Taipei, Taiwan
A month after the war in Iran, a growing shortage of crude oil threatens to morph into something worse: a shortage of almost everything.
The conflict in the Middle East has paralyzed oil and natural gas flows through the Strait of Hormuz, reducing global supply by about a fifth. The disruption has not only sent fuel prices soaring, but has reduced supplies of petrochemicals needed to make everyday items like shoes, clothing and plastic bags.
That tension is now spreading to all corners of the consumer market as prices for materials like plastic, rubber and polyester rise. So far, the impact is most evident in Asia, which accounts for more than half of global manufacturing output and relies heavily on imports of oil and other raw materials.
In South Korea, where people have been buying garbage bags in a panic, the government has encouraged event organizers to minimize the use of disposable items. Taiwan has started a hotline for manufacturers who have run out of plastic, while its rice farmers told local media they may raise prices because they cannot get vacuum-sealed bags.
In Japan, the oil crisis has raised fears that patients with chronic kidney failure will not be able to receive treatment due to a lack of plastic medical tubes used in hemodialysis. Malaysian glove makers say a shortage of a petroleum byproduct needed to make rubber latex is threatening the global supply of medical gloves.
“This spreads to everything very, very quickly: beer, noodles, chips, toys, cosmetics,” said Dan Martin, co-director of business intelligence at Dezan Shira & Associates, an advisory firm that helps international companies expand in Asia.
This is because it is becoming increasingly difficult to obtain lids, boxes, snack bags and plastic containers. Petroleum derivatives are also needed to manufacture adhesives for footwear and furniture, industrial lubricants for machinery and solvents for paints and cleaning processes, Martín added.
“It’s a very rapid transmission of disruption from oil and shipping to petrochemicals and consumer goods,” he said.
The turmoil in raw materials and the manufacturing sector is putting upward pressure on global inflation and weighing on economic growth. Manufacturers are paying more for energy and raw materials, which is affecting profit margins and starting to drive up prices for consumers. Rising fuel costs are affecting travel and logistics, while tight supplies of other Middle Eastern materials, such as fertilizers and helium, could lead to more expensive food and electronics.
“We face these complex contagion effects at a time when many economies have limited room to absorb shocks,” the International Monetary Fund wrote in a blog post on Monday. “Although war could shape the global economy in different ways, all paths lead to higher prices and slower growth.”
Countries have begun releasing a historic amount of oil from emergency reserves to offset the impact of war. But much of the growing supply crisis is due to a shortage of naphtha, a byproduct of petroleum and a critical raw material for synthetic materials, of which producers have far fewer reserves and no substitute.
Some petrochemical companies in Asia, which source more than half of their gasoline from the Middle East, have cut production or declared force majeure in recent weeks due to raw material shortages. Force majeure is a legal term that refers to unforeseeable circumstances that prevent a company from fulfilling a contract.
South Korea has taken advantage of the suspension of US sanctions on certain Russian oil and petroleum products. buy its first shipment of gasoline to Moscow since the start of the Ukrainian war. Seoul also imposed a ban on gasoline exports to preserve domestic supply.
Martin of Dezan Shira & Associates, which works with manufacturers in Vietnam, said the gasoline shortage is leading to higher input costs for customers, particularly those making products to strict specifications, such as semiconductors, auto parts and medical or food-grade packaging.
“There really isn’t much recourse except to cut assembly and use less energy,” he said. “All companies compete with each other. Everyone is in exactly the same position.”
As producers rush to source materials, the costs of plastic and products containing it are rising. According to ICIS, a commodities market intelligence platform, plastic resin prices in Asia have risen by up to 59% to record levels since late February, when the United States and Israel first launched airstrikes against Iran.
One of Thailand’s largest plastic packaging wholesalers said it increased prices by 10% for clear cellophane bags widely used in restaurants, food stalls and for takeaway deliveries. Indian media has reported that bottled water is becoming more expensive and that prices for plastic bottle caps have quadrupled since the war began. And an official at Nongshim, South Korea’s largest instant noodle maker, said the company that supplies its plastic packaging currently has about a month of supply left.
Shariene Goh, senior petrochemical analyst at ICIS, said consumer goods that rely heavily on plastic packaging, such as cosmetics, may be even more prone to shortages than some products containing plastic.
“The finished goods segment could take advantage of its inventory levels, which could run out over time,” he said. “I think they might start to run out very soon.”
As the first region to feel the impact of the fuel crisis, Asia’s new supply problems bode poorly for the rest of the world if oil and other resources cannot be produced or shipped from the Middle East.
In addition to producing about 17% of the world’s gasoline and 30% of its plastic resin, the Middle East also supplies 45% of its sulfur, used to make fertilizers, 33% of its helium, used in semiconductors, healthcare and aerospace, and 22% of its urea and ammonia. used as nutrients for crops, according to Morgan Stanley.
American farmers are already paying more for fertilizers, as the price of imported urea has risen by about a third since the war began. In India, condom manufacturers are reporting disruptions due to shortages not only of packaging materials and silicone oil, which requires petrochemical raw materials, but also of ammonia.
“As during COVID, the shock develops sequentially rather than simultaneously – a progressive supply disruption moving westward,” JP Morgan analysts wrote in a research note last week.
Over the past few weeks, Asian countries have focused on mitigating increases in oil prices, with measures such as releasing oil reserves, capping fuel prices and reducing working hours to save energy. But according to JP Morgan, supply constraints will become more severe in April, with the last deliveries of crude oil shipped before the war arriving at the beginning of the month.
“The main challenge has shifted from price to physical scarcity,” the bank’s analysts said. “Asia is no longer in a purely preventive phase.”
Analysts said some consumer goods producers are delaying purchases of materials in the hope that prices will fall if the conflict in the Middle East is resolved.
Qiu Jun, a 36-year-old polyester manufacturer in the eastern Chinese city of Haining, said that since the effective closure of the Strait of Hormuz, the price of the polyester chips he needs to make his fabric has risen about 50%, an increase his customers in the home textiles, garments and yarn industries are unwilling to accept.
His factory, with a dozen employees, continues to operate, but only to fulfill orders from existing customers. He said he is taking a wait-and-see approach to avoid overpaying for materials to produce unwanted stock.
“I’m anxious,” Qiu said. “The whole industry feels the same. Nobody knows how the war will develop.”
Others are trying to reduce costs by minimizing the amount of plastic used in packaging. In Indonesia, where plastic prices have doubled in the last month, companies are reducing the thickness of packaging material, according to the Indonesian Packaging Federation. Some are even considering using different materials, such as paper, glass, aluminum or recycled plastics, although the organization said each would pose its own challenges in terms of ensuring durability, compliance with safety standards and the time needed to rebuild production lines and obtain new supplies, which could take six months to a year.
Turning to recycled plastics could also come at a high cost, said Stephen Moore, founder of MLT Analytics, a plastics trade data platform. He said the global supply of recycled plastic material is already limited and typically costs five to seven times more than plastic made from fossil fuels.
“If everything returns to normal in the Strait of Hormuz tomorrow, I think there is still at least several months until there is a semblance of normality for the plastics sector in Asia,” he said.