The Strait of Hormuz is set to reopen under a U.S.-Iran end-of-war agreement, but the math for Korea's petrochemical industry has grown more complicated. A sharp drop in oil prices eases cost pressure, which is a positive, but concerns are rising again about potential product oversupply from China. There is also growing concern about a "reverse lagging" effect, in which companies sell products cheaply after importing materials and supplies at high prices, hurting profitability.
On the 15th, Bloomberg reported that U.S. President Donald Trump said on Truth Social on the 14th U.S. time that "the agreement with Iran has been finalized." In an additional post, Trump said, "We will fully approve the toll-free opening of the Strait of Hormuz and immediately lift the U.S. Navy's blockade," adding, "Ships around the world will once again traverse the Strait of Hormuz unconditionally."
International oil prices fell sharply after news of the U.S.-Iran end-of-war agreement. On the London ICE Futures Exchange, August Brent futures traded at $84 a barrel, down 3.3% from the previous day, while West Texas Intermediate (WTI) traded at $81 a barrel, down 4.4%.
With oil prices falling and the resumption of traffic through the Strait of Hormuz increasing the likelihood that crude supply and demand will normalize, Korea's petrochemical industry has caught a breather. Petrochemical corporations produce products such as ethylene and propylene using naphtha, a carbon compound obtained by refining oil. When oil prices decline, naphtha prices also fall, reducing cost burdens for petrochemical companies.
However, in the industry, there are concerns that if the Strait of Hormuz reopens and oil price declines persist, profitability could worsen for a time due to a reverse lagging effect.
In the first quarter of this year, Korea's petrochemical corporations saw a notable improvement in results due to the "lagging effect." The lagging effect refers to margin fluctuations arising from the time gap between raw material purchases and petroleum product sales. In other words, petrochemical corporations purchased materials and supplies at low prices before the U.S.-Iran war broke out, and after the war sent crude and naphtha prices soaring, they reflected this in product prices and booked substantial profits.
LG Chem posted an operating loss of 49.7 billion won in the first quarter of this year, but the deficit narrowed significantly from the 413.3 billion won loss in the fourth quarter of last year. In particular, the petrochemical institutional sector swung to a profit quarter over quarter, with 165 billion won in operating income. Lotte Chemical also reported 73.5 billion won in operating income in the first quarter, marking its first profit in 10 quarters.
But as international oil prices turned weak following the U.S.-Iran end-of-war agreement, the situation flipped. Companies now have to reflect lower costs in products made with materials and supplies purchased at high prices when oil prices surged after the war.
In the securities industry, there are projections that the end of the U.S.-Iran war and the resumption of traffic through the Strait of Hormuz will trigger a reverse lagging effect, possibly worsening second-half results for petrochemical corporations. According to FnGuide, Lotte Chemical is projected to swing to a loss with an operating loss of 47.4 billion won in the third quarter and to post a further operating loss of 40 billion won in the fourth quarter.
There are also concerns that China's product oversupply, which has been a reason for the slump in Korea's petrochemical industry in recent years, will resume. China, too, struggled as imports of Middle Eastern crude and naphtha were blocked by the Strait of Hormuz closure, but with the end of the war normalizing supply and demand, the likelihood it will ramp up output again has grown.
Recently, not only China but also Middle Eastern countries such as Saudi Arabia, Qatar and Kuwait have been expanding petrochemical facilities one after another, further heightening oversupply concerns. Oil-producing countries in the Middle East can source materials and supplies cheaply, giving them an inherent cost-competitiveness advantage.
Some, however, say that with the end of the war removing uncertainties that have weighed on the global economy, Korea's petrochemical sector could see a longer-term improvement trend in results.
A petrochemical industry official said, "In the Middle East, demand for postwar reconstruction has increased, and if oil prices decline and stabilize, the global economy is likely to rebound," adding, "Once the restructuring underway among domestic petrochemical companies is completed, solid growth will resume."