iM Securities projected on the 13th that if the war between Russia and Ukraine ends and sanctions against Russia are eased, the cost competitiveness of domestic naphtha cracking center (NCC) corporations will improve. This is because Russian naphtha will be available for reuse.
LG CHEM, LOTTE Chemical, Kumho Petrochemical, and Korea Petrochemical Ind. rely on imports for 70-80% of the naphtha required for NCC operations. Until 2021, before Russia invaded Ukraine, Russian naphtha accounted for 23% of import volume, the largest share. However, following the outbreak of war and the intensification of sanctions against Russia, shares of naphtha from Qatar, the United Arab Emirates (UAE), and Algeria increased. As of last year, the share of naphtha from five Middle Eastern countries exceeded 60%.
The problem is that prices of Middle Eastern naphtha are higher than those of Russian naphtha. Jeon Yu-jin, a researcher at iM Securities, noted, "In 2021, the average import price of Qatari naphtha was 6.3% higher than that of Russian naphtha, and UAE naphtha was 3.6% higher; even on an average basis from 2019 to 2021, it was about 4% more expensive," adding that "it means that domestic NCC corporations have faced an increased cost burden of 4-5% since they were unable to purchase Russian naphtha."
China has actively imported Russian naphtha since the war. In particular, the average price discount was 8%, reaching as high as 11%. In terms of costs, Chinese NCC corporations could enjoy a competitive edge of up to 15% over Korean NCC corporations. In a deteriorating petrochemical market, domestic NCC corporations had to face management difficulties for nearly three years while lagging in price competitiveness.
The former researcher expressed expectations for changes, noting that the United States is considering ways to ease sanctions on Russian energy. This means that domestic NCC corporations may have the opportunity to purchase low-cost Russian naphtha again.
He said, "A drop in oil prices is essential to alleviate inflation, but since the increase in U.S. crude oil production in the short term is unlikely, Russian crude oil and related products are expected to be key targets excluded from sanctions."
He added, "Considering that in the past, Russian naphtha was 4-5% cheaper than Middle Eastern naphtha, it is likely that the cost of domestic NCC will improve accordingly," stating that "Chinese NCC corporations will not only see the advantage of reduced cost discounts diminish but also face greater burdens as the share of Russian naphtha gradually decreases compared to before."