Reversal of Difficulties in the Chemical Industry: Supply and Demand Shift, Industry Restructuring, and Expectation Rebuilding
Internally, regulators are assessing central and state-owned enterprises using the "one profit, five rates" model, guiding high-quality development with "anti-involution" policies and strictly controlling the expansion of inefficient production capacity;
Externally, trade remedy investigations involving Chinese chemical products have surged to about 40 cases, narrowing the path for digesting excess capacity through overseas expansion.
As the marginal returns of scale expansion sharply diminish, an industry-driven movement to "sacrifice part of existing market share in exchange for overall return improvement" is spreading. From self-disciplined production cuts in polyester bottle chips and silicone, to phosphorus chemical recognizing new resource value, industry logic is shifting from "volume growth" to "quality returns." This marks a "heart-pounding moment" for China's chemical industry, as it enters a new period centered on profitability quality and strengthening of leading players.
In 2026, the chemical industry is expected to witness a turnaround from adversity.
I. What happened? Internal and external pressures reach the darkest hour
As a key sector in the narrative of anti-involution and PPI rebound, chemicals may see collective reversal in 2026.
Internally, regulators assess central and state-owned enterprises via "one profit, five rates" and guide high-quality development with "anti-involution" policies, strictly controlling inefficient production capacity expansion;
Externally, trade remedy investigations targeting Chinese chemical products have surged to about 40 cases, and the path to absorb excess capacity through overseas expansion is becoming increasingly narrow.
As the marginal returns on overall industry scale expansion sharply decline, an industry-driven movement to "sacrifice some existing market share for overall return rate improvement" is spreading. From self-disciplined production cuts in polyester bottle chips and silicone, to a renewed understanding of resource value in phosphorus chemicals, the logic is shifting from "volume growth" to "quality returns."
In 2026, the chemical industry is expected to reverse its predicament. The surge in capacity over the past five years will push industry profits and valuations to a double-bottom in 2024–2025. However, with capital expenditure peaking, global power and energy constraints becoming prominent, and in-depth domestic policy intervention against involution, the supply-demand mismatch in the sector is gradually fading. The current moment is a rebound window for the chemical industry: rigid supply-side constraints and growth in new quality productivity on the demand side will jointly drive the sector into a long-cycle valuation recovery and profit rebound.
II. Why is this important? Understanding industry restructuring
The first layer of industry restructuring is on the supply side.
① The darkest moment on the supply side has passed: capital expenditure peaks and forced capacity clearing
The industry’s cyclical nature is essentially a cycle shaped by capital expenditure. The latest expansion boom in chemical production started in 2021, reaching a historical high in construction project year-on-year growth in Q4 2022 (the peak since 2012). This intensive investment entered its explosive phase of capacity release in 2024, pushing most chemical product price differentials to historical low ranges.
Data shows that fixed asset investment growth across the chemical industry began falling in Q1 2023, officially turning negative in the second half of 2025. This means the nearly four-year cycle of massive capacity expansion has come to an end. Since project approval to commissioning typically takes 2–3 years, 2026 will be an inflection point where pressure from new capacity sharply diminishes. When capital no longer blindly floods into traditional bulk chemicals, profit recovery for existing capacity will have certainty.
② "Anti-involution" policies and expected restructuring for central and state-owned enterprises
For years, Chinese chemical companies have relied on "cost advantage + market share orientation" as core competitiveness. But with the anti-involution wave, the State-owned Assets Supervision and Administration Commission has begun to change assessment guidance for central and SOEs, shifting performance indicators from "scale" to "ROE (return on equity)" and "cash flow," cutting off the logic of blind expansion. Policies around dual control of energy consumption, carbon emission quotas, and unit efficiency requirements have effectively raised industry entry barriers. This "capacity reduction" from the top policy design is more forceful and long-acting than previous market-based culling.
③ "Soft cap" on capacity under global energy constraints
A commonly overlooked logic is that electricity is becoming the "ceiling" of chemical production. PVC and other high-energy-consuming products rely heavily on cheap and stable electricity. However, with explosive growth in computational demand, developed countries face aging grids and power shortfalls while developing nations lack construction capacity. Although China leads in power supply, dual-carbon goals mean more cautious electricity distribution to high-consumption sectors. Data shows that during 2021-2025—the fastest four years of domestic chemical expansion—PVC capacity only increased by 16%, well below the average rate. This "supply rigidity" formed by energy constraints is key to sector profit recovery.
As chemical projects under construction migrate to fixed assets, depreciation and amortization stabilize for leading companies, and reduced capital expenditure means a significant improvement in free cash flow (FCF). Top enterprises are expected to optimize asset quality, converting previously accumulated share advantages into shareholder returns. Although most products are at below 30% historical percentile, stable upstream prices (coal, crude) have led to industry gross margins bottoming and beginning to recover in Q3 2025.
The other layer of industry restructuring is on the demand side. While traditional real estate chains continue to objectively drag on chemical demand, "new quality productivity" in AI, semiconductors, humanoid robots, and energy infrastructure is becoming new growth poles for chemicals.
① The "invisible support" of AI and advanced semiconductor manufacturing
2026 will be a key period for domestic production of semiconductor materials and advanced packaging materials. From wet electronic chemicals to high-end photoresists, these niche areas have gross margins far higher than bulk chemicals. As domestic supply chains are extended and strengthened, chemical companies are no longer just "brick movers," but rather the "material foundation" for advanced manufacturing.
② Resonance of humanoid robots and new materials
Demand for lightweight materials (specialty engineering plastics, high-performance carbon fibers) in robot joints, and new lithium salts, coating materials for solid-state batteries is opening up hundreds of billions in incremental market space. These segments have high technological barriers and are becoming a "safe haven" for chemical firms seeking to escape homogenized competition.
③ Global substitution from European capacity clearing
Due to high natural gas prices and environmental pressures, European chemical capacity is undergoing irreversible clearing, with Germany and other leading chemical players shifting capacity to China. European chemical operating rates remain well below long-term averages. This creates an historic opportunity for Chinese firms to penetrate global market share, transitioning from "exporting products" to "exporting technology and capital."
III. What next? Three main industry themes emerge
In 2026, the chemical industry will focus on "profit recovery" and structural growth after supply side contraction. Pay attention to three main threads and five directions.
① Thread one: Cyclical leaders with robust cost moat and high dividend potential. Focus on firms with resource advantage or highly integrated operations, e.g. Wanhua Chemical, Hualu Hengsheng. After capital expenditure cuts, these companies have strong cash flow generation ability.
② Thread two: Segments benefiting from energy constraints and supply-demand reversal. Pay special attention to sectors where power limitation or capacity expansion is extremely hard, e.g. PVC, soda ash, silicone. As demand recovers, these areas will see profit elasticity break out first.
③ Thread three: Chemical new materials deeply engaged with new quality productivity tracks. Focus on leading firms achieving technical breakthroughs and entering mass production in semiconductors, humanoid robots, and solid-state battery materials.
The turning point for chemicals is essentially the early signal of the end of disorderly capital expenditure growth and "involution." When the industry stops sacrificing profits for scale and supply constraints become the consensus, sector logic shifts from "gaming cyclical fluctuation" to "holding quality assets." In 2026, the industry will begin a new cycle of high-quality development, starting from "supply-demand rebalancing."
Focus on five main tracks likely to lead value repricing, with the following five directions expected to become the focus of this round of value re-estimation:
1) MDI: The most optimal structure and transformation of the king. In a highly concentrated industry with strategic cooperation between Wanhua and competitors, changes in leading strategic operations will greatly enhance pricing power and profit stability.
2) Petrochemicals: Giants pivot and reshape order. Strategic adjustments by SOE giants (like optimizing capacity and raising added value) will significantly improve supply-demand expectations for the petrochemical system. Privately-owned giants with similar structures will also benefit from industry ecosystem improvement.
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4) PVC: Global demand highlights strong capacity constraints. PVC is a typical high energy consumption, heavily policy-constrained sector, with minimal new capacity globally. Rapid urbanization and infrastructure development in India, Southeast Asia, and other emerging countries are driving robust import demand.
5) Polyester bottle chips: a proven recovery paradigm. As the "forerunner" in self-driven industry adjustment, the polyester bottle chip sector has successfully passed the inflection point and entered a rising prosperity channel. With high concentration and disciplined production from leaders, effective mechanisms have formed. Ongoing destocking provides a visible blueprint for recovery in other subsectors.
In summary, China's chemical industry stands at a historic watershed. The core logic driving the industry is shifting from external "beta opportunities" to internal "alpha opportunities." This paradigm revolution, driven by policy, markets, and entrepreneurial mindset, is essentially a shift from youthful scale racing to mature value cultivation and deserves attention.
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