With the Middle East war disrupting naphtha supply, small and midsize companies that had been making various vinyl and plastic products using basic feedstocks such as ethylene and propylene from petrochemical corporations have taken a direct hit. Concerns are rising that it is not simply a matter of prices going up, but that production disruptions across the industry will trigger a chain shock.
According to the industry on the 25th, Company A, which makes food packaging materials, has been supplying customers with polypropylene (PP) film at a price raised by 300 won per kilogram since on the 23rd. Starting on the 1st of next month, it plans to raise it by an additional 500 won per kilogram. Compared with PP film typically transacting around 2,000 won per kilogram, the price has jumped 40% in 10 days. PP film made from propylene is transparent and highly heat-resistant, and is mainly used for packaging bread, snacks, and ramen.
Company B, which makes plastic containers, determined it would be difficult to receive stable supplies of materials and supplies such as PP, PET, and polyethylene (PE) from domestic petrochemical corporations, so it contacted overseas partners last week to inquire about supply, but said it was rejected across the board. Even after teaming up with nearby corporations to place a large consolidated order, it received replies from U.S. and Japanese corporations that supplying would be difficult.
An official at a plastic processing company said, "For small and midsize companies that have transacted with domestic petrochemical corporations for decades, attempting overseas orders was a major challenge," and added, "U.S. corporations cited price, and Japanese corporations cited allocation of domestic volumes to reject all transactions."
This stems from the blockade of the Strait of Hormuz cutting off naphtha supplies to Korea. Domestic petrochemical corporations feed naphtha into naphtha cracking centers (NCCs) to produce basic feedstocks such as ethylene, propylene, and butadiene. Ethylene becomes the raw material for items such as plastic bags, PET bottles, and pipes. Propylene is reborn as PP film and mask filters. In short, most of the products around us come from the petrochemical industry.
Petrochemical corporations are quickly raising prices for basic feedstocks. According to the Korea Federation of Plastic Industry Cooperatives, which represents the interests of domestic small and midsize plastic processors, the average price per ton last month for linear low-density polyethylene, low-density polyethylene, and high-density polyethylene was 1.48 million won, 1.63 million won, and 1.5 million won, respectively, but since the start of this month, list prices for all products have risen by 200,000 won per ton. It said April prices are expected to rise by at least 300,000 won per ton.
While the petrochemical corporations that make basic feedstocks are large corporations, most of the companies that receive them and make products are small and midsize. The head of a plastic container manufacturer said, "If we fail to deliver products on time, our contract with the primary contractor will be terminated, so we must secure materials first even if they are expensive," and added, "Every time we turn machines off and on, defect rates spike, so we try to keep them running as much as possible, but with materials running out we have no choice but to reduce operations."
The petrochemical sector assesses that on-hand naphtha inventories amount to only two weeks' worth. In fact, the previous day LG Chem halted operations at its No. 2 NCC plant in Yeosu. Lotte Chemical brought forward major maintenance that stops production facilities. Other petrochemical corporations are also lowering operating rates. In early this month, LG Chem, Lotte Chemical, and Hanwha Solutions notified customers of potential force majeure on supply.
Some petrochemical corporations are considering supplying export volumes to domestic customers, but the quantities are said to be insufficient. An official at a petrochemical corporation noted, "The issue is not that basic feedstock prices are rising, but that if we declare force majeure, we cannot supply at all," and added, "In about one to two weeks, other corporations are highly likely to declare 'full force majeure.'"