South Korea Naphtha Export Ban Amid Middle East Supply Crisis - 2026

South Korea implemented a full ban on naphtha exports effective from 00:00 local time on March 27, 2026, as the country moved to protect domestic supplies from growing shortages caused by the ongoing conflict in the Middle East and the blockade of the Strait of Hormuz. The regulation, titled Restrictions on Naphtha Exports and Measures for Supply Stabilization, was published in the official gazette after receiving approval from the Cabinet and the President.

Naphtha is a petroleum derivative used as the primary feedstock in the petrochemical industry. It is essential for producing ethylene and propylene, which serve as building blocks for plastics, synthetic fibers, rubber, packaging materials, films, and components used in semiconductors and automobiles. The material is often referred to in South Korea as the rice of industry due to its central role in the manufacturing supply chain.

South Korea depends on imports for approximately 45% of its naphtha demand, with 77% of those imports sourced from the Middle East. This heavy reliance on a single region left the country highly exposed when hostilities disrupted shipping routes through the Strait of Hormuz. By mid-March 2026, supply disruptions had already forced domestic petrochemical companies to significantly reduce output, with industry-wide utilization rates dropping to 60-65%.

The first major operational casualty came on March 23, when LG Chem, the country's largest chemical company, announced the shutdown of its No. 2 naphtha cracking center at the Yeosu Industrial Complex. The facility has an annual ethylene production capacity of 800,000 metric tons. LG Chem kept its larger No. 1 plant (1.2 million tons per year capacity) running to maintain baseline production. The company had been sourcing half of its naphtha from domestic refiner GS Caltex and the other half through overseas imports.

Yeochun NCC (YNCC), a joint venture between Hanwha Solutions and DL Chemical and one of South Korea's largest ethylene producers, also halted its olefin conversion unit and some downstream operations. Lotte Chemical accelerated maintenance shutdowns and reallocated supplies to sustain core production lines. Multiple producers issued force majeure notices to downstream customers.

Domestic naphtha prices surged to approximately $1,068 per ton by March 18, roughly double the level at the start of the year. Global benchmark naphtha prices climbed to $873 per ton, up from about $480 in January. Ethylene prices nearly doubled to above $1,400 per ton. The price spike effectively eliminated refining margins between naphtha and ethylene, meaning petrochemical producers were incurring losses on every ton of output. Industry sources estimated that current naphtha inventories could last only about two weeks.

Under the export ban, all domestically produced naphtha is prohibited from leaving the country, including volumes already under contract. Exceptions require direct approval from the Minister of Trade, Industry and Energy. According to government data, approximately 11% of domestically produced naphtha (about 3.9 million tons out of 32.6 million tons produced annually by refiners) had previously been exported. These volumes will now be redirected entirely to domestic end-users.

The ban is set to remain in place for five months, with priority supply ensured for healthcare, core industries, and essential consumer goods. The government simultaneously imposed a ban on hoarding of urea and urea solution, stepping up enforcement against market manipulation.

The crisis extended beyond industrial feedstocks to consumer-level impacts. Signs of panic buying emerged for everyday goods such as government-regulated garbage bags, which are made from polyethylene. Some retailers in Seoul imposed purchase limits. Food packaging companies including NongShim and Samyang Foods indicated they may have only a few months of plastic film supply remaining. Concerns also arose over the production of medical supplies, particularly intravenous (IV) fluid bags made from ethylene-based materials.

On March 26, Deputy Prime Minister and Finance Minister Koo Yoon-cheol announced a comprehensive emergency economic response plan titled Emergency Economic Response Measures to The Middle East War. The package included subsidies for higher-cost alternative naphtha procurement from non-Middle Eastern sources, efforts to secure substitute LNG cargoes through swaps, increased nuclear power utilization above 80%, and eased seasonal restrictions on coal-fired power generation.

Koo announced the government would implement a war supplementary budget of approximately 25 trillion won ($16.6 billion) in April, financed by excess tax revenues. A third stage of response was planned for deployment if the situation extended beyond May.

In a significant diplomatic shift, the South Korean government disclosed that it had discussed with domestic companies the potential import of Russian crude oil and naphtha, reversing course after halting oil trade with Moscow since 2022. The government confirmed that financial and sanctions-related barriers to purchasing Russian petroleum products had been effectively removed, with the United States allowing payments in currencies including yuan, rubles, and dirhams. LG Chem's CEO publicly thanked the government for supporting the procurement and payment of Russian naphtha.

The government also activated emergency supply adjustment measures under the Special Measures Act for Strengthening Competitiveness and Stabilizing the Supply Chain of Materials, Parts and Equipment Industries. These powers allow authorities to establish or modify production plans, adjust supply priorities, and issue directives on transportation, storage, and stockpiling. Officials stated these are the strongest measures available, never invoked even during the mask crisis of 2020 or the urea solution crisis of 2021.

The broader petrochemical industry restructuring already underway in South Korea added complexity to the crisis. In August 2025, the country's 10 largest petrochemical companies had agreed to cut naphtha cracking capacity by up to 25% (2.7 to 3.7 million metric tons annually) as part of a government-led consolidation effort to address chronic oversupply driven by Chinese competition. The Hormuz crisis accelerated these structural shifts.

The impact extended across multiple downstream sectors. Shipbuilding companies, which use ethylene gas for steel plate cutting, reported only about 20 days of supply remaining. Auto parts manufacturers raised alerts over potential shortages of ABS (acrylonitrile butadiene styrene), a key material for vehicle interior and exterior components. Textile firms strengthened raw material monitoring in anticipation of prolonged disruptions.

The government was also reviewing whether to extend export controls to downstream petrochemical products such as ethylene and synthetic resin. Park Dong-il, head of industrial policy at the Ministry of Trade, Industry and Energy, confirmed at a round-table meeting with company representatives that the government was giving serious consideration to broader petrochemical export restrictions.

Analysts warned that if disruptions persisted, the crisis could shift global petrochemical production capacity toward China, which relies on coal-based processes for certain products like PVC and maintains access to Russian feedstock. South Korean, Japanese, and Taiwanese producers face a dual challenge of feedstock shortages and constrained electricity supply due to reduced LNG availability.