Ethylene spreads keep falling, clouding petrochemical sector's second-half outlook

Renewed Middle East conflict risks are deepening uncertainty for South Korea's petrochemical industry. The ethylene spread — the difference between ethylene and naphtha prices, and a key profitability gauge for petrochemical companies — has been falling steadily, raising concerns about deteriorating earnings in the second half.

According to raw materials price data from the Ministry of Trade, Industry and Energy, the ethylene spread averaged about $315 per ton in April and $135.3 per ton in June, before falling to $100 per ton on Thursday — roughly one-third of its April level in just three months. The industry generally regards $250 to $300 per ton as the breakeven threshold, meaning the current spread falls well short of that mark.

Naphtha prices surged earlier this year on supply disruption fears following armed conflict between the United States and Iran in the first quarter. Monthly average prices spiked to $1,018.64 per ton in March and $1,063.14 in April, but quickly stabilized after a ceasefire agreement eased Middle East supply chain anxiety, falling to $708.41 in June. In July (July 1–28), however, prices rebounded to $798.1 per ton.

Monthly average ethylene prices also climbed sharply, nearly doubling from $663.75 per ton in February to $1,216.25 in March before surging further to $1,378 in April. Prices then retreated to $1,097.5 in May and $843.75 in June, edging back up to $852.5 in July (July 1–24). The pattern points to a troubling divergence: renewed Middle East tensions pushed raw material costs higher in July while product prices remained weak, raising the prospect of negative margins.

Earlier this year, the petrochemical industry turned profitable in the first quarter as product prices rose amid the escalating Middle East war. The improvement came as surging international oil prices — driven by the conflict around the Strait of Hormuz in March — allowed companies to sell products made from cheaper, previously stockpiled raw materials at elevated prices, widening margins.

That inventory lagging effect — where cheaper raw materials purchased earlier are reflected in costs only after a delay — is believed to have continued into the second quarter. Naphtha prices in April and May, which feed into second-quarter earnings, remained elevated, while the softening in raw material costs that followed the ceasefire only began to appear in June, limiting its impact on second-quarter results.

The operating environment for the second half looks increasingly difficult. The industry faces a dilemma in which either direction of Middle East geopolitical risk carries a cost. If tensions persist at current levels, high oil prices will keep naphtha costs elevated while weak downstream demand prevents ethylene prices from recovering — leaving little or no profit margin on sales.

Conversely, even a dramatic resolution to the conflict that sends oil and naphtha prices sharply lower would offer little relief. Companies would then face a reverse lagging effect — having to sell products made from expensive raw materials at lower prevailing prices — triggering a sharp near-term earnings decline.

The industry consensus is that earnings improvements driven by external variables have their limits unless genuine downstream demand recovery accompanies any easing of the global economic slowdown. Against this backdrop, domestic petrochemical companies are expected to accelerate structural restructuring in the second half. The government recently approved a second petrochemical restructuring project in Yeosu, following the first in Daesan. In Ulsan, however, restructuring discussions remain complicated by S-Oil's 9 trillion won ($6.25 billion) Shaheen Project, scheduled for completion in November.