Iran War: Exposing the Gap in the Global Oil Supply Chain

The escalating Middle East conflict is reshaping the operating environment for the global plastics industry in ways that go well beyond the conventional logic of commodity price cycles. Iran accounts for a significant share of the world's petrochemical feedstock output, and the Strait of Hormuz — the narrow waterway through which roughly 20% of global oil trade flows — has become a flashpoint with direct consequences for supply chains, input costs, and logistics networks that plastics manufacturers worldwide depend upon.

The cracking point: Supply under siege

To understand the severity of this disruption, it is necessary to start where plastics begin: the petrochemical feedstock. Ethylene and propylene, the essential building blocks for polyethylene and polypropylene, are not freely substitutable commodities. Their supply depends on a globally concentrated network of cracking facilities that cannot be replicated quickly. Iran sits at the center of that network. With installed ethylene capacity exceeding 8 million metric tons per annum, Iran is among the world's top five producers, and its output flows through direct and indirect trade routes into markets across Asia and Europe.

The conflict has introduced a dual shock to this system. Inside Iran, sanction re-enforcement and military uncertainty have disrupted production at a number of facilities; outside it, shipping constraints mean that even available product struggles to reach global markets. The downstream consequence, felt within weeks of each escalation event, is a tightening of the global feedstock balance at precisely the moment when demand in packaging, automotive, and construction remains resilient. Buyers who assumed security of supply are discovering that the market's ability to self-correct is structurally limited.

Propylene faces an even sharper version of this problem. A substantial share of on-purpose propylene production relies on propane dehydrogenation (PDH) plants, several of which are concentrated in the Gulf region. On a global scale, Asia and the Middle East region combinedly occupy approximately 70% of the PDH plant capacity, of which China accounts for the majority of the installed capacity. China's capacity is huge (approximately 40% of the global PDH capacity), but most of this capacity is consumed domestically only, limiting its export potential. Additionally, China's uneven trade relations with several countries further constrain its ability to export. Now, even if someone bypasses all these limitations and relies on China's plans of PDH capacity expansion, the cost margin will not be as lucrative as it is in the case of the Middle East.

Thus, PDH capacity outside the Middle East is present; however, access to it is not as seamless. Any sustained military escalation that deters investment or forces operational curtailments in the PDH plants in the Middle East will reverberate through polypropylene pricing globally within weeks — not the months it might take for crude oil dynamics to work through the broader economy.

The structural constraint is the timeline for remediation. Ethylene crackers take at least three to five years to build. The industry cannot respond to a geopolitical event by ordering new capacity. Instead, it must manage with the infrastructure it has. This is the fundamental asymmetry that makes feedstock risk so consequential. Disruptions hit immediately, but recovery is measured in years.

Given the immediate impact and the time required for corrective measures, market participants tend to secure supply by demonstrating a willingness to pay higher prices. Concurrently, logistics costs increase as shipments transit through high-risk zones, leading to elevated insurance premiums. As a result, a risk premium becomes embedded in the overall cost structure and does not dissipate quickly.

Possibility of a persistent risk premium

Feedstock vulnerability does not exist in isolation. It is amplified by, and inseparable from, the behavior of crude oil markets. Crude is the alpha variable in plastics economics. Naphtha, the primary feedstock for ethylene crackers and the broader petrochemical chain, is priced as a derivative of crude, and when Brent surged past $100 per barrel for the first time since 2022 during the early weeks of the US-Iran conflict's intensification, naphtha cracker margins compressed globally, and Asian countries were the worst hit.

The ethylene-naphtha spread (measured in $/mt), which is also an indicator of how costly naphtha is as a feedstock and typically ranges between $200 to $300/mt in Asian countries, shot above $400/mt for the first time in April 2026, indicating a strong scarcity. Polymer spot prices also began to reflect not just the cost of production but the anxiety of buyers seeking supply security over cost optimization. Benchmark polymer prices have spiked by an estimated 15% to 25% since the commencement of the war.

The situation has intensified to the extent that companies across the value chain have invoked force majeure clauses, adversely impacting multiple supply chain nodes. Indonesia's Chandra Asri temporarily declared force majeure due to difficulties in sourcing naphtha, while Japan's Mitsubishi Chemical and Mitsui Chemicals reduced production output. Taiwan's Formosa Petrochemical also invoked force majeure provisions.

The impact is not just limited to Asian countries but extends much beyond. For instance, in April 2026, ELIPSO, the organization representing the French plastics industry, challenged the validity of force majeure declarations issued by resin producers. ELIPSO specifically referenced companies such as INEOS, LyondellBasell, SABIC, and Indorama, stating that suppliers attempted to increase polyethylene (PE) and polypropylene (PP) prices by approximately €400 to €500 per ton, thus directly impacting the existing contracts and threatening the viability of processors.

The deeper concern, though, lies in the medium-term horizon of 12 to 36 months, where sustained geopolitical friction risks permanently embedding a risk premium in crude oil pricing. History provides instructive benchmarks. The 1973 Arab Oil Embargo and the 1990 Gulf War both produced polymer price dislocations that took 18 to 24 months to normalize. So, even if tensions de-escalate quickly, the price drop will not follow the same curve and may take up to 24 months to reach its pre-war stage. A swift drop will be too much to expect.

The long-term scenario is structurally more complex. The world has already observed that a ceasefire agreement has been reached, but sadly, it has been breached several times already. This allows all stakeholders to recognize that such agreements may not be strictly adhered to. Not to mention, one of the concerning countries this time seems to remain especially sensitive to provocations online or through other media channels. Thus, the risk of escalation over perceived provocations will also be pertinent for a long time. In reality, for this particular scenario, even when one of the involved parties asserts that the situation is under control, it often is not, and that makes the entire scenario more volatile.

Thus, capital expenditure plans, long-term supply agreements, and customer pricing structures should be stress-tested not against a return to $70 per barrel but against a persistent $100 to $120 per barrel environment. Scenarios that felt unlikely a year ago must now be treated as base cases.

Differential impact across the polymer chains

Most exposed polymers: PE and PP. The Middle East accounts for ~40% of global PE exports, and Asia gets ~60% of its naphtha from the region. PVC and specialty plastics face indirect pressure.

Logistics: The silent margin killer

Additional War Risk Premiums (AWRPs) for tankers transiting the Persian Gulf eased significantly during the week ending March 27, as a greater number of vessels resumed passage through the Strait of Hormuz amid expectations of a potential agreement to end the Middle East conflict, according to market participants.

Earlier in March, AWRPs had surged to nearly 2.5% of a vessel's Hull and Machinery value for a seven-day period in the Persian Gulf. However, several maritime insurance executives indicated that premiums had declined to approximately 1%. In certain cases, tankers successfully transiting the Strait of Hormuz secured rates as low as 0.8%.

Despite this moderation, AWRPs remain significantly elevated, up to eight times higher than pre-war levels, which were typically around 0.1% to 0.15%, according to maritime insurers.

Companies are adapting by:

1、Extending safety inventories from 30–45 to 90–120 days

2、Shifting from fixed-price to index-linked short-term contracts

3、Diversifying sourcing to North America (shale gas) and within Europe

The EU launched an “Accelerate EU” plan; Japan has secured oil supply for the year. But smaller processors risk consolidation due to higher logistics costs.

Bottom line: The industry should stress-test capital plans against sustained $100–120/barrel oil, not $70/barrel. Geopolitical risk is now a structural new normal – supply chain resilience will define competitive advantage.