Lian Hoon Lim
Partner & Managing Director - Singapore
The Hormuz crisis has turned a long-acknowledged logistics risk into a sharp hit to refining and petrochemical earnings, and the second half of 2026 is likely to keep testing lender exposure to the sector. Lenders who take stock now can identify weakened assets and limit losses as conditions stabilize.
Whether the Iran conflict resolves or rolls on over the coming months, one thing is certain: as long as flows through the Strait of Hormuz can be halted with little warning, a refining sector that relies on it is still some way from solid ground. Periods of ceasefire progress and apparent relief—including cuts to war-risk premiums when headlines turn reassuring—have quickly been tested by further military flare-ups and unresolved mine threats in key shipping lanes. For downstream operators, the disruption and uncertainty are translating directly into plant-level pain—and adding to margin and leverage pressures that were already uncomfortable.
Asia’s weaker plants are already exposed
The crisis has hit refining economics selectively worldwide, with Asia bearing the brunt, as a larger share of capacity depends on seaborne flows through the Strait of Hormuz. Sourcing replacement crude means the region’s refiners take three hits at once: paying more for supply bought on the spot market; paying more to move it on longer, higher-cost routes; and accepting that yields from the replacement barrels are usually weaker. More difficult shipping and a more challenging crude slate are structural disadvantages that refiners in North America, and in markets with deeper domestic or gas-based feedstocks, largely avoid. Those disadvantages have been amplified by a decade of overcapacity. The warning signs were already there for anyone watching closely pre-crisis; benchmark Singapore refining margins—a proxy for Asia-wide profitability—had retreated a long way from their 2022 highs, and run cuts and utilization restraint across parts of Asia ex-China were already signaling a system that had to trim throughput to keep the P&L above water, even in comparatively stable conditions.
Hormuz disruption has taken that slow grind on margins and turned it into a hard jolt to this year’s earnings, making 2026 a potential tipping point. Losing even a month’s production to disrupted or loss-making runs is equivalent to an 8 percent hit to annual revenue, which can be enough to wipe out the year’s profit and push leverage ratios through covenant limits. For lenders, the real test is separating assets that can absorb that hit without lasting damage from those that are likely to emerge significantly weaker—or not at all.
Across markets: same shock, unequal buffers
Asia as a whole is heavily reliant on Middle Eastern crude, and much of its petrochemicals and plastics capacity sits downstream of that same flow, but the credit picture varies significantly by region. China has shock-absorbers: larger strategic reserves, a chemicals sector with a significant coal base, diversified supply that includes Russia, and softening fuel demand as EV sales surge. Japan and South Korea share the comfort of deep financial reserves and strong balance sheets; higher supply and freight costs still erode margins, but they have more buffer to withstand a challenging year.
India and much of Southeast Asia start from a tougher position, with weaker balance sheets than their well-capitalized neighbors, and many legacy, lower-margin assets. When crude slate, pricing, and logistics all move against them, losses show up in cashflow and potentially in covenants—faster than in most other markets.
Recent closures underline how quickly that kind of stress can force assets out of action. PRefChem’s flagship Pengerang complex has been taken offline during the crisis, and Formosa Petrochemical’s 2025 decision to shut its Mailiao site showed that some refineries in the region were already running on fumes.
Plant economics: when runs hide losses
The plant-level mechanics of the shock are straightforward. Refineries configured around specific crude grades are now running feedstock they were not built for. Utilization might look healthy on paper, but each barrel now yields product sold at a lower aggregate price and a higher cost. The result is that runs once covering their costs can now quietly bleed cash, even before the shock is visible in reported earnings.
Newer, more complex integrated sites generally have more room to adjust their crude slate and product mix; older hydro-skimming plants and standalone crackers with simpler kit and narrower crude slates may be much closer to the edge. For lenders, that gap is a first filter for identifying the assets most exposed if Hormuz disruption persists.
From headline risk to portfolio action: stress-test, sort and support
The immediate task is to turn a messy operational shock into a clear view of asset quality and what level of support, if any, is justifiable this year.
Priority 1: Put a hard number on exposure, from crude to covenant
Turn the crude shock into numbers for each borrower by mapping:
- Grades the plant can realistically run
- Which sources and volumes are disrupted
- How much supply is under term contracts vs. spot procurement
- Any force majeure or take-or-pay provisions that apply
- Realistic alternative supply, once freight and war-risk premiums are included.
This reveals how much capacity is usable, what product mix is viable, and the impact on leverage and covenant headroom.
Priority 2: Test resilience in practice
Next, look past the model to operational reality:
- How long inventory and any strategic reserves bridge gaps
- Effects of delaying maintenance or capex
- How far the specific configuration can adapt before operations add more risk than value.
Straightforward, ongoing checks separate assets that can ride out a difficult year from those that will be forced into deeper cuts or shutdowns.
Priority 3: Get ahead of the cash and covenant squeeze
Waiting for breaches narrows options and forces reactive negotiations, and short-term fixes can become an expensive way of delaying the inevitable. Proactive steps:
- Estimate how long liquidity and covenant headroom last under different disruption scenarios
- Track cash on hand, available facilities and forward cash generation under higher crude, freight and insurance costs
- Watch how quickly interest cover, leverage, and EBITDA-to-cash conversion deteriorate as margins compress.
That allows for action to be taken before problems crystallize: waivers or temporary resets, or new funding tied to clear cash-preservation conditions where warranted, and restructuring where this year’s hit makes the capital structure untenable. It also sets a clear bar for management: from deferring non-critical investment to tightening working capital and stripping out avoidable operating costs, they should be pulling every credible lever to preserve cash before asking lenders to do the same.
Taken together, these steps turn a general concern about refining exposure into a disciplined framework for identifying weakened assets and making decisions accordingly—whatever shape the post-ceasefire disruption in Hormuz and the wider market finally takes.
