As the government moved to fully restrict naphtha exports in response to supply instability triggered by U.S. and Israeli airstrikes on Iran, attention is on how much the shortage will ease. In the petrochemical industry, many say export limits will help but will not be highly effective. They note that domestic refiners' export volumes of naphtha are small to begin with, and if those export volumes are diverted to the domestic market without a price cap, petrochemical companies could face larger losses.
The Ministry of Trade, Industry and Resources announced the Regulation on Naphtha Export Restrictions and Supply Stabilization to take effect at 12 a.m. on the 27th and run for five months. Accordingly, naphtha exports are fully restricted with no exceptions, even for existing contract volumes. Exports are allowed on a limited basis only if approved by the Minister after determining it is unavoidable. However, heavy naphtha, which is not widely used domestically, may be exported. The government may, if necessary, order refiners to produce naphtha and intervene in supply allocation to prioritize deliveries to designated petrochemical companies.
Naphtha is a byproduct from crude oil refining. Petrochemical companies with naphtha cracking centers (NCC) thermally and pressurize-crack naphtha to produce petrochemical feedstocks such as ethylene, propylene and butadiene. Ethylene, a basic petrochemical product known as the "rice of petrochemicals," is used not only in everyday items such as plastics and vinyl but also in various components for major industries including automobiles and electronics.
Domestic petrochemical companies needed 59 million tons of naphtha last year, of which 45% (26 million tons) was imported. Since 54% of imported naphtha is transported through the Strait of Hormuz, 25% (14.37 million tons) of Korea's naphtha needs are under the influence of the Middle East crisis, causing supply disruptions.
In this situation, the industry believes the government's measures will somewhat increase supply, but because export volumes of naphtha were small to begin with, it will be hard to see noticeable improvement in supply-demand conditions. According to the Korea National Oil Corporation (KNOC), last year's naphtha exports totaled about 3,846,000 tons. That is only 11.7% of domestic production (about 32,961,800 tons).
In particular, light naphtha, which is mainly used domestically, was already being supplied for domestic use by refiners. Refiners primarily exported some heavy naphtha. Light naphtha is a core feedstock for NCCs, but heavy naphtha is cracked into benzene, toluene and xylene and used to make paint, sprays and the like, and does not meaningfully affect NCC operation.
Although naphtha exports have been restricted, a key flaw noted by petrochemical companies is that they must purchase and use the diverted export volumes at international prices. The Ministry of Trade, Industry and Resources announced that naphtha supply prices are to be set "based on price indicators published by internationally accepted price reporting agencies, through negotiations among businesses." This means refiners can sell naphtha in the domestic market at prices that have risen since the Iran strikes without issue.
According to raw material price data from the Ministry of Trade, Industry and Resources, naphtha that was trading at $640 per ton on Feb. 27, just before the Iran strikes, traded at $1,029 per ton as of the 25th. Since the Iran strikes, naphtha has surged, even hitting a six-month high of $1,220 per ton (on Mar. 23).
An industry official said, "It is not enough that the international naphtha price has risen from the $600-per-ton range to the $1,100s; we also have to pay a $150-per-ton premium just to secure naphtha," adding, "From a petrochemical company's perspective, halting operations may reduce losses compared with buying expensive naphtha to maintain utilization."
In the industry, many view the fixed costs incurred when stopping an NCC as lower than the increase in naphtha feedstock costs when continuing to run an NCC. Based on Lotte Chemical, domestic NCC capacity totals 2.3 million tons, Indonesia 1 million tons and Malaysia 800,000 tons, for a total of 4.1 million tons.
In the securities market, naphtha needs are calculated by multiplying NCC capacity (CAPA) by 3.3. By this formula, Lotte Chemical, under normal operation, needs about 13.5 million tons of naphtha per year, or about 1.13 million tons per month.
The problem is that naphtha carries a premium and the exchange rate must be considered. If a $150-per-ton premium is applied, the additional amount Lotte Chemical would have to shoulder for naphtha purchases alone is about 228.8 billion won (about $169.5 million). A petrochemical analyst said, "Including the exchange rate, the additional monthly cost is around 250 billion won."
By contrast, if NCC operations are halted, only fixed costs are booked as losses. Fixed costs are typically estimated at about twice depreciation. Given that Lotte Chemical's petrochemical segment depreciation is about 650 billion won per year, fixed costs are about 1.2 trillion won. If NCC operations are halted, the monthly loss would be about 100 billion won, which is less than the loss from procuring naphtha at high prices.
Of course, costs are incurred when stopping and restarting NCC facilities. The Korea Chemical Industry Council estimates restart costs at 20 billion won. Even adding that, losses may still be smaller than operating NCCs when naphtha prices are elevated.
An industry official said, "From a national perspective, we should maintain NCC utilization to prevent a situation that harms the broader industry," while adding, "From a petrochemical company's standpoint considering profit and loss, it is better to halt operations than to keep utilization in the 30% range by bringing in high-priced naphtha."
Another industry official said, "If it is an emergency and petrochemical companies must maintain NCC operations, the government should compensate for the additional expenses, or buyers should raise product prices."