Global fertilizer faces shortage! Blockade of the Strait of Hormuz "second-order effect" strikes Morgan Stanley: the Middle East is more than just an oil reservoir.

Recently, Morgan Stanley released a research report proposing the "second-order effect" of the blockade of the Strait of Hormuz. If the first-order effect is a sharp rise in energy prices, impacting global asset prices, then the second-order effect is a supply crisis in energy-intensive industries such as aluminum, petrochemical products, and fertilizers. Among them, the vulnerability and shortage of the fertilizer supply chain are particularly prominent, transmitting through global trade channels to various economies, with emerging markets being most significantly impacted and developed economies also unable to avoid the effects. Part.01 The Middle East is more than just an oil depot The Middle East is a core supplier of global oil and natural gas, as well as a key production and export region for aluminum, petrochemical products, and fertilizers, all of which are energy-intensive industries deeply integrated into the global supply chain, strongly linked to oil and gas resources: fertilizers and plastics are directly made from hydrocarbon materials, aluminum production is one of the highest energy-consuming industrial processes globally, and sulfur, sulfuric acid - key raw materials for fertilizers and industrial chemicals, are also important export items from the Middle East. Morgan Stanley believes that the interruption of energy supply and logistics directly leads to downstream raw material shortages or delivery delays, and the duration of such second-order effects will exceed the conflict itself - as post-conflict recovery work will prioritize safeguarding the transportation of oil and liquefied natural gas, while industrial capacity restoration will be placed in a secondary position. Based on trade yearbook databases, the industry impact caused by this interruption through global trade channels has already covered several core upstream areas such as aluminum, petrochemicals, and fertilizers. Part.02 Global fertilizers face shortages The Middle East, relying on abundant and low-cost natural gas resources, has become an important production region for nitrogen fertilizer products such as ammonia and urea, providing a critical support to the global fertilizer supply chain. The interruption of fertilizer supply in the Middle East directly impacts global agriculture and related industries, making it the sector with the widest range of impact in this second-order effect. Significant impact on trade volume: Countries importing fertilizers from the Middle East globally exceed 12 billion US dollars, accounting for over 16% of the total global fertilizer trade, with some nitrogen fertilizer products having import proportions from the Middle East exceeding 25%, indicating a high reliance of the global agricultural economy on Middle Eastern fertilizers. Increased risk of upstream raw material shortages: The Middle East is a core supplier of sulfur and sulfuric acid, with around 5 billion US dollars in sulfur and sulfuric acid trade facing interruption risks, and these two substances are critical basic raw materials for fertilizer production. The shortage of these materials will further restrict fertilizer production from the raw material side, creating a vicious cycle in the supply chain. Rigid supply gap: Fertilizers, as core inputs for agricultural production, have a high correlation with agricultural seasons. The sudden interruption of supplies from the Middle East makes it difficult for economies dependent on that region's imports to quickly replace them, resulting in a rigid gap in fertilizer supply. Part.03 Global trade in aluminum and petrochemical products disrupted The core pain point of this second-order effect is the shortage of fertilizers, with disruptions in aluminum and petrochemical product trade occurring simultaneously, posing a dual pressure on the global industrial supply chain. The gaps in these two types of products both point to the core supply position in the Middle East, and are key upstream raw materials for downstream manufacturing industries. (1) Aluminum trade: 8% of global flow at risk, upstream restrictions affect the entire industry chain Global trade of over 15 billion US dollars in aluminum faces interruption risks, mainly in primary aluminum, accounting for 8% of the total global aluminum trade, which is a core upstream input for downstream component and finished product industries. The Gulf region countries such as the UAE, Bahrain, Qatar, and Oman are major aluminum suppliers globally, with products mainly exported to Asia and parts of Europe. The energy production and logistics interruption in the Strait of Hormuz will directly restrict the export of primary aluminum and semi-finished aluminum products from the region, creating a global supply gap in aluminum raw materials. (2) Petrochemical products: 9% of global plastic trade exposed, impacting multiple economies directly The Middle East is a major exporter of petrochemical products and plastics globally, with around 26 billion US dollars in plastic trade facing impacts during this time, accounting for 9% of total global plastic trade. China, India, Turkey, and Egypt are among the most significantly affected economies. Plastic, as a basic raw material in packaging, industrial manufacturing, and consumer goods sectors, its shortage will directly lead to a raw material gap in downstream industries, along with shortages in fertilizers and aluminum, amplifying the overall impact on the industrial supply chain. Part.04 Emerging markets bear the core pressure In Morgan Stanley's view, the second-order effects of the oil price shock in this case show clear differences in exposure levels among various global economies, with emerging markets being the core pressure points facing shortages in fertilizers, aluminum, and petrochemical products, while developed economies, although having more advanced industrial structures, still have significant vulnerabilities in terms of raw material imports, with risks continuously permeating. Concentrated impact on emerging markets: India, Brazil, Turkey, and South Africa are the largest importers of aluminum, petrochemical/plastic products, and fertilizers from the Middle East, and simultaneous shortages of three core upstream raw materials directly impact their core industries such as agriculture and manufacturing, creating significant pressure on the supply chain. Raw material vulnerability in developed economies: Australia, as a resource-rich country, still imports a significant amount of fertilizers from the Middle East, facing direct impacts from fertilizer supply shortages; Japan, South Korea, Italy, and the USA, with aluminum imports from the Middle East representing no less than 10% of their total aluminum imports, will experience a transmission of aluminum raw material shortage to their downstream manufacturing industries. Part.05 Core conclusions The second-order effects of the Strait of Hormuz blockade-triggered oil price shock have surpassed the energy sector and evolved into a global supply crisis for upstream industrial raw materials such as aluminum, petrochemicals, and fertilizers, with fertilizer shortages posing a core risk point in this case due to its association with global agriculture production and food security. Morgan Stanley believes that this shock has two significant characteristics in terms of impact: Firstly, sustainability - the impact of raw material shortages will exceed the conflict itself as post-conflict recovery work prioritizes oil and gas transportation, lagging behind industrial capacity restoration. Secondly, transmission - the impact spreads through global trade channels from upstream raw materials to midstream and downstream industries, penetrating from emerging markets to developed economies. For all global economies, supply chains need to quickly adjust to cope with raw material shortages. However, the impact of this interruption has been significant, and amid the backdrop of global manufacturing recovery, economies face multiple pressures for adjustments such as material substitution, inventory management, and capacity adaptation, which will become important variables in the process of global economic recovery.