Market Buzz: Jubail Industrial City Attacked, Chemicals! Chemicals!

Friends, today let's talk about something 'hot' – and no, it's not coffee; it's the chemical industry.

Here’s what happened: Iran launched a ballistic missile that struck Jubail Industrial City on Saudi Arabia’s eastern coast. The result? A major fire broke out at the SABIC petrochemical plant in the city. And this is no ordinary small factory.Jubail is one of the 'hearts' of the global petrochemical industry, with an annual production of 60 million tons of petrochemical products, accounting for 6%-8% of the global total. Just its ethylene facilities alone produce 12 million tons annually, along with 7 million tons of polyethylene and 3 million tons of polypropylene.

Do you think the market could stay calm after such an event? Of course not. Yesterday, domestic polyolefin futures surged directly, with plastics rising by 8.67% and PP increasing by 7.44%. It’s like when you’re driving and suddenly hear a loud bang ahead – instinctively, you hit the gas pedal. The market reacted similarly: prices shot up first and questions came later.

In fact, even before this, the supply of olefins in Asia had already been 'gasping for breath.'Why? Because before this incident,a large number of petrochemical plants in Gulf countries had already shut down. Add to that the obstruction of navigation through the Strait of Hormuz, and olefin products in the Asian region were already in short supply.Especially in countries like Japan and South Korea, which heavily rely on the Middle East for crude oil and naphtha. Japan depends on the Middle East for over 90% of its crude oil and over 70% of its naphtha; South Korea’s dependence is also above 70%. After a month of conflict, refineries are running out of raw materials, leading to shutdowns or reduced operations. The result? Ethylene prices surged by 104%, and propylene rose by 55% — nearly doubling.

As for downstream polyolefins, the situation is even worse. On one hand, there’s reduced supply due to domestic refinery shutdowns, and on the other hand, imports are constrained because of the destruction of Middle Eastern facilities and shipping disruptions. Pressured from both sides, prices naturally trend upward. The strike on Jubail was like pouring more fuel onto the fire.

What impact will that have on China?

Our PE (polyethylene) is the first to be affected! In our country,40% of PE imports come from the Middle East, with Saudi Arabia accounting for 19%, the UAE 15%, Iran 4%, and Kuwait 2%. Moreover, the PE imported from Saudi Arabia is mainly LLDPE (linear low-density polyethylene), which accounts for about 28% of our total LLDPE imports. In Jubail Industrial City, the full-density plant has a production capacity of approximately 4.1 million tons, HDPE around 1.75 million tons, and LDPE around 1.47 million tons. This attack is expected to primarily affect the import volume of LLDPE. That's also why yesterday's plastics futures surged more than PP.

However, China has a 'hidden skill'—export substitution.

Shou Jialu, an energy and chemical analyst at South China Research Institute, stated that our country is a major producer of polyolefins and has been less affected by this event compared to neighboring countries. Southeast Asian nations, facing limited domestic supply and reduced imports, have shifted their demand towards us. As a result, our exports of polyolefins have increased instead. Following this incident, with further reductions in supplies from the Middle East, our exports are likely to receive continued indirect boosts, and net imports are expected to decline further.

What’s the outlook for the market?

In one sentence: Strong in the short term, but keep an eye on the negotiation table.

This attack on Saudi facilities has added fuel to the fire of tight polyolefin supplies. Shou Jialu analyzed that the short-term market trend is expected to remain strong. However, the bigger picture depends on the US-Iran negotiations. If no agreement is reached, prices may remain volatile at high levels; if an agreement is reached, the risk premium for crude oil will decrease, and polyolefins will follow suit in a correction.

But don’t expect too much of a drop. The actual reduction in supply due to factory shutdowns and decreased operating rates is significant, and it will take 1-2 months for the Strait of Hormuz to resume normal navigation. Additionally, downstream companies had relatively low inventories before, and when prices fall, they might engage in concentrated procurement to replenish stock, providing some support for prices. Therefore, even if there’s a correction, the support level will be noticeably higher than before the event occurred.

To sum up: A single explosion in the Middle East sends ripples through the chemical industry, causing “accelerated heartbeats.” Don't chase highs in the short term, don’t panic during pullbacks—keep an eye on the negotiation progress and proceed steadily!

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