In the first half of this year, the pressure on supply growth in China's chemical market weakened, the structural balance between supply and demand improved, chemical product inventories gradually decreased, market prices steadily increased, and overall profitability slightly improved. In the second half of the year, as Europe and the United States gradually initiate interest rate cuts, the global manufacturing industry is expected to continue to improve with the recovery of the PMI (Purchasing Managers' Index). Under the expectations of the peak season of "Golden September and Silver October" and the stimulation of various policies, domestic demand in the chemical market will be better than in the second quarter. Crude oil prices on the cost side are expected to rise first and then fall, gradually increasing the pressure on chemical product supply and putting pressure on product prices. Among them, the supply and demand fundamentals of the chemical market in the third quarter are expected to slightly improve, with strong cost support and limited recovery of profit losses.

Looking back at the first half of 2024, the limited supply increment means industries continue to face pressure.

·Limited growth in the supply of chemical products.

In the first half of this year, some new chemical projects in China were delayed in production, resulting in an additional production capacity of 12.7 million tons/year for 24 major chemical products, a year-on-year decrease of 65% and a 36% decrease from the 19.8 million tons/year in the second half of 2023, indicating a significant slowdown in growth rate. After the Spring Festival this year, chemical plants underwent centralized maintenance, causing a decrease in operating load and gradual destocking of products, resulting in continued tight supply of some products. Among them, there is still a significant increase in polyolefin production capacity, but maintenance was concentrated in the second quarter, and some PDH (propane dehydrogenation) units temporarily reduced production and load, gradually destocking and lowering to a normal low level. Unplanned shutdowns of butadiene plants in Europe and Asia have resulted in historically low inventories at major domestic ports in recent years. The newly added production capacity of pure benzene is relatively low, and the supply and demand fundamentals remain tight. PX (p-xylene) has no new production capacity throughout the year, and the operating load remains at a high level of 81%, an increase of 7 percentage points from last year.

·The external demand for major chemical products has performed better than the domestic demand.

Since the beginning of this year, the domestic economy has continued to rebound and improve, but still faces challenges such as insufficient effective demand and weak social expectations. In the first half of the year, domestic consumption showed the characteristics of "strong necessity and weak choice". The total retail sales of consumer goods increased by 3.7% year-on-year, a decrease of 4.5 percentage points from the same period last year. Sales of commercial housing continued to bottom out, with sales decreasing by 25% year-on-year. Fixed assets investment increased by 3.9% year-on-year, basically the same as the same period last year, but infrastructure investment continued to slow down, and real estate investment continued to decline. The downstream production of plastic products only increased by 0.5% year-on-year, far below the expected 5%.

At the same time, the global manufacturing industry is recovering, and with the boost of overseas inventory replenishment demand, product export growth is gradually recovering. In June, the global manufacturing PMI was 50.9%, remaining in the expansion zone for five consecutive months. Most industries in the United States have entered the stage of replenishing inventory, and global trade sentiment has improved significantly. From January to May this year, China's total export value (in US dollars) increased by 2.7% year-on-year, with a growth rate 4.1 percentage points higher than the same period last year. Among them, the export volume to emerging economies such as ASEAN and Latin America was higher than that to developed economies such as the United States and the European Union. The export volume of plastic products, clothing, household appliances, and other products related to chemical products hit the bottom and rebounded. The cumulative export of 24 major chemical products was 9.328 million tons, a year-on-year increase of 15.1%.

·The market prices of major chemical products are rising.

In the first half of this year, crude oil prices were affected by geopolitical conflicts and OPEC+'s maintenance of production cuts, with prices fluctuating and rising. Brent crude oil prices averaged $83.4 per barrel, up 4.1% year-on-year, while market prices for 24 major chemical products increased by 5.5% year-on-year. Among them, LDPE (low-density polyethylene) polyolefin products had more maintenance and parking devices, and imports were relatively less, causing market prices to rise to a high level in nearly three years. PP (polypropylene) was affected by insufficient demand, with phased reductions in production and load, and market prices rose to the highest point of the year. The supply and demand of butadiene continued to be tight, and market prices continued to rise, driving the price of butadiene rubber to a new high in nearly five years. Unexpected shutdowns of pure benzene facilities increased, resulting in continuous tight supply and rising prices to the highest point of the year. Polyester factories jointly reduced production and pushed prices to ensure profitability, resulting in a significant increase in product prices. At the end of June, the price of polyester staple fibers rose nearly 2% year-on-year against the market trend.

·The gross profit level of the chemical industry has slightly improved.

In the first half of this year, the price index of 24 major chemical products in China increased by 100 yuan/ton compared to the same period in 2023, and the gross profit level slightly improved, but the industry as a whole still suffered losses. From a product perspective, polyolefin products such as naphtha, propane, methanol, and other raw material routes are all in a loss-making state. The production of PE (polyethylene) and PP from naphtha is losing 230 yuan/ton and 770 yuan/ton respectively, while the propane route is losing 200 yuan/ton. The comprehensive profit of the downstream of the pure benzene industry chain remains at a relatively low level. The gross profit of styrene has compressed from near the breakeven line in the same period last year to a loss of 450 yuan/ton. The loss of CPL (caprolactam) continues to expand, from a loss of 260 yuan/ton at the beginning of the year to a loss of 2500 yuan/ton in June. The profit of pure benzene remains at a good level, with a gross profit of over 3000 yuan/ton in June and an average gross profit of double in the first half of this year compared to the same period last year. The gross profit of butadiene continues to expand, exceeding 6000 yuan/ton in June, while downstream butadiene rubber continues to suffer losses, with losses exceeding 600 yuan/ton in the second quarter. The benefits of the PX-polyester chain are concentrated in upstream PX products. The loss margin of MEG (ethylene glycol) has narrowed due to the decrease in inventory, but most polyester products are losing money, forcing factories to reduce production.

Looking ahead to the second half of 2024, with a dynamic balance of supply and demand, there may be an improvement in profitability.

·The domestic economy is expected to continue its upward trend of recovery.

The interest rate cut cycle in Europe and America has begun, and global demand expectations have increased, providing support for exports. Developed economies will gradually bid farewell to the high interest rate environment caused by the most severe inflation in nearly 40 years. Multiple central banks have started to cut interest rates, and the global manufacturing industry is expected to continue expanding. The global inventory replenishment cycle will drive steady growth in domestic exports. At the same time, the domestic economy continues to pick up and improve, with equipment renewal and transformation significantly boosting fixed assets investment. The "old for new" policy has continued to release the stimulus effect on durable goods consumption, and various real estate policies continue to exert force. It is expected that the economic operation will be stable and good, the annual domestic GDP is expected to achieve the goal of 5%, and the problem of insufficient effective demand may be gradually solved.

·Weak balance between supply and demand in the chemical market.

In the second half of this year, it is expected that the domestic chemical market will add approximately 22.6 million tons of production capacity per year, accounting for 64% of the total new production capacity in the domestic chemical market for the year. Among them, the expected new production capacity in the third quarter is 6.9 million tons per year, and the pressure of supply growth is mainly concentrated in the fourth quarter. The newly added production capacity of polyethylene and polypropylene in the third quarter is 700,000 tons/year and 1 million tons/year respectively. Maintenance facilities are gradually returning, and the pressure on the supply side is gradually increasing. However, some facilities may be delayed in restarting due to economic reasons. The demand side will enter the traditional peak season from August and September, and it is expected that the supply and demand will maintain a weak balance. The expected new production capacity of pure benzene in the third quarter is only 200,000 tons per year. With the maintenance and recovery of overseas facilities, imported resources will increase, and the short-term tight supply and demand pattern may turn into a small inventory accumulation. However, as downstream new facilities such as styrene and phenol are gradually put into operation, the supply and demand of pure benzene will still return to a tight pattern in the medium term. It is expected that the production capacity of styrene will increase by 800,000 tons per year in the third quarter. Downstream ABS (a ternary copolymer composed of acrylonitrile, butadiene, and styrene), PS (polystyrene), and EPS (expanded polystyrene) are all expected to have new production capacity, and supply and demand will remain loose. There is no new production capacity for PX in the third quarter. Under the expectation of the "Golden September and Silver October" peak season, PTA (purified terephthalic acid) plant maintenance is relatively low, and polyester plant operating load may be high, leading to a dynamic balance between supply and demand.

·The overall profitability level of chemical products may slightly improve.

The market price of chemical products is expected to follow cost fluctuations during the peak season, and the overall gross profit level is expected to slightly increase. From a product perspective, the polyolefin market is in the peak demand season, but the real estate market is still struggling to get out of the slump. The growth of end consumer demand is expected to be relatively stable, and the cost side will still have support in the third quarter. The polyolefin market price is expected to continue to rise slightly, and the loss will slightly improve compared to the second quarter. The price of butadiene in the market may still show a strong trend overall and maintain a good level of profitability under the temporary tight supply and demand fundamentals. The recovery momentum of downstream tire demand for Shunding rubber is insufficient, and it is expected that the market price increase will be limited, and the gross profit level will remain basically the same as the second quarter. The market price of pure benzene is expected to weaken first and then strengthen due to changes in supply and demand, with gross profit still at a good level. Under the support of crude oil prices, the price center of the PX market may shift upward in the third quarter.

Comment: Adopting flexible business strategies to produce more efficient products.

In recent years, the growth of demand for chemical products has slowed down. At a time when the real estate market is sluggish, the concentrated production of chemical plants in China has intensified competition among chemical product manufacturers. Domestic chemical enterprises should adopt flexible business strategies, produce economically beneficial products in the upstream and downstream industrial chains, and increase production of differentiated products in more segmented application markets.

·Pay more attention to the local chemical supply chain.

Many intermediate chemicals in China can rival imported products. Domestic intermediate chemical producers generate higher net profits in the domestic market than export profits. Downstream customers are increasingly valuing reliable suppliers who can provide a variety of products, technical services, and local currency transactions. Overall, a complete chemical supply chain of "local to local" seems to be becoming increasingly common.

The business model of chemical importers relying solely on price competition seems to be facing challenges in sustainable business models. Industry insiders say that in the future, China will need various grades of chemicals and polymers. Local chemical product manufacturers such as polyethylene, polypropylene, and polyurethane will continue to expand their technology licensing scope, and their product varieties will double.

·Enhance the ability to produce different grades of chemical products.

China is capable of meeting the market demand for polypropylene at a faster pace than anticipated, including products such as high-impact block copolymers and random copolymers. The future winners will be large-scale chemical product manufacturers that can produce different grades of chemical products. This necessitates chemical companies continuously enhancing their ability to develop new products and provide technical services.

·Accelerate technological innovation in specialized materials and composite materials.

As the growth rate of domestic GDP slows down, the annual growth rate of chemical demand is gradually decreasing. Compared with the double-digit growth rate between 1992 and 2021, the annual growth rate of chemical demand in China will be at a lower level in the future. However, the annual growth rate of demand for specialized materials for chemical products and composite materials is significantly higher than that of bulk commodities.

With the continuous development of China's economy, the markets for specialized chemical products and composite materials will develop rapidly. This growth is driven by sustainability and cost efficiency. Taking the construction industry as an example, China aims to use modular materials in 25% of new houses by 2030. The achievement of this goal is inseparable from innovation in the production of chemical composite materials technology. It is understood that modular buildings in China can be constructed in about 3 months, compared to 6 months for traditional buildings, which not only saves costs but also enhances sustainability due to the recyclable materials used. The market for specialized materials for chemical products and composite materials will become a new competitive frontier for domestic chemical enterprises in the future.

Although the export prospects for specialized materials for chemical products and composite materials in China are unclear at present, it can be confirmed that China will achieve a high degree of self-sufficiency. Due to the increasing self-sufficiency of domestic bulk chemical products, foreign chemical product manufacturers are shifting towards producing specialized materials and composite materials for chemical products. It is expected that by 2030, various categories of products such as PP, PE, PX, and ethylene glycol will almost achieve self-sufficiency in China.