Oil Supply Shock Ripples Through Fertilizer, Plastics, and Tech
The worst supply shock in the history of the oil market is spilling over to critical supply chains, threatening shortages of medical supplies, fertilizers, semiconductors, and everyday consumer goods, including textiles, footwear, and cosmetics.
When the Strait of Hormuz is shut, it’s not only Asian refiners scrambling for crude oil to turn into fuels.
The naphtha, ammonia, urea, and helium supply that the Middle East would typically export via the most critical energy chokepoint is now trapped in the Persian Gulf. Petrochemicals producers in Asia, which are key exporters of plastics and other derivatives to the global markets, are cutting production and operations, declaring force majeure left and right. Without plastics, adhesives, lubricants, solvents, and even materials to make plastic caps and packaging for basic consumer goods, what began as an oil supply disruption is turning into a crisis along the supply chains of key industries, which will hit consumers with higher prices and/or shortages soon.
The most immediate disruption is seen in Asia. But Asia is a major exporter of all these goods and processed petroleum derivatives, which means shortages and higher prices are spilling over to other regions, too.
“Much like during COVID, the shock unfolds sequentially rather than simultaneously – a rolling supply disruption moving westward,” J.P. Morgan said in a note last week, as carried by CNN.
Asia’s petrochemicals industry is already feeling the crunch. Across Asia, shortages of naphtha and other key petrochemicals feedstocks due to the Iran war have already forced petrochemicals firms to curb output.
Asia’s petrochemicals sector is highly dependent on naphtha, liquefied petroleum gas (LPG), and methanol from the Persian Gulf, so the war in the Middle East is creating a major supply shock in Asia, which is the most vulnerable to supply disruptions from the Gulf region, trade credit insurance group Coface said last month.
“With 60 to 70% of Asian naphtha passing through Hormuz, a prolonged disruption could redefine flows, costs and, perhaps, the very geography of the global petrochemical industry,” said Joe Douaihy, sector economist, Coface.
Commodity intelligence firm ICIS noted in the second week of the war that “Asia’s petrochemical dominance sits atop a feedstock system that is dangerously concentrated. A single geopolitical shock can reverberate across an entire industrial continent.”
We are now in the sixth week of the war, the Strait of Hormuz is still de facto closed, and supply chains are reeling from the shock of slashed crude, naphtha, LNG, LPG, fertilizer, ammonia, urea, and helium supply.
Asia feels it first, but concerns and shortages spread to the West, too.
U.S. farmers plan to plant less corn, wheat, and rice acreage, as fertilizer prices have surged following the supply shock in the Middle East.
“The interruption of crop-nutrient supplies from the Gulf comes just as planting season begins in the Northern Hemisphere, threatening yields and harvests through the year and pushing food prices higher,” the International Monetary Fund (IMF) said last week.
Shortages of helium, of which Qatar produces a third of the global supply, are reverberating through the tech industry. Chip makers are scrambling for supply, with Qatar’s production sites hit by missiles and what’s already produced unable to leave the Strait of Hormuz. Helium is vital for the manufacturing of semiconductors and medical imaging devices.
Medical supplies are also threatened, and not only in Asia. The UK could face days until some supplies run out, the chief executive of NHS England, Sir Jim Mackey, told LBC radio last week.
The IMF last week warned that “The war is also reshaping supply chains for non-energy and critical inputs.”
The closure of the Strait of Hormuz, the mother of all disruptions, is affecting not only fuel supply and fuel prices globally. It has hit the processing and manufacturing of materials critical for food production, medicine, technology, and consumer goods, exposing the world’s dependence on petroleum derivatives for a normal everyday life.
By Tsvetana Paraskova for Oilprice.com
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