(March 17): For all the headlines about the looming shortage in crude oil, Japan faces a more immediate hit to its industrial supply chain from a little-known petroleum byproduct.
Multiple Japanese petrochemical firms have announced production cuts in recent days on worries that the Middle East conflict will strain supplies of naphtha, a vital component for plastic manufacturing.
The curbs point to a brewing crisis that could stunt production and pressure earnings across sectors from food to tech. Made by refining crude oil, naphtha’s uses range from plastic bottles to construction materials and electrical appliances. It can also be processed to produce gasoline.
“Markets are not really thinking through the cascading implications of no naphtha supply,” said Mateen Chaudhry, founder and managing director of corporate advisory firm BCMG. “It might be the canary in the coal mine, and unfortunately Japan is very exposed.”
Japan gets around 60% of its naphtha from overseas and relies on the Middle East for over 70% of those imports, according to the Japan Petrochemical Industry Association. That leaves the nation highly vulnerable to shipping disruptions in the Strait of Hormuz, which have driven up naphtha prices by about 66% since the Iran war began.
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Japan also has very few naphtha stockpiles to fall back on. The country holds around 250 days worth of crude oil reserves, but only 20 days worth of naphtha, according to Citigroup analyst Yuta Nishiyama. Even the release of those reserves “does not warrant immediate optimism for the petrochemical industry” as most naphtha would likely be prioritised for gasoline, Nishiyama wrote in a note.
Japan’s Asian neighbours, including South Korea, also depend heavily on Middle Eastern naphtha imports. The US is less exposed because much of its petrochemical industry uses ethane as an alternative.
Tokyo-based oil refiner Idemitsu Kosan Co became the latest Japanese firm to announce a cut in its production on Monday in anticipation of a drop in naphtha supplies. The company will curb output of ethylene, which is made using naphtha, at its Chiba and Tokuyama plants, a representative told Bloomberg.
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Idemitsu joins Mitsubishi Chemical Group Corp, Mitsui Chemicals Inc and Cosmo Energy Holdings Co, which announced similar measures last week. Just two weeks into the Iran war, six out of Japan’s 12 ethylene plants have already started reducing output.
The risks of naphtha supply constraints extend far beyond the petrochemical sector to plastic manufacturers and even automakers, according to analysts.
“As you go downstream, there are going to be a massive number of companies that are going to be affected by this,” said Joel Scheiman, a senior analyst at equity research firm Pelham Smithers Associates. “This is a real wake-up call for how dependent we are on oil-derived products.”
Japanese petrochemical firms had been reducing production even before the Iran war, due to overcapacity resulting from an increase in exports from China. Many plants were already operating below capacity, making it “basically impossible to reduce the utilisation rates much further”, Scheiman said.
“At some point, the plants won’t function and they will have to totally close,” leaving clients in the lurch, Scheiman said.
Worries about naphtha shortages are starting to play out in some corners of Japan’s equity market. Shares of Hiroshima-based food container maker FP Corp have plummeted about 16% since the Iran war broke out. Japan’s broader Topix index has lost around 8% in the same period.
But most investors have not yet woken up to the broader risks of naphtha scarcity, said BCMG’s Chaudhry. “Things could end up somewhat like Covid,” he said. “The key problem now is complacency.”
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