The local petrochemical industry breathed a sigh of relief after an emergency injection of 27,000 tons of Russian naphtha. However, the analysis indicates that this volume, equivalent to only 3-4 days of domestic consumption, is insufficient to dispel fears of a supply chain collapse. It is expected to be just a “temporary measure” to prevent shutdowns rather than a fundamental solution.
The basic solution is “normalization of crude oil imports.” However, crude oil is imported in much larger units than naphtha, making it difficult to secure alternative suppliers. In this case, it is encouraging that the government is providing some breathing room through measures such as swapping strategic oil reserves, to stave off the worst-case scenario. But with no clear solution in sight if the Middle East crisis drags on, anxiety is growing.
According to industry sources on April 2, the 27,000 tons of Russian naphtha imported by LG Chem was a shipment that was secured with great difficulty by taking advantage of the temporary relief of sanctions by the US administration. However, the industry estimates that this amount can only last for 3-4 days, even with plant operating rates reduced to a minimum.
Despite this, the outlook for additional imports is bleak. First, lack of time is a major obstacle. Russian shipment must be unpacked and paid for by April 11th. Considering the actual shipping time and financial procedures, it is very likely that this is the last import.
Kim Dong-chun, president of LG Chem, also lamented the supply difficulties, saying: “We have obtained some volume within the range allowed by US sanctions, but additional purchases are difficult.”
“We must create a structure that allows us to survive as long as possible with the remaining inventory,” an industry official said. “All we can do now is close the plants one by one as needed based on the supplies we secure, and use this volume to operate the remaining plants for as long as possible.”
While the government is making comprehensive efforts, such as activating diplomatic channels to obtain confirmation of sanctions waivers from the US Treasury, EU sanctions against Russia remain in place. Companies are reluctant to sign additional contracts because of the risk of “secondary sanctions” that may arise if they export products made from Russian raw materials. Moreover, with Iran taking the hard line of requiring payment for passage through the Strait of Hormuz in its own currency, competition to divert import routes to regions outside the Middle East has intensified, making the process of securing supplies itself “like plucking a star from the sky.”
Crude oil trading units are larger and competition is fierce. Hesitation regarding new long-term contracts amid uncertainty
The situation for crude oil is more serious than for naphtha. While naphtha can be purchased in relatively small batches or transported by small to medium-sized vessels, crude oil is transported in very large crude carrier (VLCC) units, making flexible responses impossible. Currently, due to the repercussions of the Iranian blockade, seven ships carrying 14 million barrels of crude oil to local refineries are stranded within the Strait of Hormuz.
The government has played the “strategic oil reserve swap” card of 20 million barrels with the four major domestic oil refineries. Under this system, the government first releases its strategic reserves once it is certain that a company has shipped replacement supplies from abroad, and the reserves are subsequently replenished when the replacement supply arrives. However, this is just a “steal from Peter to pay Paul” measure to cover temporary stock shortages, not a fundamental solution.
In particular, securing alternative crude oil supplies requires enormous costs and time. If the crude oil is sourced from Brazil or Africa instead of the Middle East, the shipping time increases from the usual 20 days to 50 days. Sea freight rates and high raw material prices have reached a level that is difficult for companies to bear.
“The stock of spare parts for key industries such as automobiles and home appliances is about one to one and a half months. Even if we can hold out until the end of June with strategic reserves and replacement supplies, it is difficult to be optimistic about the situation after that,” an official from the Ministry of Trade, Industry and Energy said.
Ultimately, the structural weakness of the energy supply chain that relies on the Middle East for more than 70% of its needs has been offset by the war variable, and has become a “detonator” for the real economy. Concerns are growing that a prolonged disruption in supplies of naphtha and crude oil, essential raw materials for petrochemical products, could spread production disruptions like a “domino” effect across all industries, from health care and medical supplies like IV bags to auto parts.
Source: Korea Business
