Aftermath of Ukraine War... Short-term Headwinds for Domestic Chemical Stocks

[Asia Economy Reporter Ji Yeon-jin] Recently, Russia's invasion of Ukraine is expected to inevitably cause a short-term rise in international crude oil and natural gas prices.

According to the financial investment industry on the 25th, Russia ranked 3rd in the world for crude oil production and 2nd for natural gas production last year. If economic sanctions by the US and Europe intensify, imports of Russian crude oil and natural gas may become difficult.

However, the short-term strength of international oil prices is considered a neutral issue from the perspective of the refining industry. Baek Young-chan, a researcher at KB Securities, said, "Although the increase in profits and losses related to inventory is positive for short-term performance, concerns about long-term demand decline due to higher petroleum product prices also remain." In 2020, South Korea's imports of Russian crude oil amounted to 53.7 million barrels, accounting for 5.6% of crude oil imports. While it seems difficult to import Russian crude oil for the time being, imports from other regions such as the Middle East and South America are sufficiently possible, so the direct damage to South Korean refining companies is judged to be limited."

However, the current Ukraine situation is analyzed to be negative for domestic chemical companies. This is because a short-term rise in the price of naphtha, a raw material, is expected due to the strength of international oil prices. However, in 2020, South Korea's chemical product exports to Russia accounted for only 0.6%, so it is expected that there will be no direct damage to the domestic chemical industry. Researcher Baek said, "It is difficult to immediately pass on the sharp short-term rise in naphtha prices to chemical product prices," adding, "It is judged that the increased raw material prices will be reflected in selling prices with a 2-3 month lag. If this war ends as a limited full-scale war or short-term conflict, the burden of rising naphtha prices may not be significant."

Furthermore, if economic recovery policies in China and the US become visible, it is expected that the chemical industry outlook will improve through demand recovery in the second half of the year. Researcher Baek said, "Although it is a negative factor in the short term, there is no need to show excessive concern," adding, "The direction of chemical product prices in the Asian chemical market is expected to be determined by the Ukraine situation and economic stimulus policies to be announced at the Chinese National People's Congress in early March."

This content was produced with the assistance of AI translation services.