more companies produce. The price inversion — naphtha above ethylene — is the first since the oil shocks of the 1970s.
Industry officials said naphtha has climbed sharply since the Iran situation. Based on Japan’s import price on a C&F basis, a key benchmark for domestic pricing, naphtha rose from about $557 per ton in January to $785 as of March 9, a jump of about 41% in a little over two months.
Ethylene, meanwhile, fell to $663.75 per ton in March from about $800 in September last year, a decline attributed to weaker demand amid a global economic slowdown.
Profitability in petrochemicals largely depends on the gap between naphtha and ethylene prices. Ethylene is a basic building block for widely used products such as plastics, fibers and film. Companies refine naphtha derived from crude oil into ethylene for sale, and the industry says an ethylene spread of at least $250 is generally needed to turn a profit.
Recently, however, supply concerns tied to the Iran war have lifted feedstock costs above product prices, creating a negative-margin structure. Companies say they are struggling to raise prices for ethylene and other products because demand remains weak and supply is excessive, even as naphtha costs surge.
The squeeze is also hitting operating rates. Major naphtha cracking centers (NCCs) including those run by LG Chem, Daehan Oil Chemical and GS Caltex are known to be cutting runs. Some companies’ average operating rates have fallen into the 50% range, down from 80% to 90% just a few years ago.
Companies say it is difficult to halt NCC operations outright because the ethylene process also produces other chemicals such as butadiene and propylene. They say they must keep plants running at a minimum level, even at a loss, to supply certain products. Concerns are also growing that management burdens will rise further as the government pushes an NCC restructuring policy.
The government said it is closely monitoring developments in the Middle East and will respond flexibly. The Ministry of Trade, Industry and Energy said it has no immediate plan to convene a meeting of petrochemical company CEOs, but is checking conditions through frequent communication with the industry.
A ministry official said the government is in daily contact with petrochemical companies to assess on-the-ground conditions and is weighing response steps while watching Middle East developments and feedstock price swings.
Trade, Industry and Energy Minister Kim Jeong-gwan told reporters on March 8 that petrochemical companies affiliated with refiners have relatively more room, but firms with petrochemicals-centered structures such as Yeochun NCC could face a bigger impact. He said the government would soon prepare and announce measures related to naphtha supply and demand.
* This article has been translated by AI.
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