As the Iran situation has persisted for over a month since the conflict erupted on February 28, the blockade of the Strait of Hormuz has also exceeded one month. Following the initial rapid emotional release, markets appeared to enter a relatively "calm period" over the past one to two weeks, but this surface-level tranquility could easily be disrupted. Furthermore, as time progresses, if markets begin to perceive that the impact is shifting from "paper concerns" at the sentiment and trading level to "actual disruptions" affecting production and daily life, the economic repercussions and drag on earnings will need to be repriced.
For example, since the conflict began, earnings expectations for U.S. and A-shares have actually been revised upwards by 4% and 1.5%, respectively. The downward revisions in Hong Kong stock earnings are largely related to structural weaknesses within their own industries rather than being attributable to geopolitical tensions and high oil prices. In other words, the pricing of earnings shocks from oil price spikes has not yet materialized, which is one reason we suggest that equity markets have not fully priced in pessimistic scenarios.
Consequently, two critical points lie ahead regarding the Iran situation: first, April serves as a potential "tipping point" for whether the situation escalates and for expectations themselves; it also marks the actual starting point for oil tanker supply disruptions. Second, Southeast Asia, as a vulnerable region with low energy inventories and single-source import dependencies, has been a key node in China's export structure and global supply chain realignment due to trade frictions over the past couple of years. If production activities there are impacted, declining or even halting, it would deliver a more substantial blow to the economy and market sentiment.
However, the impact of high oil prices is clearly not uniform. Differences manifest primarily along two dimensions: 1) Having diversified energy sources and alternative solutions can minimize the impact of high oil prices, such as China's multiple energy import channels and the United States' domestic shale oil production. Leveraging energy alternatives or having lower exposure to oil and gas costs (or even benefiting directly as an energy exporter) provides a natural immunity to high oil prices. 2) Cost absorption capacity and production resilience: even when affected, industries can benefit from robust energy security systems, economies of scale, and supply chain resilience, which allow them to suffer less than competitors. This can enable them to gain market share when other capacities are forced out, as seen in sectors like steel and aluminum.
If enduring high oil prices becomes a reality we must accept in the foreseeable future, the question this analysis seeks to answer from a macro perspective is: which industries represent areas of comparative advantage for China that could potentially benefit?
Where has the high oil price shock transmitted so far? Financial markets felt the immediate impact, energy prices reacted swiftly, but second-round effects along supply chains and on inflation expectations remain less pronounced.
Rising oil prices are primarily due to supply disruptions. The Strait of Hormuz has been effectively "shut down" since February 28, with oil tanker traffic on this route falling to zero in March, directly cutting off approximately 20% of global daily crude supply. This supply blockage further led to production cuts. Data shows OPEC+ producers reduced output by 7.95 million barrels to 21.57 million barrels per day in March, a 27% month-on-month decrease, reaching the lowest level since June 2020, with Kuwait, Iraq, Saudi Arabia, and the UAE being the main sources of reduction.
First, the shock to financial markets was immediate. High oil prices have caused futures markets to price out any expectations of interest rate cuts within the year. Analysis suggests this implies an assumption that the conflict persists into the second half of the year, keeping the average oil price above $100 per barrel.
Second, energy prices reacted swiftly. Brent spot prices hit $141 per barrel on April 2, the highest level since 2008, with the spread to Brent continuous contracts widening to $32, further highlighting tight physical crude supply due to the Strait of Hormuz blockade. However, significant divergence is evident across products and regions: - By product type, jet fuel price increases outpaced diesel and gasoline. Looking at crack spreads (the difference between refined product prices and crude oil costs), the average jet fuel crack spread rose to $70-80 per barrel in March, significantly higher than diesel at $56 per barrel and gasoline at $30 per barrel, reflecting relatively tight jet fuel supply and weak substitutability under refinery output structure constraints. For chemicals, products with high Middle East exposure saw significant gains; short-term supply shocks led to substantial increases in sulfur (49%), ethylene glycol (41%), methanol (38%), and polyethylene (37%). While international prices for urea and phosphate fertilizers rose, China, as a net exporter of these, saw only modest domestic price increases (urea 3%, phosphate fertilizers 2%). Potash, primarily transported via the Red Sea and Mediterranean coasts, saw limited supply disruption, with domestic prices remaining relatively stable (0%). Notably, the widening oil-coal price spread enhances the production advantage of alternative routes using coal as feedstock, potentially boosting profitability for domestic coal-to-methanol, coal-to-ethylene glycol, and coal-to-polyethylene processes. - Regionally, oil price increases were highest in the Asia-Pacific. As of April 2, diesel and jet fuel prices benchmarked to Singapore rose over 120%, with gasoline increases lagging at 79%, far exceeding涨幅 for similar products in Europe and the U.S. European natural gas prices saw the highest increase, with the Dutch TTF price rising 57% since the conflict began, while U.S. NYMEX natural gas prices, benefiting from high energy self-sufficiency, fell slightly by 1.8%.
Third, second-round price transmission to other industrial supply chains and inflation expectations is more noticeable for products with high import dependency on the Middle East and weak substitutability, such as refined products, sulfur, and methanol. The global manufacturing PMI sub-indices for input and output prices rose in March to their highest levels since 2022, particularly in ASEAN regions, suggesting price pressures will further transmit to PPI and CPI. Whether this will further propagate along supply chains warrants attention. From an inflation expectations perspective, short-term expectations have risen significantly, but long-term expectations remain relatively stable. The 2-year U.S. Treasury inflation expectation increased by 58 basis points, significantly higher than the 22 bp increase for the 5-year and 12 bp for the 10-year, indicating the market has not yet priced the inflation pressure from the Iran situation as a long-term structural upward shift in the core level.
Where are China's relative advantages? Diversified import channels, ample inventories, dispersed energy structure, and price stabilization mechanisms.
Nearly ninety percent of crude oil and natural gas shipments passing through the Strait of Hormuz are destined for Asia, meaning the shipping halt since March theoretically impacts Asian crude supply far more than Europe and America. However, the supply shock exhibits significant "asymmetry" within the Asia-Pacific region itself: - The Philippines, Vietnam, and Malaysia face greater pressure, with diesel prices rising over 80%. Over the past month, gasoline and diesel prices in the Philippines rose 76% and 96% respectively, followed by Vietnam (gasoline up 19%, diesel up 84%) and Malaysia (gasoline up 49%, diesel up 82%). Against a backdrop of already low crude reserves, Vietnam prioritized policies like fuel tax exemptions and promoting remote work to curb gasoline prices, but diesel costs on the production side rebounded sharply. - Japan, South Korea, India, and Indonesia experienced relative price stability, with gasoline and diesel increases not exceeding 20%. Japan and South Korea suppressed end-user prices by releasing strategic petroleum reserves, implementing price controls, and providing fuel subsidies. Gasoline and diesel prices in India and Indonesia remained largely unchanged; Indonesia promoted biodiesel to stabilize prices, while India used excise tax cuts and price caps, albeit at the "cost" of significant cost-price inversions for state-owned refiners. - China's gasoline and diesel prices rose around 20% over the past month, placing it in the "middle ground" among major Asian countries. According to China's Oil Price Management Mechanism, price adjustments are suspended only when international oil prices exceed the "ceiling price" of $130. Within the $80-$130 range, price increases are moderated by reducing refinery processing margins. This mechanism curbs extreme volatility while "protecting" private refineries' operational enthusiasm to ensure supply security.
Looking ahead, if high oil prices persist, China's relative advantages may further expand, benefiting from diversified import channels, relatively ample inventories, and a greener energy mix. - Diversified import channels: In recent years, the proportion of China's crude oil imports from the Middle East has slightly declined, from 51% in 2022 to 42% in 2025. The share from Russia and Eurasian countries has increased, from 26% in 2022 to 33% in 2025. - Relatively ample reserves: According to estimates, China's onshore petroleum reserves exceeded 1.2 billion barrels by early January 2026, a record high. Japan and South Korea hold reserves sufficient for over 200 days, whereas the Philippines and Vietnam have reserves covering only about 45 days and 10 days, respectively. - Dispersed energy structure: Firstly, based on 2023 data, coal dominates China's energy supply structure at 61%, while oil and natural gas account for only 26%, giving China far lower oil & gas exposure than Germany (62%), Japan (57%), and South Korea (56%). The share of renewable energy continues to rise, increasing from 2% in 2000 to 7%, lower than the Philippines (16%) and Vietnam (10%) but higher than Japan and South Korea. Secondly, although China is a net oil importer, its oil import dependency (72%) is lower than Japan, South Korea, and India. The proportion of crude supply transported via Hormuz is particularly high for Japan (71%) and South Korea (54%). Thirdly, the power generation structure is also dominated by thermal power (58%), with oil and gas accounting for only 4% of electricity generation, significantly lower than Mexico (72%), Japan (36.5%), and South Korea (30%).
New energy vehicle adoption alleviates oil demand pressure: The retail penetration rate of new energy vehicles in China reached 54% in 2025, meaning new car purchases are increasingly less dependent on gasoline, reducing gasoline's share in refined product consumption from a peak of 42% in 2021 to 39%.
Identifying China's Relative Advantages Under High Oil Prices: A Cross-Country Industry Comparison
Given that exports have been a primary driver of China's growth over the past two years and low cost is a key competitive advantage for Chinese enterprises, Chinese industrial companies generally operate with thin profit margins under capacity and destocking pressures. Rising oil and gas prices inevitably increase production costs, especially for industries with low margins and limited ability to pass on costs.
However, the energy price shock is not entirely negative for China. Compared to other trade surplus economies, China's energy system possesses certain advantages, potentially suffering less damage from the Iran situation. Consequently, China might gain market share when competitors' capacity temporarily exits, emerging as a "winner." In this process, industries with strong existing export capabilities are better positioned to "monetize" their comparative advantage in global trade, seizing opportunities for increased market share and export profits. Analysis can proceed along two dimensions: cost share and relative advantage.
- Energy Cost Share: Includes costs related to oil & gas, refined petroleum products, electricity, and gas. Using OECD input-output tables, the direct cost share of these components is calculated and summed for each industry. This provides two insights: 1) Absolute cost: Industries with high oil & gas related cost shares face greater cost-side impact from the Iran situation. 2) Relative cost perspective: Considering China's energy system advantages, China's relative advantage might be more pronounced precisely in these high-cost-share industries. Generally, if an industry has a universally high energy cost share, China tends to have a relative advantage in cross-country comparison. - Export Competitive Advantage: Industries where China already holds a strong competitive advantage are better equipped to capture additional market share. Export competitiveness can be measured by: 1) China's export share within each industry (China's proportion of global exports for that industry). 2) China's Revealed Comparative Advantage (RCA) for each industry (share of the industry in China's exports divided by its share in global exports), indicating China's advantage relative to the rest of the world. Stronger export capability makes it easier to convert cost-based comparative advantages into actual export gains (e.g., higher international market share).
Based on these two dimensions, analyzing 24 industries from the OECD input-output tables allows for a cross-country industry comparison under energy shock conditions:
- Category 1: High Energy Cost Share, Strong Export Advantage. These industries face greater cost impacts than others (e.g., steel manufacturing is energy-intensive, making it more sensitive to energy prices), but possess a relative cost advantage compared to competitors. China's energy supply advantages, discussed earlier, are more pronounced in industries with high oil & gas exposure. Additionally, China holds production process advantages in certain segments or products that can circumvent the negative impact of rising oil & gas prices. Typical industries include chemicals, steel, and building materials (e.g., fiberglass). - Taking steel as an example, the relative cost advantage manifests on two levels: 1) Steel consumes significant thermal and electrical energy. The direct cost share of electricity and heat in "basic steel manufacturing" is 4.2% (vs. an industry average of 2.3%), allowing China's energy advantage to show. 2) From a production route perspective, crude steel production can use the EAF route (high electricity input, ~50%) or the BF-BOF route (low electricity input, ~7%). China's EAF route share is only 10.2%, compared to an average of 49.7% for the other top ten crude steel producers, meaning China's steel production consumes less electricity, further strengthening its cost advantage and benefiting steel exports. In contrast, European steel producers (holding 9.3% of global crude steel capacity) had already noted earlier this year that high electricity prices weaken their competitiveness against China; the Iran situation exacerbates the EU's disadvantageous competitive position relative to China. - Aluminum follows a similar pattern. In the 2025 global primary aluminum production structure, China, Europe, and the Middle East ranked top three, with shares of 59.9%, 9.6%, and 8.3% respectively. The electrolysis process is sensitive to electricity price and stability. With rising natural gas prices, China holds a greater cost advantage over production centers reliant on gas-fired power generation, like Europe. Furthermore, if Middle Eastern capacity is forced offline due to the conflict, it would further enhance the relative advantage of Chinese producers. During the conflict, power supply stability for Middle Eastern smelters was threatened, with direct attacks on two major aluminum plants potentially leading to temporary capacity withdrawal in the region.
- Category 2: Low Energy Cost Share, Strong Export Advantage. These industries have relatively small overall energy cost shares, making the impact from the Iran situation manageable. Simultaneously, China's strong export competitiveness in these sectors allows them to remain robust advantage industries, unless high oil prices cause a severe global demand slump or recession. Typical industries include electronics, electrical equipment, and automobiles & components.
- Category 3: High Energy Cost Share, Weak Export Advantage. These industries face significant energy cost increases but lack the pronounced export advantage of Category 1, making it difficult to quickly monetize relative advantages through overseas demand. Typical industries include metal ore mining and other mining activities (e.g., stone, sand, clay).
- Category 4: Low Energy Cost Share, Weak Export Advantage. These industries have relatively small energy cost shares and are not major export-advantage sectors, possessing stronger domestic demand attributes. Typical industries include biotechnology, food, beverages, and tobacco.
Investment Implications? Electrical equipment, autos & parts strengthen advantages; chemicals, aluminum, steel, building materials may expand market share.
Based on the above analysis, industry-level "winners" and "losers" can be identified from the dual perspectives of "cost" and competitive advantage. In summary, based on the four-category classification: 1) If oil prices remain relatively high but do not trigger a global recession, Category 1 industries hold the greatest relative advantage. 2) If persistently high oil prices lead to a global recession, Category 4 industries offer the best defensive attributes. 3) If oil prices decline rapidly, Category 2 industries remain the primary competitive advantage sectors.
However, cost is only one angle. The ultimate impact of the energy shock on profits also depends on supply-demand dynamics and the ability to pass on costs. An extreme example: an industry might have relative cost advantage and global competitiveness but very low profit margins, potentially leading to a scenario of "losing money to gain market share," which is not an optimal investment proposition. Considering this, net profit margin serves as a supplementary metric, comparing the current expected net margin to its historical percentile (over the past eight quarters). A higher percentile indicates better supply-demand balance (leaning towards a "seller's market"), a greater likelihood of successful cost pass-through, and less risk of excessive profit erosion from "compensating volume for price." Synthesizing these factors:
- Strengthening Advantages: Industries with low oil & gas related cost share, strong export competitiveness, and high historical profit margin percentiles, such as electrical equipment and automobiles & components. These sectors face manageable cost impacts from oil prices, and some segments may even benefit from energy substitution demand arising from the Iran situation, thereby strengthening their competitive edge (e.g., new energy vehicles and their components). - Expanding Market Share: Industries with high oil & gas related cost share, strong export competitiveness, and high historical profit margin percentiles, such as steel and building materials (e.g., fiberglass), along with certain chemical and aluminum sectors where supply has already been damaged by the Middle East situation. These industries will face cost pressures, but if cost increases for other major producing regions lead to supply shortages, China stands to benefit by expanding its market share. - Defensive Attributes: Industries with low oil & gas related cost share, weak export competitiveness, and high historical profit margin percentiles, such as biotechnology, food, beverages, and tobacco. These sectors are relatively insulated from external shocks and can serve as defensive options if external demand is severely impaired.
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