A research report from Guolian Minsheng Securities Company Limited suggests that the chemicals sector is building a foundation for a fundamental bull market. In the short to medium term, this is driven by substantial physical capacity losses stemming from the U.S.-Iran and Russia-Ukraine situations. Over the medium to long term, the "dual carbon" goals are leading to the exit of outdated production capacity.

From a short to medium-term perspective, 73 global chemical companies have estimated repair completion timelines ranging from 2027 to 2030. This supply loss is independent of factors such as whether certain straits are open or oil price levels. The firm believes that barring scenarios like the 1980 Iran-Iraq conflict (which caused a -9.9% demand shock) or the 2020 public health event (a -8.9% demand shock), a supply-demand gap will rigidly persist. This gap is not influenced by the opening of straits or high or low oil prices.

Looking at the medium to long term, the strengthening of "dual carbon" assessments means supply constraints in the chemical industry are continuously intensifying. The key viewpoints from Guolian Minsheng Securities Company Limited are outlined below.

Areas of Demand Exceeding Expectations

Demand from AI computing infrastructure and the energy storage industry is maintaining rapid growth, driving accelerated demand release for high-performance electronic materials and new energy materials. The upgrade of AI servers towards higher speed, frequency, and computing density imposes greater performance requirements on upstream PCB materials like high-end electronic cloth and electronic resins. Product iteration and domestic substitution are expected to jointly unlock growth potential. Meanwhile, the growth in global energy storage installations is anticipated to boost demand for lithium battery materials such as lithium hexafluorophosphate. Given the high industry barriers and relatively limited supply increments, the supply-demand balance for related products is expected to remain tight. Leading companies with technological advantages, stable supply capabilities, and a focus on high-end products are likely to benefit first.

Directions of Supply Disruption Coupled with Demand Recovery

Overseas refining and chemical capacities are experiencing load reductions or exits due to geopolitical disturbances, high costs, and prolonged low capital expenditure. The pace of new capacity additions in China's petrochemical industry chain is also gradually slowing. On the demand side, recovery is expected alongside improvements in textile and apparel, packaging, automotive, and general manufacturing activities. Reduced new capacity for PX, combined with support from blending demand, is expected to maintain profitability at a favorable level. For PTA and polyester filament, the supply-demand structure is poised to improve, driven by slower capacity expansion and industry efforts against excessive internal competition. Refining, olefins, as well as coal chemicals, soda ash, organic silicon, and caprolactam are also expected to benefit from overseas supply contraction, the exit of outdated domestic capacity, and the recovery of end-user demand. It is advisable to focus on integrated industry leaders with complete supply chains, strong cost-control capabilities, and the potential to achieve significant profit elasticity during the demand recovery process.

High-Profile Cyclical Product Segments

Some cyclical chemical products already exhibit characteristics such as relatively inelastic demand, high global supply concentration, limited new capacity, and low inventory levels. This tight supply-demand balance is expected to support high price and profit levels. Potash fertilizer demand is underpinned by global food security and increased agricultural investment, but supply is concentrated, and new project construction cycles are long, leading to relatively limited new supply release. Methionine demand is growing long-term with the expansion of global farming scale and increased feed additive ratios; the industry is highly concentrated, with supply disruptions and rising costs further enhancing price elasticity. Additionally, high-quality oil and gas resources also benefit from global energy supply constraints. Focus is recommended on leading cyclical product companies possessing resource advantages, low-cost capacity, strong pricing power, and stable cash flow.

Overseas-Oriented Chemicals Segment

The restructuring of global trade flows, the exit of high-cost overseas capacity, and the rising competitiveness of Chinese chemical enterprises are creating new opportunities for market share expansion for companies with globalized production and distribution layouts. In the tire industry, against the backdrop of strengthened trade barriers and anti-dumping policies in Europe and the U.S., the scarcity of overseas capacity already built by Chinese companies in regions like Southeast Asia has further increased. Leading enterprises with overseas production bases, global customer certifications, and advantages in brand channels are well-positioned to capture order transfers and increase overseas market share. Simultaneously, domestic chemical companies are continuously enhancing their global competitiveness in fine chemicals, new chemical materials, and other export-oriented chemical products, leveraging advantages in complete industry chains, scale and cost, engineering construction, and stable delivery. It is advisable to focus on chemical industry leaders with well-established overseas capacity layouts, strong local operational capabilities, outstanding ability to navigate trade barriers, and extensive global customer resources.

Investment Recommendations

It is suggested to focus on: (1) Leaders in high-carbon emission industries; (2) Upstream oil and gas leaders; (3) Materials related to AI and lithium batteries in the area of demand exceeding expectations, such as electronic cloth, electronic resins, lithium hexafluorophosphate; (4) High-profile cyclical products such as potash fertilizer and methionine; (5) Targets in sectors experiencing reduced internal competition, such as organic silicon, soda ash, PTA, caprolactam, and pesticides; (6) Leading tire companies with globalized layouts in the overseas expansion segment.

Risk Warnings

Risks include tariff uncertainty; risks associated with a global macroeconomic downturn; mismatch risks arising from global industrial chain rebalancing; risks of significant commodity price volatility; risks related to international trade and industry policies; risks of rising environmental protection costs; and production safety risks.