UBS 100-Page In-Depth Report: China's Chemical Industry Stands at the Starting Point of a New Major Cycle

```

China's chemical industry is standing at the starting point of a new major cycle.

A recently released hundred-page in-depth report by UBS points out that, as capital expenditure growth slows, overseas backward production capacity accelerates its exit, and policies strictly control new capacity additions, this industry will usher in a trend reversal in prosperity after 2026.

The report states that industry profits are set to reach a historic bottom in 2025, and clear signs of recovery are now emerging. The accelerated closure of overseas, especially European, high-cost facilities, combined with spontaneous production cuts in several domestic sub-sectors, are gradually improving the supply-demand balance, providing substantial support for the restoration of chemical firms' profit margins.

Although Middle East geopolitical conflicts have increased global supply chain uncertainty in the short term, UBS believes this is just a temporary disturbance rather than a structural turning point. The situation has pushed up the benchmark price of crude oil, significantly enhancing the cost advantage of alternative production routes like coal chemicals and light hydrocarbon cracking, and driving capital towards targets with raw material advantages.

Currently, the valuation of China's chemical sector is still at a historically low level. In terms of investment strategy, market focus is turning from concerns about short-term cost inflation and supply chain disruptions to cyclical improvement, with industry leaders possessing global competitiveness, economies of scale, and significant cost advantages becoming the core direction for capital allocation.

Capital Expenditure Decline and Policy Tightening Drive Cycle Reversal

Historical data shows a high correlation between capital expenditure and profit margins in the chemical industry. High profitability usually drives capital expenditure and capacity expansion, while a significant decline in capital expenditure is often a precursor to profit recovery. UBS notes that after previous rounds of concentrated capacity investment, the growth rate of capital expenditure in China's chemical industry is slowing, which will drive profit recovery in the next one to two years.

Policy tightening is another core factor driving the current major cycle reversal. During the 15th Five-Year Plan period, the government is expected to tighten approval of new petrochemical production capacity. As the carbon peak target in 2030 approaches, new approvals for chemical capacity will become much more difficult. Meanwhile, policies of dual control on total and intensity of carbon emissions, as well as the promotion of upgrading and retrofitting of outdated capacity, will accelerate the elimination of backward production capacity.

In addition, adjustments to import and export policies are also reshaping the industry. Starting April 1, 2026, China will cancel export tax rebates for multiple chemical products, and implement controls over exports of finished oil and fertilizer. This series of policy combinations means that China's chemical industry is officially moving from an extensive stage of capacity expansion to a new cycle dominated by stock optimization and high-quality development.

Geopolitical Conflict Disrupts Supply, Cost Advantages Reshape Market Focus

Since the outbreak of Middle East conflicts, market concerns over rising costs and supply disruptions have intensified.

UBS expects Brent crude oil average prices in 2026 and 2027 to reach $86/barrel and $80/barrel respectively, higher than pre-conflict levels.

High crude oil prices directly alter the profitability of different chemical production routes.

Take basic petrochemical products like ethylene and propylene as examples. Traditional naphtha cracking routes face profit squeeze due to increased oil costs, and some newly built overseas factories are at risk of exiting due to long-term losses.

In contrast, China's coal-to-olefin (CTO) and ethane cracking (EDH) routes show significant cost advantages.

Baofeng Energy, as China's largest coal-to-olefin enterprise, directly benefits from the widening "oil-coal price gap". Satellite Chemical leverages the light hydrocarbon cracking route with imported US ethane, creating a substantial cost moat.

UBS believes that geopolitical risks will prompt companies to pay more attention to the security of raw material supplies and that expansion of naphtha-based petrochemical capacity will become more cautious. As geopolitical risks gradually ease, the main investment theme will return to fundamentals, focusing on companies able to leverage alternative raw material routes to achieve low-cost expansion.

Sub-sector Divergence, Polyurethane and Agrochemicals Show Recovery Resilience

Across more than 20 covered chemical sub-sectors, UBS points out a significant differentiation in recovery pace.

The polyurethane (PU) industry chain fundamentals continue to improve. The MDI and TDI sectors have extremely high technical and financial barriers, with a global supply oligopoly. Industry leaders such as Wanhua Chemical have strong pricing power and can support prices collaboratively during market downturns to maintain profits; future new capacity mainly concentrates among these leaders, ensuring a stable supply-demand balance.

In the agrochemical sector, pesticides and potash fertilizers exhibit strong recovery resilience. Glyphosate, as the most widely used herbicide worldwide, faces restricted new domestic capacity. Notably, in 2026 US President Trump signed an executive order to protect domestic phosphorus yellow and glyphosate production, enhancing the global strategic importance of these products.

For fertilizers, changes in China's export policies for urea and phosphate fertilizers will directly affect company profitability, while potash fertilizers will require close attention to the progress of new overseas capacity launches.

Asia Potash International, with its vast potash resources in Laos, has significant potential for output growth; NHU Company has broken overseas technical monopolies in the vitamin and methionine fields, possessing industry-leading cost advantages.

In fluorosilicone chemicals and refrigerants, third-generation refrigerant prices continue to rise under a quota system, and fundamentals remain solid. Meanwhile, driven by new energy vehicles and energy storage markets, downstream demand for electrolyte, industrial silicon and PVDF keeps growing rapidly.

By contrast, products closely related to real estate such as titanium dioxide (TiO2), PVC and soda ash face significant short-term demand and profitability pressures due to weak domestic property demand and overseas anti-dumping pressures.

Valuation at Historic Low, Focus on Industry Leaders with Global Competitiveness

UBS quantitative analysis shows the price-earnings ratio (PE) of chemical stocks is negatively correlated with chemical product prices, while the price-book ratio (PB) is positively correlated.

Currently, valuations and institutional holdings in China's chemical sector are at a trough, providing a good window for long-term capital to build positions.

UBS recommends investors adopt a long-term perspective, preferring China's chemical industry leaders with global competitiveness, integrated industrial chains and absolute cost advantages.

Risk Warning and DisclaimerThere are risks in the market, investment requires caution. This article does not constitute personal investment advice and does not take into account the unique investment goals, financial status or needs of individual users. Users should consider if any opinions, views, or conclusions in this article suit their particular situation. Investing based on this content is at your own risk. ```