The U.S.-Iran Conflict Continues to Escalate, Putting China's Economy 'in the Fire'.

China‘s Economy on a Roller Coaster, Shaking and Sliding Downward (Graphic by People News)

[People News] As tensions between the U.S. and Iran escalate, the repercussions of the Middle Eastern conflict are crossing borders and significantly affecting the operational dynamics of the Chinese economy. As a key global manufacturing hub and the largest energy consumer, China is grappling with a 'multitude of challenges' stemming from rising costs of basic petrochemical raw materials, shortages of essential non-ferrous metals, and disruptions in cross-border logistics for agricultural inputs. This geopolitical conflict, occurring thousands of miles away, is translating into real cost burdens and operational crises for domestic companies through the highly integrated global supply chain.

Refined oil prices have risen for the seventh time this year.

On May 8, the price adjustment window for refined oil in China reopened. Due to the fluctuations in international oil prices caused by the U.S.-Iran conflict, the price of refined oil in China has experienced its 'seventh' increase this year. According to the National Development and Reform Commission of the Communist Party of China, effective from 24:00 on May 8, domestic prices for gasoline and diesel will rise by 320 yuan (RMB, the same below) and 310 yuan per ton, respectively. In terms of per-litre prices, 92-octane gasoline, 95-octane gasoline, and 0-octane diesel will see increases of 0.25 yuan, 0.27 yuan, and 0.26 yuan, respectively. Following this price adjustment, private car owners will need to pay an additional 12.5 yuan to fill a 50-litre tank of 92-octane gasoline. Furthermore, the price of 95-octane gasoline will fully enter the '9 yuan era', with some regions like Hainan even exceeding the 10 yuan threshold.

In addition to the rising prices of gasoline and diesel, aviation kerosene prices have also seen a significant increase due to the ongoing conflict in the Middle East. In February 2026, the domestic ex-factory price of aviation kerosene was 5,314 yuan per ton, which suddenly surged to 8,500 yuan per ton in March, marking a staggering monthly increase of 60%. In April, the price further climbed to 9,782 yuan per ton, reflecting a month-on-month increase of 15.08% compared to March, thus reaching a historical peak. The ex-factory price remained stable in May, matching that of April.

As a result of the rising fuel costs, numerous flights from mainland China to Southeast Asia and Australia were cancelled during the May Day holiday. On April 7, Air China was the first airline to announce the suspension of direct flights from Chengdu Tianfu to Kuala Lumpur, effective immediately until June 30. Following this, Asia's largest low-cost carrier, AirAsia, announced it would suspend the round-trip route from Bangkok Don Mueang to Shanghai Pudong starting April 17 until the end of the current season. Additionally, Thai AirAsia's flights from Xi'an to Bangkok will also cease operations after May 11.

Oceania routes were similarly impacted, with cancellation rates of 83.3% for flights from Guangzhou to Darwin, 57.1% for flights from Hangzhou to Auckland, and 50% for flights from Wuhan to Sydney.

It has been reported that the cancellations of these flights are attributed to 'excessively high fuel costs making it impossible to achieve a balance between income and expenses for the routes.'

The entire petrochemical industry chain is currently 'under pressure.'

Crude oil serves not only as an energy source but also as the 'mother of industry.' The petrochemical industry chain starts with the upstream refining and extraction of basic raw materials like naphtha, ethylene, and propylene, and extends to midstream synthetic resins (plastics), synthetic fibres (polyester), and synthetic rubber, ultimately reaching various end products such as fertilisers, automobiles, and textiles. In February 2026, amidst escalating US-Iran tensions, crude oil prices nearly hit the $130 mark, creating a 'cost tsunami' that exerted downward pressure throughout the petrochemical industry chain and led to significant fluctuations in the prices of basic chemicals [20].

Ethylene and propylene are considered the 'mother grains' of the plastics industry, and as oil prices rise, the pricing of their downstream products has spiralled out of control. In May, domestic prices for polyethene (PE) and polypropylene (PP) skyrocketed by over 2,500 yuan per ton within a single month. As essential raw materials for packaging and home appliance casings, the sharp increase in their costs has severely eroded the profits of downstream injection moulding factories, which now find themselves in a challenging situation of 'losing more the more they operate.'

PTA (purified terephthalic acid), a key intermediate for chemical fibres, saw its spot price increase by more than 1,800 yuan per ton in May. The Jiangsu and Zhejiang regions, recognised as the global hub for chemical fibres, are undergoing an unprecedented 'industrial shock.' While upstream PTA prices are soaring, the downstream textile and apparel sectors are unable to raise prices in response due to declining demand driven by overseas inflation. This 'cost inversion' has forced some filament factories in Jiangsu and Zhejiang to cut production by over 30% in May, significantly diminishing their competitiveness in foreign trade due to issues related to product premiums.

In addition to plastics and chemical fibres, the price of synthetic rubber (polybutadiene rubber) has skyrocketed from 12,000 yuan per ton at the start of the year to 19,500 yuan per ton in April, marking a cumulative increase of 60%. This uncontrollable rise in synthetic rubber prices has directly led to an approximately 18% increase in the manufacturing costs of all-steel radial tyres. The 'cost tsunami' triggered by rubber is evolving into a systemic logistics disaster through a 'ground-air resonance' effect. On one hand, road freight has experienced widespread shutdowns due to the dual surge in fuel and tyre wear costs, forcing many individual drivers to sell their vehicles and exit the market under financial strain. On the other hand, air freight has seen a wave of flight cancellations due to skyrocketing aviation fuel prices and the rising costs of essential consumables like tyres, ultimately resulting in systemic blockages in the logistics operations of society as a whole.

Key Nonferrous Metal Supply Shortages

In the context of geopolitical conflicts in the Middle East, the global nonferrous metal market is facing the most severe supply decoupling and price fluctuations since the 1970s. As the largest processor and consumer of nonferrous metals in the world, China is unsurprisingly at the epicentre of this crisis.

Aluminium is referred to as the 'energy metal' due to its smelting process, which heavily depends on a stable supply of energy (electricity and natural gas). The Middle East, with its low natural gas costs, has emerged as the core production region for global electrolytic aluminium.

The electrolytic aluminium production capacity of six Middle Eastern countries, including the UAE, Bahrain, and Qatar, represents 9% of the global total. The conflict that erupted in February 2026 has forced several large aluminium plants in the region to cut production or even shut down due to damage to power facilities or interruptions in gas supply. It is anticipated that the global aluminium supply gap will exceed 1.5 million tons in the second quarter.

In March, aluminium prices on the London Metal Exchange (LME) surged by over 25%, while domestic aluminium prices in Shanghai also surpassed the historical high of 23,000 yuan per ton, reaching a peak of 27,000 yuan per ton within just a few days.

As of May 8, domestic aluminium prices have remained high, fluctuating around 25,000 yuan per ton. The new energy vehicle sector is grappling with a significant reduction in gross margins, as the costs of battery packs and aluminium materials for vehicle bodies have increased by over 1,000 yuan per vehicle. Concurrently, the photovoltaic industry has been compelled to halt installations of solar power stations in various regions due to the skyrocketing costs of aluminium brackets. Aluminium alloys are essential components in aircraft skin and structural parts. Following the blockade of the Strait of Hormuz in mid-April, imports of high-quality primary aluminium from the Middle East have been disrupted, putting some domestic aviation component manufacturers at risk of failing to meet delivery deadlines due to material shortages.

Copper, often referred to as 'Doctor Copper', serves as a barometer for industrial health and is a crucial raw material for the power, electronics, and new energy sectors.

The blockade of Middle Eastern shipping routes has led to a dramatic surge in international copper prices, which increased by over 23% from March to May. In early May, domestic copper prices in Shanghai not only surpassed 75,000 yuan per ton—the 'survival red line' for the industry's profit and loss balance—but also soared to 104,000 yuan per ton, breaking the previous historical record of 85,000 yuan per ton set in 2006 and reaching an all-time high. Concurrently, due to the instability in the Red Sea and the Strait of Hormuz, many copper concentrate ships travelling from Africa and South America to China have been forced to take a detour around the Cape of Good Hope, extending the original 30-day journey to over 45 days, while freight and insurance costs have also doubled.

The rapid increase in copper prices has compelled numerous power grid infrastructure projects, which had already been tendered, to halt or delay due to significant budget overruns. Additionally, since the cost of copper in wires and cables constitutes a large portion of expenses, and many infrastructure contracts are fixed-price, the average operating rate of domestic cable factories fell to below 55% in May.

Agricultural inputs are facing 'cross-border impacts'

In the wake of the global resource misallocation caused by the US-Iran conflict, the agricultural input sector is experiencing substantial pressure. As a fundamental component of food production, the agricultural input industry is confronting an unprecedented 'imported cost storm.' The heavy reliance of key agricultural input products, such as fertilisers and pesticides, on petrochemical energy means that the effects of the Middle Eastern conflict have already reached the 'fields and farms.'

The production of nitrogen fertilisers primarily depends on natural gas as a raw material. The Middle East serves not only as a hub for crude oil but also as a key supplier of global natural gas and synthetic ammonia. Following attacks on natural gas facilities in Qatar and other countries in March 2026, along with export disruptions, global natural gas prices surged, resulting in a more than 40% increase in international urea prices within a single month.

Beyond nitrogen fertilisers, 15%-20% of China's potassium fertiliser demand is also met through imports from the Middle East. The blockade of the Strait of Hormuz has led to a significant reduction in the volume of potassium fertilisers arriving at ports. Given that potassium fertiliser is a non-renewable mineral resource, domestic production capacity cannot quickly make up for the shortfall in imports over time. In March, domestic spot prices for potassium fertilisers spiked due to urgent inventory shortages, with a cumulative increase exceeding 25% in just one month.

Benzene, toluene, and xylene, which are extensively used in pesticide synthesis, are aromatic compounds produced from crude oil refining. In May, the prices of these essential raw materials jumped by over 30% due to rising crude oil prices.

Herbicides, such as glyphosate and glufosinate, are highly dependent on basic aromatics. In May, the uncontrolled price surge of 'three benzenes' forced herbicide raw material prices to rise, with a monthly increase surpassing 25%. 

Insecticides involve more synthesis steps than herbicides and have stricter purity requirements for intermediates. The sharp fluctuations in aromatic prices have led downstream intermediate manufacturers to suspend production due to their inability to secure profits. This has resulted in a shortage of efficient insecticide spot supplies in the market, creating a dual premium situation characterised by 'expensive raw materials' and 'scarce spot goods,' ultimately causing insecticide prices to rise by over 20% in May. 

The period from March to May is crucial for spring planting in northern China and summer management in the south. The increase in agricultural input costs has forced an additional investment of nearly 100 yuan per mu of land, which not only directly eats into the already slim profits of grain farmers but also raises the possibility of reduced grain production due to related 'input reductions,' posing a serious challenge to China's food security this year. 

Analysts point out that in today's highly interconnected global economy, conflicts in the Middle East are no longer distant geographical events. Every fluctuation in oil prices and every shipping route blockade resulting from the US-Iran conflict ultimately translates into layoff notices from factories thousands of miles away, flight cancellations from airlines, and deficits in farmers' accounts. Under the combined pressures of uncontrolled raw material prices and supply chain disruptions, the Chinese economy may seem to be 'standing by,' but in reality, it is already 'caught in the fire.' 

(First published by the People News) △