OilChem: Middle East tensions disrupt supply chains as China emerges as a regional olefins supplier

Over the past month, global chemical supply chains have undergone sharp disruption, with Asia standing at the center of the storm. Global propylene production capacity reached about 186 million tonnes in 2025 and is projected to exceed 190 million tonnes in 2026. China, with 77.72 million tonnes of production capacity, accounts for around 42% of the global total, making it the core driver of this expansion cycle.

1. From feedstocks to end-use markets: deep integration across the olefins chain and the current market transmission

Feedstock diversification underpins value chain resilience

Note: Routes such as toluene disproportionation (TDP), toluene alkylation (TA) and hydrodealkylation of toluene (HDA) also convert toluene into benzene, but their shares are relatively small.

The Iranian conflict has had the biggest impact on the oil-based and paraffin-based production routes, both of which are efficient pathways. The result has been tighter crude supply and higher paraffin prices, which have in turn fed through into the olefins and downstream polyolefins sectors.

At the same time, the value of coal-based routes has become more evident, as they have provided alternative supply and helped prevent systemic disruption caused by a breakdown in one part of the chain. Intermediate products remain the foundation of the petrochemical industry, while the so-called "three olefins and three aromatics" serve as the key link between upstream and downstream segments. Taking the olefins chain as an example, propylene extends downstream into PP, PO, butanol and octanol, acrylic acid, acrylonitrile and other products, many of which have already seen sharp price increases.

Recent gains in olefins prices have quickly spread through the chain. The ethylene-styrene chain has driven higher PS prices, the propylene-acrylonitrile chain has lifted ABS resin prices, and the butadiene chain has pushed up styrene-butadiene rubber and butadiene rubber prices. This is a clear reflection of the chain's deep integration: any disruption at one upstream point can quickly spread through multiple downstream sectors.

The transmission path from feedstock markets to end-use consumption

The flow chart covers a wide range of end-use sectors, including construction and packaging such as BOPP film and PVC pipe, automotive products such as tires and plastic components, home appliances such as ABS casings, and textiles such as PET polyester. Current market conditions can be understood as a shock originating from imported feedstocks.

Stage 1: Cost shock. Geopolitical risk has pushed up oil and gas prices, raising costs for all products derived from oil and gas.

Stage 2: Supply shock. Disruption to crude imports has forced some cracking units to cut output, sharply reducing the supply of intermediates such as olefins and aromatics and pushing these products to lead the price rally.

Stage 3: Full transmission. Rising intermediate prices are passing along the chain, lifting prices of PP, acrylic acid, PO and other products. At the same time, tighter butadiene supply has pushed up synthetic rubber prices, while styrene and phenol in the aromatics chain have also moved higher under the combined impact of oil and olefins.

Stage 4: End-user feedback. Cost pressure is ultimately passed on to consumers, resulting in the broader wave of price increases now visible in the market.

2. Crisis-driven adjustment: supply chain security is shifting from a cost item to a strategic asset

In March 2026, disruptions to navigation through the Strait of Hormuz have directly exposed the vulnerability of China's chemical feedstock supply chain. More than 60% of methanol imports rely on Iran, around 66% of ethylene glycol imports come from the Middle East, and about 56% of sulfur imports depend on the same region. These are no longer just static trade figures. They have become key indicators of corporate risk resilience.

The dual shock of feedstock disruption and surging prices has delivered a profound lesson to the industry. Procurement logic is shifting from a single-minded focus on price advantage to a broader balance among price, logistics stability and supply security. Supply chain resilience is replacing efficiency-first thinking as the operating baseline for chemical companies.

Chart 2 Olefins yield comparison by production route

A direct consequence of this shift is the strategic reassessment of coal-to-olefins routes backed by domestic feedstock security. As crude prices move higher while China's domestic coal supply remains stable under policy support, the widening spread between the two has quickly amplified the cost advantage of coal-based olefins. Profitability at leading producers has improved markedly. More importantly, this round of disruption has made the market more aware that Chinese companies with scale, cost competitiveness and closed-loop supply chain capabilities are themselves a form of strategic asset.

First, the economic window for alternative routes has opened. The United States, supported by its ethane feedstock advantage, is emerging as an alternative source of global olefins supply. China's coal-to-olefins and light hydrocarbons cracking routes are capturing additional profit space in a high-oil-price environment. The impact of this conflict on natural gas supply is no less significant than that of the Russia-Ukraine conflict, which is expected to further weaken the competitiveness of overseas chemical producers and accelerate import substitution for some higher-end polyolefins products in China.

Second, the global pricing system is being reshaped. Polypropylene prices have risen by more than 38%, far outpacing crude. This reflects not only supply-demand conditions, but also a historic moment in which a security premium is being built into pricing. In this process, Chinese companies with stable supply capabilities are gaining greater pricing influence.

Third, Chinese companies are shifting from passive recipients to active participants in global capacity allocation. Middle Eastern countries have abundant resources and capital, while China offers a complete industrial base and strong engineering capabilities. As the drivers for cooperation between Gulf producers and China shift from purely economic logic toward political and security considerations as well, the pace of Chinese companies' expansion in the Middle East is expected to accelerate.

3. Direct impact: rising costs and hard supply gaps are emerging at the same time

The Strait of Hormuz handles around 20% of global oil and LNG trade and is also a core route for Middle Eastern petrochemical exports. Disruption to the strait has had an immediate effect: the global olefins and polyolefins supply chain has tightened sharply and prices have moved up rapidly.

On the pricing side, olefins products have entered a sharp upward cycle. Since late February, prices across upstream and downstream products have risen across the board. Weekly gains for olefins feedstocks have generally exceeded 15%, while propylene has driven synchronized increases in downstream products. Market sentiment has heated up quickly, traders have become more reluctant to sell, and downstream buyers have been forced to accelerate essential purchases, further tightening the spot market. From a value chain perspective, the rally has formed a clear pattern of higher feedstock costs, follow-through increases in intermediates and mounting pressure on downstream sectors.

Table 1 Monthly average prices of propylene and related products (yuan/tonne, USD/tonne)

Source: OilChem

On the supply side, the risk of feedstock disruption is moving from expectation toward reality. China's high dependence on Middle Eastern chemical imports is becoming increasingly visible. More than 60% of methanol imports come from the Middle East, and after the outbreak of war, this portion of supply has moved close to zero. At the same time, around 1.2 million barrels per day of global naphtha exports have been disrupted. This is not just a short-term price shock. It points to a structural shift in the logic of global chemical trade. Supply chain resilience is replacing efficiency-first thinking as the bottom-line principle for all market participants.

4. Divergence along the chain: delayed maintenance and sluggish production restarts create a dual challenge

Middle East tensions have not only reshaped cost curves, but also disrupted the traditional production rhythm of China's chemical sector.

At the upstream level, an unusual pattern of delayed maintenance has emerged. March is usually the peak season for spring maintenance across China's domestic chemical units, but rising crude prices have pushed up olefins product prices and strengthened producers' operating incentives. As a result, willingness to carry out maintenance has weakened noticeably. Higher costs have lent clear support to product prices, encouraging relatively high operating rates and leading some units to postpone planned spring turnarounds.

Downstream sectors, by contrast, are facing the opposite problem: sluggish willingness to restart production. Post-holiday operating recovery was already relatively slow, and the sharp rise in feedstock prices has further squeezed margins. End-users are maintaining only essential procurement and lack the incentive for concentrated restocking, while some small and medium-sized companies have been forced to delay production restarts. This widening gap, with upstream operating at high rates and downstream recovery remaining subdued, highlights a structural imbalance in profit distribution across the chain.

In the near term, upstream producers are capturing the gains from higher prices. If downstream demand remains soft and cost pass-through becomes increasingly difficult, the pressure will eventually feed back into the entire industry chain.

5. Opportunity emerges: the olefins industry is moving strategically from import dependence to export expansion

The continued escalation of Middle East tensions is quietly changing the traditional pattern of olefins trade across Asia-Pacific. One notable signal is beginning to emerge. Traditional olefins exporters such as South Korea, Japan and Southeast Asia rely heavily on naphtha crackers and relatively concentrated production routes. As crude supply disruptions intensify, these producers are facing growing feedstock shortages. At the same time, downstream margins have improved, lifting willingness to resume production and creating an increasingly sharp contradiction between feedstock shortages and rigid production demand. This structural mismatch is pushing companies in Japan, South Korea and Southeast Asia to look increasingly toward China.

China's distinctive advantage lies precisely in the diversity of its production routes. After years of development, the country has built a multi-route supply system covering coal-to-olefins, light hydrocarbons cracking and naphtha cracking. Supply stability for core basic chemicals is therefore significantly stronger than in Japan and South Korea, where production relies more heavily on a single feedstock pathway. As the naphtha route comes under pressure from crude disruption, China is becoming one of the few suppliers in the region capable of providing stable olefins output backed by diversified feedstock security.

Trade flows are beginning to reverse. In the past, China was the main importer of olefins and polyolefins in Asia-Pacific, with South Korea, Japan, the Middle East and Southeast Asia serving as key sources. Now, however, companies in Japan, South Korea and Southeast Asia are actively approaching Chinese suppliers to procure olefins, polyolefins and related feedstocks to fill their own supply gaps.

6. Outlook: from responding to crisis to shaping the next market structure

As the Middle East crisis enters its second month, China's olefins and polyolefins industry is facing continued pressure from feedstock disruption and higher costs. At the same time, the market is showing signs of broader structural adjustment.

First, China's industry position is shifting. In addition to being the world's largest chemical consumer market, China is taking on a larger role in regional supply balancing and cross-border capacity coordination.

Second, the basis of competition is changing. Cost remains important, but supply security, feedstock flexibility and sustainability considerations are becoming more relevant in assessing corporate competitiveness through the cycle. Companies with stronger feedstock access, technical capabilities and overseas operating capacity are better positioned under this environment.

Third, China's external role is expanding. Chinese companies are becoming more involved in regional trade reallocation and overseas capacity cooperation. Whether through additional transshipment trade or deeper participation in Middle East capacity projects, these developments point to a broader international role for China's chemical industry.

More broadly, the conflict has exposed the vulnerability of global chemical supply chains to concentrated feedstock and logistics risk. The effects are expected to extend beyond short-term price volatility. For Chinese companies, the key issue is not only whether margins improve during market disruption, but whether this period leads to a more durable improvement in global positioning. As existing trade patterns adjust and a new supply structure gradually takes shape, early movers are likely to hold a stronger position in the next phase of market competition.

The 2026 Asia Olefins and Polyolefins Summit will convene in South Korea on June 10-11.

With a focus on new regional opportunities under shifting Middle East geopolitics, the event will examine capacity complementarity, higher-end industrial upgrading and data-driven transformation. Mysteel OilChem welcomes industry leaders across the global value chain to help build a new Asian industrial ecosystem centered on stronger regional circulation and closer cross-border coordination.

Click here for more information and registration.