Middle East situation triggers Japan's "industrial blood" crisis: Naphtha shortage may cause a "COVID-19-style" impact on the entire industry chain.

Despite the overwhelming news about an imminent shortage of crude oil, the Japanese industrial supply chain is currently facing a more urgent threat from the lesser-known petroleum byproduct - naphtha. In recent days, several Japanese petrochemical companies have announced production cuts, citing concerns that the conflict in the Middle East may tighten the supply of naphtha (a key raw material for plastic manufacturing). These restrictions indicate a brewing crisis - one that could disrupt production processes and create significant pressure on profits across various industries, from food to technology. Naphtha, as an important byproduct of crude oil refining, has a wide range of uses: from plastic bottles, construction materials to electrical equipment, it pervades almost every aspect of modern industry, and can also be further processed into gasoline. "The market has not truly grasped the chain reaction that could arise from a disruption in naphtha supply," pointed out Martin Joduri, founder and managing director of business consulting firm BCMG, "This is like the canary in the coal mine, an early warning of danger approaching. Unfortunately, Japan, due to its industrial structure, is at the forefront of this crisis and is being hit particularly hard." According to data from the Japan Petroleum Association, Japan relies on imports for around 60% of its naphtha, with over 70% coming from the Middle East. This high dependence makes Japan highly vulnerable to disruptions in shipping through the Hormuz Strait - since the two Iraq wars, disruptions in shipping through the strait have led to a 66% increase in naphtha prices. Even more alarming is Japan's limited naphtha reserves. Citigroup analyst Yuta Nishiyama pointed out that Japan's crude oil reserves could last for about 250 days, but its naphtha reserves are only enough for 20 days. He emphasized in his report that even releasing these reserves "would be difficult to quickly restore confidence in the petrochemical industry," as most of the naphtha may be prioritized for gasoline production. This dilemma is not limited to Japan. Its Asian neighbors like South Korea also heavily rely on imported naphtha from the Middle East. In contrast, the United States is less affected, as most of its petrochemical industries use ethane as an alternative raw material. Idemitsu Kosan Co., a refining company based in Tokyo, announced production cuts on Monday, becoming the latest Japanese company to take action in response to anticipated tightening naphtha supply. Representatives of the company revealed that they will reduce the production of ethylene (made from naphtha) at their Chiba and Tokuyama plants. This move has set off a chain reaction among companies like Mitsubishi Chemical Group, Mitsui Chemicals, and Cosmo Energy Holdings, who have announced similar production cuts last week. It is worth noting that after the escalation of tensions in Iran just two weeks ago, half of Japan's 12 ethylene factories have initiated production cut programs. Analysts point out that the risks arising from the tight naphtha supply will not only be limited to the petrochemical industry but will also further spread to plastic manufacturers and even automakers, creating chain impact on the industry level. Driven by expectations of a supply crunch, international naphtha market prices have soared by 50% in just a month, reaching a high of $875 per ton. As a result of this chain reaction, domestic fuel prices in Japan have also broken historical barriers, with gasoline prices in the Tokyo area exceeding 200 yen per liter, further intensifying cost pressures on manufacturing and household burdens. "With the extension of downstream in the industry chain, more companies will be affected," emphasized Joel Scheiman, senior analyst at stock research firm Pelham Smithers Associates, "This indeed sounds alarm bells for us, prompting us to realize the high dependence on petroleum derivatives." Affected by excess production capacity caused by a surge in Chinese exports, Japanese petrochemical companies had already initiated production cuts before the outbreak of the Iran war. According to Scheiman's analysis, many factories were already operating at below full capacity, so "it is essentially impossible to further reduce capacity utilization." He warned, "One day, these factories will no longer be able to operate normally and will have to shut down completely." This situation will leave customers in a dilemma of supply chain disruption. Concerns about a shortage of naphtha have started to show in certain sectors of the Japanese stock market - since the outbreak of the Iran war, shares of FP Corporation, a food container manufacturer based in Hiroshima, have plummeted by about 16%, while the Japan Topix index has fallen by around 8%. BCMG's Joduri pointed out that most investors have not yet realized the broader risks that could arise from a shortage of naphtha. He cautioned, "The eventual situation may be similar to the supply chain impact during the COVID-19 pandemic, the critical issue now is to not take it lightly."