China has a coal-based energy system, but heavily relies on petroleum and liquefied natural gas from the Middle East Gulf in high-end manufacturing sectors such as petrochemicals, synthetic fibers, and semiconductor. With the ongoing conflicts in the Middle East, there is a risk of energy and raw material supply disruptions. Despite the “lights still being on” in China, the raw material supply chain and high-end manufacturing chain in factories may already have broken.
Although China has achieved a certain degree of coal self-sufficiency in the power sector, it still heavily relies on petrochemical products transported from the Middle East region by sea and land in the precision segments of high-tech manufacturing industry. The latest developments in Chinese enterprises also reflect the rapid transmission of Iranian conflict pressure downstream.
According to reports from Caixin, during an internal supply chain meeting on March 20, BYD mentioned that due to sharp price increases in basic chemicals for electrolyte solvents and lithium battery separators, the cost per vehicle in the second quarter is estimated to increase by 3,000 to 5,000 RMB.
Ningde Times is accelerating the use of Jiangxi Yichun lithium mica ore and recycling facilities, attempting to hedge external energy costs through “internal circulation”. They are also negotiating with shipping companies to redirect some exported European batteries to the China-Europe freight train to avoid risks in the Red Sea and the Gulf.
Although Huawei has not publicly announced a price hike, the supply chain has reportedly issued “price protection” notices for some enterprise-level switches and servers. China’s SMIC is facing shortages of precision chemical cleaning agents and packaging materials, requesting strategic partners to prioritize the supply of materials for the 5-nanometer and 7-nanometer advanced processes.
On Xiaomi’s side, founder and CEO Lei Jun mentioned in social media interactions that the “supply chain challenges are severe”. Some models of laptops and high-performance smartphones have issued “out-of-stock warnings”, and PC/ABS engineering plastics required for mobile phone casings are one of the most affected segments due to the shortage of naphtha.
Rongding Group warned in a brief comment on March 22 that if the strait remains blocked for more than 30 days, China’s manufacturing industry may shift from “profit compression” to “substantive contraction of production capacity”.
Naphtha, commonly known as the “mother of industry” or light oil, is considered the most alarming “hidden killer” in this crisis.
According to the Asian Petrochemical Price Weekly Report released by S&P Global on March 20, the closure of the Hormuz Strait has resulted in a sudden 40% decrease in naphtha supply in Asia, rapidly impacting China’s electronics industry chain and high-end manufacturing.
High-end manufacturing emphasizes the production process with “high technological content” and “high added value”, including advanced semiconductor processes (2 nanometers), aerospace engine assembly, and precision medical equipment manufacturing.
The report points out that in the core components of semiconductor packaging and PCB substrates, epoxy resins have surged by 28% in the third week of March due to the naphtha shortage leading to a sharp increase in upstream raw materials such as phenol and acetone.
PCB suppliers in Jiangsu and Guangdong have begun issuing “price adjustment letters” to global customers. According to Digitimes in Taiwan, the price of substrates is expected to increase by 12% to 15% in the first wave.
Furthermore, special engineering plastics such as polycarbonates (PC) and polyamides (PA), commonly known as nylon, used in electronic product casings, connectors, and insulation components inside electric vehicles (EVs), rely heavily on petrochemical materials from the Gulf region. Due to the closure of the Hormuz Strait, bulk carriers have been unable to reach ports in Ningbo and Shanghai, and several joint ventures and private petrochemical plants in China have declared a “force majeure” reason for stopping supply since March 18.
The Rhodium Group, a U.S. think tank, stated in the “China Industrial Resilience Tracking Report” last Saturday (21st) that based on surveys of 50 electronic and automotive parts suppliers in Eastern China, the inventories of these engineering plastics can only support production for 14 to 20 days.
Moreover, in precision cleaning and optical component processing, the costs of high-purity isopropyl alcohol (IPA) and other petrochemical-derived solvents have soared and faced logistical delays.
The report mentions that the cost of engineering plastics needed for electronic assembly, such as PC/ABS, has risen by 18%, semiconductor packaging resins and wireframe costs have increased by 15%, and high-purity monomers and chemical solvents required for optical lens manufacturing have seen a 10% price increase.
The Atlantic Council and Rhodium scholars believe that the “chemical shortage chain reaction” triggered by the Iran war and strait crisis may lead to a global price increase for electronic products in the second quarter of 2026 if the situation does not ease by early April.
Since 2023, China has saved billions of dollars by acquiring sanctioned Iranian “shadow oil tankers”, which had been a significant subsidy to maintain international competitiveness in the manufacturing industry amidst a real estate downturn.
However, with Brent crude surging above $115 per barrel on March 19 and Iranian supplies disrupted due to conflicts, China has been forced back into the immediate market to compete with European buyers. The Atlantic Council believes that this has not only eliminated the previous cost advantage but also triggered significant “cost-driven inflation”, leading to rising energy and chemical material costs that not only erode industrial profits but also weaken the price advantage of China’s electric vehicle and photovoltaic manufacturing.
International benchmark Brent crude has risen approximately 50% over the past month. Last week, Israel attacked the South Pars gas field in Iran, which was followed by retaliatory strikes by Iran on the main natural gas hub at Ras Laffan in Qatar. Market concerns that the attacks could spread to other key energy infrastructure in the region could escalate into a “structural supply interruption”.
Landon Derentz, Vice President of the Energy Project at the think tank, emphasized that the attack on the Ras Laffan industrial city facilities on March 18 has heightened market concerns. The location supplies about 20% of global liquefied natural gas.
He warned that this situation will have a lasting impact on the affordability of global energy and is not just a temporary shock that will dissipate upon the reopening of the Hormuz Strait.
The Atlantic Council stated on March 20 that Beijing has been striving to build a so-called “fortress economy” over the past five years, hoping to withstand potential sanctions from the West and severe fluctuations in global supply chains by enhancing food self-sufficiency, diversifying energy sources, and localizing core technologies.
However, the escalation of conflicts in the Hormuz Strait from the Iran war and the resulting energy supply disruptions are posing unprecedented challenges to this “fortress”.
The report points out that China’s policymakers have long taken pride in the country’s strong coal foundation. While about 60% of China’s electricity comes from domestically produced coal, high-tech manufacturing sectors in the country have vastly distinct situations.
China’s petrochemical industry, synthetic fibers, and semiconductor manufacturing rely heavily on imported petroleum and liquefied natural gas from the Gulf region. When the South Pars gas field in Iran and the Ras Laffan gas hub in Qatar were damaged due to attacks, China suddenly found that “even though the lights are still on, its factories’ raw material supply chains have already broken”.
The March report by the Rhodium Group describes China’s current situation as a “perfect storm”: long-standing domestic structural problems are intertwining with immediate external energy shocks. The report indicates that despite the Chinese Communist Party’s vigorous promotion of the “new trio” – electric vehicles, lithium batteries, and solar energy – their scale is still not sufficient to fill the significant gap left by the downturn in real estate and infrastructure construction.
Estimates show that these emerging industries have only contributed 0.8 percentage points to GDP growth from 2023 to 2025, far below the momentum needed to achieve the target of 5% annual growth.
On top of that, the energy shock that erupted in March 2026 has further deepened issues of cost-driven inflation and competitiveness degradation. Despite China’s abundant domestically produced coal, the country still heavily relies on imported petroleum and liquefied natural gas in the industrial and chemical sectors. Soaring energy prices directly raise manufacturing costs, weakening China’s products’ competitiveness in the international market.
This has also led to a significant disparity between Beijing’s set GDP growth target of 4.5% to 5% for 2026 and the realistic forecasts.
According to Rhodium’s assessment, if the energy crisis continues and the domestic real estate industry and consumption remain weak, China’s actual growth rate for 2026 may only be maintained between 2.5% to 3.0%.