Sinolink: High oil and gas prices continue to exceed expectations, and the impact is gradually becoming apparent.

Sinolink released a research report stating that regardless of the source of the economic compensation from this war, or the losses in supply and transportation capacity for the warring parties and neighboring countries, it is highly likely that oil and gas prices will remain high. The impact on the chemical industry is difficult to eliminate in the short term, and the estimated duration of the impact will be significantly extended. Sinolink pointed out that the focus of this round of localized conflicts is gradually shifting towards the passage of the Strait of Hormuz. The strategic significance of the Strait of Hormuz is higher compared to the outcome of the war between Iran and the US, and its impact is more pronounced. Since the war has become a tug-of-war between the two sides, the interdependent effects outside the Strait of Hormuz have become an important bargaining chip for both sides in subsequent negotiations or talks: 1) Merchant ships passing through the Strait of Hormuz as the optimal route need to detour for transportation, greatly increasing transportation distance and time, and transportation costs; 2) The Middle East, as a concentrated area for global oil and gas energy supply, is significantly constrained in product output, as most oil and gas cannot be transported through alternative routes, such as the Red Sea ports, due to previous pipeline and port configurations; 3) Storage conditions for oil and gas products are relatively strict, so prolonged transportation restrictions will significantly impact storage, leading to Middle Eastern oil-producing countries to significantly reduce production or cease production in order to reduce inventory pressure. The significant impact of oil and gas transportation through the Strait of Hormuz has affected the Asian market, with the implications of the closure time further amplifying. As the closure time of the strait continues to lengthen, many indirect impacts are also expanding: 1) The operational start of downstream refining processes in the oil and gas sector is gradually affected by unstable upstream supply and continuous depletion of inventories, leading to adjustments in operational status, causing local product supply to contract or strategically decrease production; 2) Globally-priced petrochemical products experience a significant increase in raw material prices, leading many downstream processing sectors to enter a phase of cost transmission pressure after initially benefiting from inventory gains; 3) Global energy prices are correlated and rise, further expanding the scope of interdependent impacts, as the increase in raw material costs extends to processing costs; 4) The stability and impact of global manufacturing supply differ, combined with the trend of globalization in the chemical industry, this round of energy fluctuations will significantly accelerate the elimination of production capacity in some regions; 5) Significant differences in the energy supply structure in different regions, the shortage of Middle Eastern oil and gas supply will promote the competitiveness of differentiated processes and diversified feedstock processing. Based on the above analysis, Sinolink believes that there needs to be a focus on both "quantity" and "price": In terms of "price," the increase in overseas raw material and energy costs needs to be transmitted downstream: 1) Products linked to oil, with limited changes in coal prices, leading to a widening price difference for products such as coal chemicals; 2) Companies that can supply some of their own raw materials or substitute raw materials, such as typical oil and gas companies like Sinopec, can purchase natural gas production companies in the US, where gas prices are relatively stable or have minor increases; 3) In the renewable energy chain, as oil and gas prices increase significantly, the pricing of primary products follows the substantial growth in oil and gas prices, resulting in improved profitability in the renewable chain; 4) Significant increase in overseas energy processing costs, modest increase in domestic energy costs, as marginal overseas capacity pricing rises, driving a significant increase in export profitability for domestic enterprises, such as the animal husbandry industry. In terms of "quantity," domestic supply remains relatively stable, ensuring the safety and stability of the industrial chain: 1) Opportunities for transfer of orders are expected, with a focus on the processing and manufacturing sectors in the pharmaceutical and pesticide industries; 2) Material supply chains with higher certification barriers are offered opportunities for development as safety supply requirements increase; 3) Export-oriented products entering local markets and channels, increasing market share, such as MDI and TDI; 4) Due to limited competitiveness in overseas production, this round of intense fluctuation will accelerate the elimination of production capacity, leading to an improvement in the mid-term structure, such as polyethylene; 5) As crude oil prices rise to later stages, the impact of demand suppression will gradually be realized, improving the risk resistance capabilities of certain rigid demands or products in dispersed demand areas, such as fertilizers, additives, etc.