Iran war's surprise victim: How Asia's chip industry is running out of naphtha

For decades, global debate about the Strait of Hormuz has focused on crude oil, the barrel prices, the tanker routes, and the strategic reserves. What it has largely ignored is naphtha: a lighter petroleum distillate, less discussed than crude but no less critical to the industrial architecture of modern technology.

Naphtha sits at the base of the petrochemical supply chain in a way that rarely makes headlines. Refiners crack it at extreme temperatures to extract ethylene and propylene, which then feed into a long sequence of chemical processing before eventually reaching the chip fabrication stage as photoresists, ultra-pure solvents, and the insulating compounds deposited on silicon wafers. The distance between a naphtha cargo and a finished semiconductor is measured in months and dozens of intermediate steps, which is precisely why disruptions to the feedstock take a while to register, and why they are so hard to quickly reverse once they do.

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South Korea has now discovered, at considerable cost, what happens when that supply is severed. The country imports approximately 45 per cent of its total naphtha demand, and some 77 per cent of those imports originate in West Asia, according to the Korea International Trade Association. A significant portion transits through the Strait of Hormuz. Since the effective closure of that waterway following the outbreak of the US-Israeli war against Iran in late February, South Korea has been in a race against its own industrial clock.

The perfect storm

To understand the severity of what South Korea now faces, it is necessary to trace a chain of policy decisions that stretches back well before the first strike on Iranian territory.

The story begins with Western sanctions on Russia following its full-scale invasion of Ukraine in 2022. South Korea, in alignment with its allies, halted Russian naphtha imports that year. Before the sanctions, Russian naphtha had accounted for nearly 30 per cent of South Korea's total imports — a substantial cushion that was quietly removed. The country replaced that supply almost entirely with West Asian alternatives, deepening a structural dependency on the Hormuz corridor.

Then came the Iran war. The US-Israeli campaign against Iran has had the predictable effect of choking the waterway through which roughly 84 per cent of Gulf-bound oil destined for Asia must pass. For South Korea, which had treated West Asian naphtha as a stable commodity, the closure was not a manageable disruption. It was a structural rupture.

The compounding factor was the absence of any strategic reserve. An LG Chem representative acknowledged the gap directly: it would have been better, the company said, if a government-level naphtha stockpiling system had been in place. It was not. South Korea had managed its naphtha supply on just-in-time commercial principles; a choice that looked reasonable until it no longer did.

South Korea's industrial cascade

The consequences moved quickly up the production chain. LG Chem, the country's largest chemical company, announced in late March the shutdown of its No. 2 naphtha cracking centre at the Yeosu National Industrial Complex in South Jeolla Province. The facility, with an annual production capacity of 800,000 metric tonnes of ethylene, went dark as feedstock supplies dried up. The company has kept its larger, No. 1 plant (with a capacity of 1.2 million tonnes) running, but acknowledged it was operating under severe constraints.

LG Chem was not alone. Yeochun NCC, South Korea's largest standalone ethylene producer, declared force majeure and cut production to minimum operating levels. Lotte Chemical and Hanwha Solutions both told customers they might declare force majeure, adding to the alarm already spreading through downstream industries. Officials in Seoul warned privately that if supply remained constrained into April, the damage would ripple well beyond chemicals — hitting shipbuilding yards that use ethylene for steel cutting, packaging manufacturers, and textile producers.

The price moves told the same story. Industry data showed naphtha trading at roughly $776 per metric tonne on March 6; within a week, it had cleared $1,000. A survey of 37 member companies by the Korea Federation of Plastics Industry Cooperatives found nine in ten had already been told to expect price increases, and nearly three-quarters had received warnings of possible supply cuts or suspensions. The government moved to ban naphtha exports by domestic oil refiners, concentrating available supply within the country.

The regional picture was similarly alarming. In Japan, which relies on imports for more than 60% of its naphtha supply, Mitsubishi Chemical began reducing ethylene output, and multiple producers cancelled import tenders. In Taiwan, Taiwan Petrochemical declared force majeure on March 10. In Singapore and Indonesia, Chandra Asri and other producers followed.

An estimated 70% of South Korea's crude oil and half its naphtha arrive via the Strait of Hormuz. It was a dependency that was for long treated as a constant of economic life rather than an existential vulnerability.

The Russia pivot

On March 30, South Korea's Ministry of Trade, Industry and Resources confirmed that LG Chem had received 27,000 tonnes of Russian naphtha. It was the country's first such purchase since Western sanctions halted the trade in 2022. The transaction was only made possible by a temporary US sanctions waiver, covering Russian cargoes loaded between March 12 and April 11. The volume is significant as a signal rather than as relief: South Korean naphtha cracking centres consume an average of four million tonnes per month, meaning the Russian shipment represents roughly three to four days of additional operation at a single facility.

The logistical and financial architecture required to complete even this limited transaction illustrated how thoroughly the sanctions framework had atrophied the trading relationship. Seoul had to confirm with the US Department of the Treasury that payments could be settled in currencies other than the US dollar before companies were willing to proceed. EU compliance regulations added further friction, given that South Korean firms operating under international frameworks must navigate both European and American sanctions regimes. Uncertainty over whether the waiver would be extended beyond April 11 meant companies faced a closing window within which to execute contracts, complete payments, and arrange transport simultaneously.

That a country with one of the world's most sophisticated industrial economies — a close US treaty ally hosting 28,500 American troops on its soil — was reduced to seeking emergency permission to buy Russian naphtha in non-dollar currencies captures the hidden cost of a sanctions architecture that was built for one crisis and is now straining under the weight of another.

Before 2022, Russia supplied nearly a third of South Korea's naphtha imports. That supply was not replaced with diversified alternatives; it was replaced with a concentrated reliance on a single waterway that a rival power could close.

The tech economy vulnerability

The link between a petrochemical feedstock and a semiconductor fabrication plant is not obvious, and that invisibility is part of what made South Korea so exposed. Chip manufacturing requires a vast array of highly refined chemical inputs, including solvents used to strip and clean wafer surfaces between process steps, photoresist compounds that allow circuit patterns to be etched at the nanometre scale, and dielectrics layered between conductive elements.

These materials are manufactured far upstream from the fabs themselves, inside chemical plants that run on naphtha-derived feedstocks. Samsung and SK Hynix, which together account for the bulk of global DRAM production and a large slice of NAND flash, sit at the end of a supply chain that begins, several transformations earlier, in a petrochemical cracker.

A naphtha shortage does not shut a fab overnight. What it does is tighten the availability and raise the cost of the chemical inputs that those fabs depend on, and it does so at a moment when procurement teams across the industry already have very little slack to absorb new shocks.

The global semiconductor economy has been built on the assumption that petrochemical supply chains would simply function as background infrastructure. The Hormuz closure has exposed that complacency. In a world where geopolitical risk has returned as a first-order variable, the vulnerability of naphtha supply has, in effect, become a vulnerability of the technology industry itself.

South Korea's pivot away and back to Russian naphtha was never a diplomatic choice. It is imposed by a sequence of policy decisions of the US, including sanctions, the Iran war, compounded by Seoul's absence of strategic reserves, all converged to leave one of America's most important Asian allies with no alternative. How Washington rebuilds trust with Seoul, and how South Korea rebuilds supply-chain resilience, will define much of the industrial politics of the years ahead.