Yeocheon NCC Declares 'Force Majeure' on Supply... Petrochemical Industry Faces Domino Concerns Amid Middle East Crisis
Raw Material Supply Disrupted by Strait of Hormuz Blockade
Naphtha Prices Soar, Inventories Dwindle... NCC Operating Rates May Decline
Tension is rising within the domestic petrochemical industry as Yeocheon NCC, which operates the country’s largest ethylene production facility, notified its customers of a possible force majeure that could make product supply difficult. Industry sources say this action could potentially lead to similar measures by other naphtha cracking centers (NCCs).
As of March 8, industry sources report that major domestic petrochemical companies typically stockpile one to two months’ worth of naphtha feedstock. However, following the U.S. airstrike on Iran, concerns have emerged that prolonged disruptions to traffic through the Strait of Hormuz could cause feedstock supply issues. If this continues, it is predicted that major NCCs may begin to declare force majeure as early as this month.
Force majeure is a measure declared to exempt companies from liability when contract fulfillment becomes difficult due to uncontrollable external factors such as war or natural disasters. Petrochemical companies are required to immediately inform their customers if they determine that product supply will be disrupted.
Yeocheon NCC, which operates the country’s largest ethylene production facility, was the first to announce supply disruptions. With an annual ethylene production capacity of approximately 2.29 million tons, Yeocheon NCC declared force majeure on March 4, notifying its customers of potential delays in supply schedules and possible adjustments in supply volumes.
In its notice to customers, Yeocheon NCC explained, "Geopolitical tensions in the Middle East have risen sharply, causing significant disruptions in raw material procurement," and added, "Due to the impact of the Strait of Hormuz blockade, naphtha shipments scheduled to arrive in March have been greatly delayed."
It is understood that the decision to halt supply came less than a week after war broke out in the Middle East on February 28, largely due to insufficient feedstock inventory.
The domestic petrochemical industry has been reducing production since last year due to sluggish global demand and oversupply from China. Yeocheon NCC also halted operations of its No. 3 plant, with a capacity of 470,000 tons per year, at the end of last year and is currently running only its No. 1 and No. 2 plants. The low operating rate meant naphtha inventories were not high, making Yeocheon NCC the first to feel the impact of instability in Middle Eastern feedstock supplies.
The industry is concerned that if tensions in the Middle East persist, other NCC operators may follow Yeocheon NCC in declaring force majeure and halting supplies.
About half of the naphtha used by the domestic petrochemical industry is imported, with the rest produced by domestic refineries. Approximately 70% of the crude oil imported into Korea comes from the Middle East, and a large portion of this passes through the Strait of Hormuz. Similarly, around 54% of imported naphtha also enters via this strait.
An industry official commented, "Not only Yeocheon NCC, but most NCC facilities are exposed to feedstock supply instability. Since production has been cut back until recently, inventory levels are not sufficient, and if this situation continues, other NCCs may take similar measures later this month."
The rising cost of feedstock is also adding to the burden on the industry. The price of naphtha, which was around $590 per ton prior to the outbreak of war on February 27, surged to $737 per ton by March 3—a roughly 25% increase.
Ordinarily, when production costs rise, these are reflected in product prices. However, with the current oversupply and weak demand, it is difficult to pass on higher costs to customers. As a result, product spreads are shrinking, raising the possibility that profitability will worsen.
If feedstock supply problems persist, the average operating rate of NCCs, currently at 70–80%, could decline further.
Hot Picks Today
NICE Investors Service commented, "The petrochemical industry is in a structurally oversupplied phase, making it difficult to immediately reflect increases in feedstock costs in product prices. It is necessary to continue monitoring international oil price trends, the situation regarding feedstock procurement, companies’ adjustments to operating rates, and strategies for securing alternative feedstocks."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
