Hormuz closure threatens global chemicals supply chains, Fitch warns

A prolonged closure of the Strait of Hormuz would negatively affect global chemical production and disrupt supply chains worldwide, with Middle Eastern and Asian producers most exposed, Fitch Ratings has warned on March 25.

Guillaume Daguerre, senior director at Fitch Ratings and the agency's EMEA chemicals and fertiliser analytical lead, said the closure would raise chemical production costs and prices and restrict the supply of key feedstocks, including naphtha, liquefied petroleum gases, sulphur and methanol.

Europe and Asia typically source 10%-20% of their polyethene and polypropylene needs from Middle East imports, while the Gulf region produces around a third of globally traded nitrogen fertilisers. Large volumes of chemicals, plastics and fertilisers are normally shipped through the waterway.

Fitch said the disruption would likely trigger force majeure announcements and production curtailments, particularly in Asia given its high reliance on Middle Eastern feedstocks. Several ex-China chemicals producers have already declared force majeure.

Gulf producers face lower sales volumes given their export-dependent business models. Fitch estimates that the vast majority of Ma'aden's (BBB+/Stable) assets and around 70% of SABIC's (A+/Stable) assets are domestic, while around a third of Fertiglobe's (BBB/Stable) capacity is in Abu Dhabi. Companies may seek alternative export routes via Saudi Arabia's west coast or through Oman, though at higher cost and with congestion risk.

US producers could see their competitive position strengthen in the near term, as their output relies primarily on natural gas and natural gas liquids, which are less sensitive to global LNG price moves.

Chinese state-owned producers may also weather the disruption relatively well given large strategic oil reserves and access to Russian supplies.

Fitch's downside scenario, modelling a three-month Hormuz closure followed by gradual reopening, points to material threats to chemical sector credit profiles in Europe, Gulf Cooperation Council states and Asia-Pacific, with some risk in Latin America.

North American issuers face a neutral to limited impact.