Petrochemical firms desperate for Russian naphtha imports

Factories emit smoke at a petrochemical complex in Yeosu, South Jeolla Province, March 9. Yonhap

Calls are growing for the government to permit imports of naphtha from Russia, as prolonged disruptions in the Strait of Hormuz have put Korea’s petrochemical companies at risk of operational disruptions.

Although the government has pledged to diversify sources of the key petrochemical feedstock and restrict exports, industry officials argue the measures are insufficient for the current crisis.

Briefing President Lee Jae Myung on countermeasures to deal with issues resulting from escalating tensions in the Middle East, Deputy Prime Minister and Finance Minister Koo Yun-cheol said Tuesday that naphtha will be designated as an item for economic security by the end of this week.

“There has been a shortage of naphtha and other products that rely heavily on shipments through the Strait of Hormuz,” Koo said during a Cabinet meeting. “By restricting exports, the government will address the shortage.”

Products designated as items for economic security are eligible for customized government support, including diversification of import markets, stockpile expansion and development of substitutes.

According to the Ministry of Trade, Industry and Resources, domestic petrochemical firms are expected to run out of stockpiled naphtha within a couple of weeks, even after cutting capacity utilization to cope with the shortage.

Yeochun NCC already declared force majeure on March 4, notifying customers of delays in ethylene supply. Lotte Chemical, LG Chem and Hanwha Solutions also warned clients of the possibility of force majeure, a condition temporarily allowing companies to avoid contract terms due to events out of their control.

Industry officials view Russian naphtha as the only viable alternative to Middle Eastern supplies.

Data from the Korea International Trade Association show that Russian naphtha accounted for nearly 30 percent of Korea’s total imports before Western sanctions halted imports.

Most Canadian naphtha is exported to the United States and Australian naphtha has been deemed cost-ineffective.

“The government told us it would review whether importing naphtha from Russia is possible,” an official at the Korea Chemical Industry Association said. “But it seems difficult, given the European Union’s hard-line stance and the fact that Korean petrochemical firms are exporters bound by international regulations.”

Since the U.S. issued a 30-day waiver on March 12 allowing countries to purchase sanctioned Russian oil and petroleum products, there has been cautious optimism that Korea might resume imports of Russian naphtha.

However, the EU has continued to oppose any energy trade with Russia.

China has emerged as a beneficiary, able to turn to Russia as an alternative supplier.