Prolonged Middle East war sends crude procurement costs soaring
Transport and fuel costs eat into refiners’, airlines’ and shipping companies’ profits
Logistics firms’ delayed cost recovery squeezes profits across the supply chain

Disruptions to crude shipments caused by the Middle East war have stalled Asian refiners’ earnings recovery. Although rising petroleum product prices widened refining margins, soaring freight 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 operations slipped into the red. Logistics companies are also under pressure as they struggle to pass higher freight costs 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 at 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 strained this month, with local traders reporting that some refiners’ margins are effectively hovering around zero. Energy analysis firm Hyro Analytics put Asian refiners’ average October margin, after freight costs, at just over USD 7 (approximately USD 7.22) per barrel.

Recent gains in margins for individual products have also begun to reverse. Last month, Asian low-sulfur diesel crack spreads topped USD 87 (approximately USD 89.72) per barrel, setting a record. This surpassed the previous high of USD 85.6 (approximately USD 88.28) reached in late March, prompting Asian refiners at the time to focus on securing strong 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 transportation fuels. An analysis released on the 13th by commodities analytics firm Sparta also showed refining margins for year-end delivery hovering around break-even. December margins at Asian refineries with medium-complexity cracking facilities were estimated at slightly below USD -1 (approximately USD -1.03) per barrel when using Murban crude from the United Arab Emirates (UAE), and around break-even when using Omani crude.

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

The deterioration in profitability coincided with capacity cuts by South Korean and Japanese refining and petrochemical companies amid a prolonged downturn. Even before the Iran war, the two countries’ refining and petrochemical industries had been struggling with oversupply from China and price competition. As China massively expanded petrochemical capacity while demand recovered slowly, product margins shrank, forcing South Korean and Japanese companies to cut capacity. In feedstock procurement, Chinese independent refiners also lowered costs by using discounted Russian and Iranian crude. Securing cheaper crude gave them more room to protect profits even when product prices fell. Middle Eastern oil producers have also joined the push to expand petrochemical operations that process their own feedstocks. Saudi Aramco and TotalEnergies’ Amiral project will produce 1.65 million metric tons of ethylene annually using naphtha and byproduct gases from an existing refinery, linking feedstock supply directly to chemical production.

Amid this competition, South Korean and Japanese companies had been reducing capacity to address oversupply. In South Korea, 10 petrochemical companies agreed last year to cut annual naphtha cracking capacity by 2.7 million–3.7 million metric tons. Japan’s Eneos also considered shutting down part of the ethylene facilities at its 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 secure profits from refining. Integrated refining and chemical companies burdened by weak petrochemical operations had greater scope to ease earnings pressure through fuel sales profits. Asian refiners accordingly increased crude throughput 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 Shipping Costs Soaring

However, as transport disruptions in the Strait of Hormuz dragged on, soaring logistics costs began eating into the gains from higher refining margins. Attacks targeting tankers and the resulting reluctance to sail through the strait drove up logistics costs. According to United Kingdom Maritime Trade Operations (UKMTO), four tankers transiting 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 back near Fujairah in the UAE, at the entrance to the strait. As transit risks increased, insurance premiums and crew allowances also rose for vessels continuing their voyages. Early this month, war-risk insurance premiums for the waters climbed to 6–10% of hull value, with some captains offered up to USD 100,000 (approximately USD 103,077) per month plus a bonus of USD 50,000 (approximately USD 51,538) for each transit through the strait.

In response, oil-producing countries and transport companies expanded the use of ship-to-ship crude transfers at sea, assigning dedicated vessels to cross the dangerous waters. Under this arrangement, dedicated tankers pass through the Strait of Hormuz and transfer their crude to other tankers in waters near Oman, with the receiving vessels carrying it to its final destination. This requires more vessels to move the same volume and lengthens waits for transshipment, leaving fewer ships 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 places such as the United States and West Africa.

The vessel shortage drove up costs for Asian refiners seeking alternative crude supplies. As of the 9th, the charter cost for a VLCC carrying 2 million barrels of crude from the U.S. Gulf Coast to China reached USD 80 million (approximately USD 82.5 million). Freight alone amounted to 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), but SK Energy and Trafigura failed to find ships despite offering USD 76 million–77 million (approximately USD 78.38 million–USD 79.4 million). As large tankers became harder to secure, crude traders sought smaller vessels even if it meant reducing shipment sizes, but concluding charters 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. Efforts to secure medium-sized vessels to split crude cargoes also ran into difficulties.

South Korean and Japanese Airlines Also See Profitability Retreat

Cost pressures stemming from disruptions to crude shipments are also affecting airline profitability. According to preliminary results released by Korean Air on the 15th, third-quarter fuel costs totaled USD 1.30 billion, up 67% from a year earlier. Fuel accounted for USD 524 million, or roughly 69%, of the USD 763 million increase in total operating expenses. As fuel spending surged, the operating margin fell from 9.4% in the third quarter last year to 8.3% this year. Third-quarter revenue rose by USD 797 million year on year, but operating profit increased 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, a weaker yen compounded rising fuel costs, deepening profit declines. Japan Airlines (JAL) reported operating expenses of JPY 516.8 billion (approximately USD 3.34 billion) for April–June this year, up 18.7% from a year earlier. Soaring jet fuel prices and the yen’s depreciation increased fuel procurement costs, sending earnings before interest and taxes (EBIT) down 72.1% to JPY 12.7 billion (approximately USD 82.0 million). In particular, its full-service airline segment, which handles passenger and cargo transport, posted an EBIT loss of JPY 800 million (approximately USD 5.17 million). Its low-cost airline business also failed to absorb higher fuel costs, recording an EBIT loss of JPY 100 million (approximately USD 645,385), underscoring profitability pressures on its core transportation operations.

Fuel Costs and Operational Disruptions Also Cut 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% from a year earlier to USD 479 million, while its operating margin declined from 15.5% to 10.2%. HMM said the Middle East war had caused revenue losses and higher costs, including fuel expenses, 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. First-half operating profit nevertheless fell by USD 172 million from a year earlier, failing to fully offset the earlier earnings weakness.

Japanese shipping companies also faced additional operating costs from rerouting and port congestion. Nippon Yusen (NYK) reported recurring profit of JPY 16.8 billion (approximately USD 109 million) in its car transport business for April–June this year, down JPY 12 billion (approximately USD 77.5 million) from a year earlier. NYK cited rerouting caused by the Strait of Hormuz blockade, higher fuel costs and port congestion as the main factors behind the decline. Over the same period, the group’s average vessel fuel price rose about 25% to USD 722.71 (approximately USD 745) per metric 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 roughly 42%.

Logistics companies that buy shipping capacity from carriers and resell it to shippers faced the additional burden of delayed cost recovery. NYK said cargo handling volumes in its ocean freight forwarding business rose substantially over the same period, but profits fell because higher capacity procurement costs were not promptly reflected in the freight rates charged to customers. Costs paid to shipping companies rose first, with selling-price adjustments following later, reducing margins on arranging transportation. 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 deterioration of JPY 5.6 billion (approximately USD 36.2 million) from a year earlier.