Chinese energy and chemical enterprises should accelerate their diversification strategy

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The ongoing conflicts in the Middle East have recently intensified, leading to disruptions in shipping through the Strait of Hormuz and a reduction in energy supplies, which has had a severe impact on the global energy and chemical industry chains. Multiple domestic futures firms and industry analysts have pointed out that this round of conflicts has evolved from a mere cost disruption to a systemic challenge involving supply chain disruptions, breaches of contractual obligations, and increased difficulties in risk management. It is also accelerating the reshaping of the industry landscape, creating structural opportunities for the adjustment of China’s competitive manufacturing capacities. 　　The primary impacts of the current Middle East conflict on the energy and chemical industry as well as the spot market lie in the areas of supply and distribution. Wang Jiayu, a senior chemical industry analyst at the Derivatives Research Institute of the Tokyo Stock Exchange, told reporters that as a core raw material for the energy and chemical industries, any disruptions in crude oil supply directly affect the production stability across the entire industrial chain. Amid the turmoil in the Middle East, upstream products such as naphtha, PX, and pure benzene, as well as downstream products like polyolefins and styrene, are all facing dual pressures of rising costs and supply disruptions, with risks spreading rapidly along the industrial chain. Spot market prices have seen increased volatility; some traders are holding back goods and being reluctant to sell, while order defaults are occurring alternately, resulting in a significant reduction in market liquidity. 　　Dong Dandan, deputy director of the Commodity Research Department at CITIC Futures Research Institute, said in an interview that the most significant impact of this round of conflicts has been the historic and substantial decline in the supply of key energy commodities such as crude oil, LNG, and LPG. The drop in crude oil supply was as high as 20%, which has fundamentally altered the global energy supply and demand landscape. A person in charge of related businesses at Zhejiang Merchant Futures noted that the conflicts have also impacted supply chain risk management systems. Conventional futures hedging can only mitigate price risks, but it cannot address the force majeure default risks arising from blocked shipping routes; as a result, it is difficult to align futures and spot positions, which in turn creates new operational challenges. Managing defaults in extreme scenarios has become a new issue facing the industry. 　　Overall, compared with previous Middle Eastern geopolitical incidents, this round of shocks exhibits three distinct new features. Wang Jiayu pointed out that in the past, geopolitical disruptions were mainly reflected in increased costs alone, but this time, the shipping risks in the Strait of Hormuz have become a key issue, giving rise to concerns about a significant reduction in supply. Coupled with difficulties in using import channels such as those for aromatics from Japan and South Korea, this has further exacerbated the supply-demand gap. Dong Dandan added that this conflict is characterized by a longer duration, tangible impacts on supply, and an extent of affected product categories and reduction levels that exceed historical norms, all of which have led to price fluctuations in energy and chemical-related products that are greater than expected. 　　Amidst severe industry fluctuations, domestic energy and chemical enterprises face both challenges and opportunities. In terms of challenges, companies urgently need to restore the stability of their supply chains and optimize inventory management strategies. Insufficient raw material supplies and high costs leading to losses on orders as well as difficulties in fulfilling commitments will remain widespread problems in this industry. In terms of opportunities, coal chemical companies that can secure raw materials domestically see a significant expansion in their profit margins, with their cost advantages becoming increasingly prominent ； Leading domestic enterprises with integrated upstream and downstream operations are likely to leverage the resilience of their supply chains to reshape the industry’s competitive landscape, and to accelerate the expansion of their market share, amid the reduction of production capacity in Japan and South Korea and the financial pressures faced by smaller competitors. 　　Currently, the geopolitical risks in the Middle East remain uncertain, and the trade patterns and pricing mechanisms of global energy and chemical companies are undergoing significant changes. The industry suggests that domestic energy and chemical companies should accelerate the diversification of their raw material sources, improve emergency response plans for extreme risks, address both price risk management and supply chain security, seize structural opportunities amid industry restructuring, and achieve stable operations and long-term development.