Military action leading to the closure of the Strait of Hormuz between Iran and Saudi Arabia could seriously disrupt global trade in chemicals and oil products, with a knock-on effect for the world’s already fragile manufacturing economy, reports ICIS Chemical Business.

“The Strait of Hormuz is an important shipping lane, linking Middle East oil and chemical exporters to the rest of the world,” explained ICIS’ deputy editor Will Beacham. “More than 20 per cent of global petroleum liquids and a significant proportion of chemicals are transported through the Strait.”

According to ICIS’s senior consultant for Asia, John Richardson, quoting ICIS Supply & Demand database forecasts for polyolefins exports in 2020, this includes 4.1 million tonnes of Middle East HDPE production due to be exported via the Strait.

This accounts for 38 per cent of total global net exports amongst all the regions that are in net export positions .

Supply risk is greater in LLDPE where 51 per cent of global net exports – 4.7m tonnes – appears to be exposed. LDPE is most at risk, with Middle East exports via the Strait accounting for 3.1m tonnes of net exports, 68 per cent of the global total.

Other important products heavily exposed to disruption to shipping in the Strait of Hormuz include monoethylene glycol (MEG), ethylene and methanol.

“In an all-out war scenario the Strait could close completely, cutting off regional chemical exports for a prolonged period. A lesser conflict could lead to periodic disruption to traffic through the Strait,” added Beacham. “For chemical markets already in oversupply, such as polyolefins, isocyanates and MEG, any supply shock from the Middle East will have less impact as capacities elsewhere can be ramped up in response. This happened after the attack on a Saudi Arabian oil processing facility in September 2019 which cut feedstock supplies to regional chemical facilities.”

Oil prices spiked 5 per cent to more than $70 a barrel following the US attack and Iran’s response before dropping back slightly. They remain well above levels prior to the incident.

According to John Richardson, ethylene and PE variable cost margins for naphtha-based crackers in northeast Asia fell throughout 2019 and in December hit minus $90/tonne, the lowest since ICIS records began in 2000. Higher oil prices would squeeze these further whilst demand is suffering because of increased US supply to the region.

“Higher oil prices will act as a tax on the economy, reduce economic growth and make life worse for petrochemical producers. I think that is probably the bigger story than any interruption to supply,” he added.

International eChem chairman Paul Hodges believes that any threat to the Strait of Hormuz would almost certainly plunge the global economy into outright recession, given the likely impact on oil market supply and prices.