Prolonged Hormuz Blockade Triggers Cost Shock, Eroding Profits Across Asian Refining, Aviation and Shipping

Prolonged Middle East war sends crude procurement costs soaring
Transport and fuel costs eat into refining, airline and shipping profits
Delays in logistics companies’ cost recovery squeeze profits across supply chains

Disruptions to crude shipments caused by the Middle East war have stalled the earnings recovery of Asian refiners. Although rising petroleum product prices widened refining margins, soaring transport costs driven by a tanker shortage have eaten into profits. Airlines and shipping companies in South Korea and Japan, facing heavier fuel bills, have also seen cases where revenue growth failed to translate into higher profits, or where operations slipped into the red. Logistics companies are also facing profitability pressure as they struggle to pass higher freight rates on to shippers promptly.

Asian Refiners’ Margins Turn Negative

According to the International Energy Agency’s (IEA) oil market report on the 19th (all dates hereafter are local time), refining margins for Asian refiners processing high-sulfur Middle Eastern crude turned negative last month. This means they face difficulty recovering their input costs even after buying and refining crude and selling the resulting petroleum products. Profitability remains tight this month, with local traders reporting that some refiners’ margins are effectively hovering around zero. Energy research firm Hyro Analytics estimated that Asian refiners’ average margin in October was just above USD 7 (approximately USD 7.22) per barrel after deducting freight costs.

Recent gains in margins for individual products have also begun to reverse. Last month, the Asian low-sulfur diesel crack spread exceeded USD 87 (approximately USD 89.72) per barrel, reaching a record high. This surpassed the previous peak of USD 85.6 (approximately USD 88.28) set in late March, prompting Asian refiners to focus on securing high margins by increasing diesel production and exports. By the middle of this month, however, gasoline, jet fuel and diesel crack spreads had all weakened, reducing profitability for major transport fuels. An analysis released on the 13th by commodities analytics firm Sparta also put refining margins for year-end delivery around the break-even point. December margins for Asian refineries with medium-complexity cracking facilities were estimated at slightly below USD -1 (approximately USD -1.03) per barrel when processing the United Arab Emirates’ (UAE) Murban crude, and around break-even when using Omani crude.

Hopes for a Refining Margin Rebound Give Way to Renewed Profitability Pressure

The deterioration in profitability coincided with efforts by South Korean and Japanese refining and petrochemical companies to cut capacity amid a prolonged downturn. Even before the Iran war, the two countries’ refining and petrochemical industries had been struggling with Chinese oversupply and price competition. As China sharply expanded petrochemical capacity, a slow recovery in demand squeezed product margins, forcing South Korean and Japanese companies to reduce capacity. In procuring feedstock, Chinese independent refiners also lowered costs by using discounted Russian and Iranian crude. Securing cheap crude gave them room to protect earnings even when product prices fell. Middle Eastern oil producers have also joined the push to expand petrochemical operations that process their own feedstock. Saudi Aramco and TotalEnergies’ Amiral project is designed to produce 1.65 million tons of ethylene annually using naphtha and by-product gases from an existing refinery, integrating feedstock supply with chemical production.

Amid this competition, South Korean and Japanese companies were reducing production capacity to address oversupply. In South Korea, 10 petrochemical companies agreed last year to cut the annual capacity of their naphtha crackers by 2.7 million–3.7 million tons. Japan’s Eneos also considered shutting down part of its ethylene facilities at the Kawasaki refinery at the end of 2027 in response to declining demand. For an industry already cutting capacity, the postwar rise in refining margins offered an opportunity to generate profits in refining. Integrated refining and chemical companies struggling with weak petrochemical operations had greater scope to ease pressure on their results through fuel sales profits. Asian refiners therefore increased crude processing and diesel production and expanded exports to distant markets, including Africa.

Table 1. Shipping Disruptions in the Strait of Hormuz and Logistics Cost Pressures

Avoidance of Hormuz Sends Crude Transport Costs Soaring

However, as shipping disruptions in the Strait of Hormuz dragged on, soaring logistics costs began eroding the gains from higher refining margins. Attacks targeting tankers and the resulting reluctance to sail through the strait drove up logistics costs. According to the United Kingdom Maritime Trade Operations (UKMTO), four tankers passing through the Strait of Hormuz were struck by unidentified projectiles on the 11th alone. Subsequently, around 10 very large crude carriers and some Suezmax vessels were observed turning around near Fujairah in the UAE, at the entrance to the strait. As navigation risks increased, insurance premiums and crew allowances also rose for vessels continuing their voyages. Early this month, war-risk insurance premiums for the area climbed to 6–10% of hull value. There were even cases of captains being offered up to USD 100,000 (approximately USD 103,077) per month, plus a USD 50,000 (approximately USD 51,538) bonus for each passage through the strait.

Oil-producing countries and transport companies have consequently expanded the use of ship-to-ship crude transfers, assigning dedicated vessels to pass through the high-risk area. Under this arrangement, dedicated tankers exit the Strait of Hormuz and transfer their crude to other tankers in waters near Oman, which then carry it to its final destination. This requires more vessels to move the same volume and lengthens waiting times for transfers, leaving fewer vessels available for other routes. According to maritime data provider Signal Ocean, more than 40% of the world’s roughly 850 very large crude carriers (VLCCs) are concentrated in the Persian Gulf or waters within about two days’ sailing of it. The concentration of vessels carrying Middle Eastern crude has also made it harder to secure ships for long-haul routes from the United States and West Africa.

The vessel shortage has pushed up costs for Asian refiners seeking alternative crude supplies. As of the 9th, chartering a VLCC to transport 2 million barrels of crude from the U.S. Gulf Coast to China cost USD 80 million (approximately USD 82.5 million). Transport alone cost USD 40 (approximately USD 41.25) per barrel, roughly five times the prewar level of USD 8.60 (approximately USD 8.87). At the time, Japan’s Cosmo Oil provisionally secured a vessel for USD 81 million (approximately USD 83.5 million), while SK Energy and Trafigura failed to secure ships despite offering USD 76 million–77 million (approximately USD 78.38 million–79.4 million). As large tankers became harder to secure, crude traders sought smaller vessels even if that meant reducing shipment sizes, but closing deals remained difficult. Vitol offered USD 27 million (approximately USD 27.8 million) for an Aframax tanker to carry U.S. crude to South Korea but ultimately failed to charter it. Even securing midsize vessels to split crude cargoes across had become difficult.

South Korean and Japanese Airlines Also See Profitability Retreat

Cost pressures stemming from disrupted crude shipments are also affecting airline profitability. According to preliminary results released by Korean Air on the 15th, its third-quarter fuel costs rose 67% year on year to USD 1.30 billion. Of the USD 763 million increase in total operating expenses, higher fuel costs accounted for USD 524 million, or approximately 69%. As fuel spending surged, its operating margin fell from 9.4% in the third quarter last year to 8.3% this year. Third-quarter revenue increased by USD 797 million year on year, but operating profit rose by just USD 34.5 million. In effect, about 96% of the additional revenue was consumed by higher operating expenses.

In Japan’s airline industry, higher fuel costs were compounded by a weaker yen, deepening profit declines. Japan Airlines’ (JAL) operating expenses for April–June this year rose 18.7% year on year to JPY 516.8 billion (approximately USD 3.34 billion). Soaring jet fuel prices and the yen’s depreciation increased fuel procurement costs, driving earnings before interest and taxes (EBIT) down 72.1% to JPY 12.7 billion (approximately USD 82.0 million). In particular, the full-service carrier business, which handles passenger and cargo transport, posted an EBIT loss of JPY 800 million (approximately USD 5.17 million). The low-cost carrier business also failed to absorb higher fuel costs, recording an EBIT loss of JPY 100 million (approximately USD 645,385), underscoring profitability pressure on its core transport operations.

Fuel Costs and Operational Disruptions Reduce Shipping and Logistics Profits

Higher fuel costs and transport disruptions are also squeezing profitability in the shipping industry. HMM’s operating profit for the first half of this year fell about 26% year on year to USD 479 million, while its operating margin declined from 15.5% to 10.2%. HMM said it had experienced revenue losses and increases in fuel and other costs caused by the Middle East war since March. Freight rates subsequently rebounded as the peak season began early in late May, helping second-quarter operating profit recover to USD 272 million, up 52% year on year. Nevertheless, cumulative first-half operating profit fell by USD 172 million from a year earlier, leaving the earlier earnings weakness not fully offset.

Japanese shipping companies also shouldered additional operating costs from rerouting and port congestion. Nippon Yusen’s (NYK) recurring profit from its vehicle transport business for April–June this year was JPY 16.8 billion (approximately USD 109 million), down JPY 12 billion (approximately USD 77.5 million) year on year. NYK cited rerouting caused by the Strait of Hormuz blockade, higher fuel costs and port congestion as the main factors behind the decline. During the same period, the group’s average vessel fuel price rose about 25% to USD 722.71 (approximately USD 745) per ton from USD 578.60 (approximately USD 597) a year earlier. The company explained that while vehicle transport volumes remained at the previous year’s level, rising operating costs reduced the business’s profit by about 42%.

Logistics companies that secure cargo space from shipping lines and sell it to shippers faced the additional burden of delayed cost recovery. NYK said that although cargo handling volumes in its ocean freight forwarding business increased substantially during the same period, profit declined because higher purchase prices for cargo space were not promptly reflected in the freight rates charged to customers. Costs paid to shipping lines rose first, while adjustments to selling prices lagged, squeezing margins on transport arrangements. Combined with lower contract logistics volumes in some regions and goodwill amortization related to acquired businesses, NYK’s overall logistics business posted a recurring loss of JPY 2.4 billion (approximately USD 15.5 million). This represented a year-on-year deterioration of JPY 5.6 billion (approximately USD 36.2 million).