Key Takeaway:

In the first half of the year, geopolitical tensions in the Middle East delivered a sharp short-term shock to the petrochemical market, resulting in an overall environment of weak supply and demand. At the same time, heightened geopolitical risk premiums pushed crude oil prices higher, while disruptions to Strait of Hormuz shipping constrained access to feedstocks, leading some chemical plants to reduce operating rates or shut down. This rapid tightening of market supply, coupled with downstream panic‑driven stockpiling, drove petrochemical prices sharply higher. Integrated refining and petrochemical players such as Hengli and Shenghong leveraged their supply-chain advantages and previously accumulated low‑priced crude oil inventories to demonstrate robust profitability.

In the second half of the year, despite the traditional peak season and restocking demand, the industry’s fundamentals remain challenging, given the substantial capacity additions from projects such as Huajin–Aramco and Tarim Phase II. Meanwhile, with U.S. midterm elections approaching, should tensions in the Middle East ease, oil prices are likely to trend lower on a volatile basis compared with the first half. Consequently, petrochemical product prices will gradually decline under downward pressure from supply-and-demand dynamics, keeping the sector under sustained strain.

First-Half Review

Supply has tightened rapidly, with performance diverging across routes.

In the first half of the year, the pace of new domestic capacity commissioning slowed, with only a handful of projects—such as BASF’s (Zhanjiang) integrated site and Wanhua Chemical’s Phase I technical upgrade—coming online. Meanwhile, some projects were delayed due to factors including raw material supply.

On the production front, since March, disruptions to shipping through the Strait of Hormuz and tight raw-material supplies have led many domestic oil‑based facilities to shut down for maintenance, operate at reduced capacity, or even suspend operations temporarily—particularly those that rely on externally purchased naphtha. At Gulei Petrochemical, plant shutdowns for maintenance began in March, while the cracker units at Wanhua Chemical, CNOOC Shell, ExxonMobil, and other companies saw a sharp decline in operating rates, with March utilization hovering around 60%. By contrast, private refining and petrochemical players such as Hengli and Shenghong maintained flexible procurement strategies; benefiting from low‑priced feedstock inventories built up prior to the Middle East geopolitical tensions, they were able to keep their plants running at full capacity.

Domestic coal‑chemical and ethane‑cracking facilities, benefiting from cost advantages, are operating at full capacity, thereby partially offsetting shortfalls in domestic supply.

On the coal‑chemical front, international coal trade has been disrupted by Indonesia’s export controls and geopolitical tensions in the Middle East. At the same time, stricter safety regulations in China’s major producing regions have slowed the ramp-up of raw‑coal capacity, while coal arrivals at coastal ports have continued to decline. With overall spot supply remaining tight, domestic thermal‑coal prices have risen steadily. As of end-June, the average spot price for 5,500 kcal/kg thermal coal at Huanghua Port had increased by RMB 100 per ton compared with levels before the Middle East crisis—roughly a 13% rise—far less than the sharp surge seen in naphtha prices over the same period. Meanwhile, producers such as Guoneng and China National Coal Group, which operate their own mines, enjoy controllable input costs, further accentuating their cost advantages relative to companies that rely on imported coal.

On the ethane‑based route, U.S. ethane supplies are ample and prices have remained relatively stable, with ethane cracker margins at elevated levels and strong purchasing momentum among producers. Domestic ethane imports have surged, and ethane crackers operated by companies such as Satellite Chemical have largely maintained full‑capacity operation. According to customs data, April’s ethane imports reached 1.14 million tonnes, marking a record monthly high. Overall, amid persistently high oil prices, the cost advantages of coal‑to‑chemicals and ethane‑based pathways over traditional oil‑derived feedstocks have been further reinforced.

Downstream players struggle to absorb high raw-material prices, and demand remains persistently weak.

On the consumption front, downstream demand improved in the first quarter, supported by pre‑holiday inventory buildup and other factors. However, since late February, rising raw‑material costs driven by geopolitical tensions in the Middle East have weighed on the market. At the same time, shipping disruptions in the region and tightening supply expectations, coupled with relatively weak demand, have left downstream firms unable to absorb higher-priced inputs. As a result, most companies have adopted a just‑in‑time purchasing approach, while many plants have opted to reduce operating loads and slow their procurement pace. Consequently, the industry’s average capacity utilization has declined markedly compared with the same period last year, leaving the market mired in stagflation.

In the real estate sector, the industry remains in a phase of deep adjustment, with real estate development investment continuing to post year-on-year declines exceeding 10%. The pace of new construction starts and project completions among property developers has continued to slow. From January to May, the area of newly started housing projects fell 22.6% year on year. Meanwhile, rigid demand for real‑estate‑related chemical products—such as building plastics, piping materials, insulation materials, and architectural coatings—has kept contracting, serving as the primary factor weighing on overall demand for core petrochemicals like polyolefins.

In the automotive sector, domestic demand has continued to weaken, driven by the phasing out of the 2025 half‑rate purchase tax incentive and front‑loading of consumer spending. Only the export market has remained resilient. From January to May, total domestic automobile sales—including exports—stood at 14.95 million units, down 4% year on year, further weighing on demand for resin‑, rubber‑, and related products.

In the home appliance sector, domestic end‑consumer demand has reached saturation, and replacement demand remains weak, leading to sluggish production and sales across most product categories. From January to May, total retail sales of household appliances and audiovisual equipment fell 6.9% year on year. Only traditional categories such as refrigerators, washing machines, and televisions have received modest support from overseas exports; however, the incremental growth in external demand is limited and insufficient to offset the overall shortfall in domestic end‑user demand.

Ethylene consumption in the first half of the year is expected to decline by approximately 5 percentage points year over year.

Strong cost-side support keeps product prices on the firmer side.

Following the outbreak of geopolitical tensions in the Middle East, risk premiums directly pushed up the cost center for raw materials across the entire industrial chain. Brent crude oil prices surged from around $60 per barrel at the start of the year to exceed $120 per barrel, while the average CIF price of naphtha in Japan rose to $820 per ton in the first half of the year—up roughly 30% year on year—marking a recent peak. Petrochemical facilities in Japan, South Korea, Southeast Asia, and other regions are heavily reliant on Middle Eastern naphtha; with shipping through the Strait of Hormuz disrupted and raw-material costs soaring, multiple naphtha‑cracking units in the region have voluntarily reduced operating loads or even shut down, further tightening the supply of petrochemical products.

Rising risk-aversion in the market has triggered a wave of panic‑driven restocking, and, fueled by multiple factors, petrochemical prices have surged—particularly those along the C3 (propylene) and PX (paraxylene) value chains.

In the C3 industry chain, more than 20% of China’s propylene capacity is currently produced via propane dehydrogenation (PDH) units, with 45% of the propane feedstock imported from the Middle East. The outbreak of geopolitical tensions in the Middle East has forced many PDH plants to operate at reduced loads or even shut down, leading to relatively tight domestic supplies of propylene and downstream products and supporting firm pricing. Taking polypropylene for fiber‑spinning applications as an example, the average price in the first half of the year was RMB 8,400 per ton, up 12% year on year.

On the PX industry chain, constrained by concentrated maintenance at supply‑side facilities, logistical bottlenecks, and the diversion of overseas supplies, overall supply contracted sharply, providing strong support for prices across the PX value chain. In the first half of the year, both PX and PTA (purified terephthalic acid) prices rose by more than 20% year over year. As a result, private refining and petrochemical players such as Hengli and Shenghong, leveraging their fully integrated PX–PTA upstream–downstream operations, demonstrated robust profitability. Coupled with low‑priced crude oil inventories built up prior to the conflict, these companies further amplified their overall earnings advantage. According to the latest annual report data, Hengli Petrochemical expects to post a net profit attributable to shareholders of RMB 5.33 billion for the first half of 2026, excluding non‑recurring items—a 132% year‑on‑year increase—while Dongfang Shenghong’s net profit attributable to shareholders for the first half is projected to nearly decuple compared with the same period last year.

China’s petrochemical exports are enjoying a brief window of opportunity.

Affected by disruptions to Middle Eastern shipping and tight raw-material supplies, 10% to 15% of global ethylene capacity has been operating at reduced loads or even shut down due to geopolitical tensions in the region. The situation is most severe in Asia; in April, as vessels that had already departed before the Strait’s closure gradually arrived at ports, nearly all compliant crude oil and chemical cargoes that had entered prior to the closure were consumed. Coupled with the second-quarter maintenance season and rising ocean freight rates, raw-material shortages have begun to surface in certain regions.

By contrast, thanks to its stable supply-chain advantages and diversified feedstock mix, China has emerged as a key global hub for alternative chemical‑product supplies. For some products, domestic–international price differentials have inverted, and export‑driven gains are beginning to materialize. Taking polyolefins as an example, from January to May, China’s polyethylene (PE) exports reached 1.44 million tonnes, up 247% year on year. Notably, in April, high-density polyethylene (HDPE) posted its first-ever net export position. Meanwhile, polypropylene (PP) exports totaled 1.84 million tonnes in the same period, a 56% year‑on‑year increase. The main export destinations are concentrated in Asia-Pacific markets such as Vietnam, Indonesia, India, and Thailand, accounting for more than 50% of shipments, where they help bridge regional supply gaps.

Since June, as tensions have eased, crude oil prices have declined and overseas refineries have resumed operations. Meanwhile, weak global demand has pushed down international chemical prices; coupled with a sharp surge in marine fuel prices, export shipping costs have risen sharply, gradually narrowing the arbitrage window for domestic chemical exports.

Second-half assessment

In the second half of the year, on the supply side, several large-scale projects—including Huajin–Aramco, Tarim Phase II, and Zhongsha Gulei—are expected to come on stream, adding an estimated 5.7 million tons per year of ethylene capacity and 2 million tons per year of PX capacity. Even after accounting for production cuts resulting from the retirement of older facilities, the overall increase in market supply will remain substantial. Meanwhile, most units that were sidelined in the first half due to feedstock constraints and rising costs have already completed their scheduled maintenance ahead of schedule, and fewer planned turnarounds are anticipated in the second half, making it difficult to mitigate the impact of this new capacity on the market.

On the domestic demand front, the continued rollout of special-purpose bonds and stimulus measures has provided some support. Meanwhile, with the third quarter traditionally marking a peak season for chemical demand, coupled with low inventory levels in the first half of the year, certain products still face restocking needs, suggesting that domestic chemical demand in the second half will improve compared to the first half. However, given that new construction starts and completed floor space in the real estate sector remain in negative territory, demand for related petrochemical products is unlikely to see any significant rebound.

On the external demand front, overseas demand remains weak as economic growth falters; the lagged effects of inflation and the time required for logistics to fully recover will further constrain growth. Consequently, the incremental volume of overseas orders is expected to be limited, suggesting that the strong export momentum seen in the first half of the year may not persist.

Overall, in the second half of the year, domestic supply and demand are expected to remain in a tug-of-war. Should tensions in the Middle East ease and oil prices gradually trend lower, petrochemical product prices may come under downward pressure. Looking ahead to the medium and long term, a substantial amount of new production capacity is set to come online domestically. Coupled with the waning demographic dividend and slowing investment growth, there is limited momentum for a significant surge in domestic chemical consumption. As a result, the market’s structural imbalance—strong supply and weak demand—is unlikely to reverse in the near term, and the petrochemical sector is expected to continue operating under pressure.

Geopolitical tensions persist, making it difficult to reverse the petrochemical industry’s supply‑strong, demand‑weak market structure.

Geopolitical tensions persist, and petrochemical prices rebounded again in July.

From late February to early June, the contraction in shipping traffic through the Strait of Hormuz was the central factor driving shifts in the petrochemical market. Following the outbreak of geopolitical tensions in the Middle East, the number of tankers transiting the strait plummeted, fueling persistent expectations of a tightening supply and pushing crude oil prices sharply higher. This, in turn, pushed up costs across the entire chemical value chain, prompting downstream producers to cut operating rates and actively destock in response to elevated raw-material prices, thereby shaping a cost‑driven rally in the first half of the year. By June, as tensions eased and the strait gradually reopened, average daily vessel traffic rebounded to roughly 30% of pre‑crisis levels. Market dynamics shifted toward expectations of a supply recovery, with WTI crude oil’s June average price falling 17% month over month. Accordingly, prices for various chemical products also declined in tandem as cost pressures abated, leading to a concentrated unwinding of the geopolitical premium and a gradual return of pricing to supply‑and‑demand fundamentals.

Following the signing of the June memorandum of understanding, shipping traffic through the Strait rebounded swiftly. However, as geopolitical tensions flared again in July, crude oil prices had risen by 34% by the 23rd compared with the start of the month, with market participants in the first half of the month remaining relatively restrained in their response—shifting from a “peace dividend” to a return of a “panic premium.” Yet, as hostilities escalated, the closure of the Strait of Hormuz once again led to a sharp drop in vessel transits, and concerns about tightening import‑related supply conditions grew increasingly pronounced.

Against the backdrop of recurring geopolitical tensions, the price resilience of different commodities is determined by their reliance on Middle Eastern supplies; sectors with higher dependence tend to exhibit stronger short-term support. By factoring in the share of Middle Eastern imports and the degree of reliance on the Strait of Hormuz, commodity tiers can be clearly delineated: products such as methanol, ethylene glycol, propylene, and polypropylene—highly dependent on Middle Eastern imports—are likely to enjoy stronger price support during periods of heightened geopolitical risk. In contrast, commodities like toluene, xylene, and PTA, which benefit from relatively high domestic self-sufficiency, lack the underpinning effect of supply‑side constraints and are driven primarily by oil prices and market sentiment. This explains why, during July’s price rebound, olefins outperformed aromatics—a key rationale for the relative strength of olefin price gains. Companies can tailor their safety stock levels to reflect these tiered dynamics when planning raw material procurement.

Supply and demand are the key medium- to long-term factors; the ramp-up of production capacity in the second half of the year could exert downward pressure on prices.

2026 is set to be a peak year for new capacity commissioning in the petrochemical sector, with total additional capacity for the “three olefins and three aromatics” (including PX) expected to reach 28.63 million tonnes per year. Specifically, 3.04 million tonnes per year will come online in the first half, 12.29 million tonnes per year in the third quarter, and an estimated 13.30 million tonnes per year in the fourth quarter, meaning second-half supply additions will far outpace those of the first half. Meanwhile, rising costs driven by ongoing geopolitical tensions in the Middle East are clashing with the surge in newly commissioned capacity and the resumption of production at previously shut-down units. As a result, price centers for most commodities face downward pressure in the third quarter, while in the fourth quarter, certain products may benefit from seasonal restocking or experience a temporary rebound.

The aromatics industry chain is characterized by a notably loose supply‑demand balance, with overall pressure expected to persist. In the fourth quarter, new PX production capacity will come online, and with rising import volumes, supply conditions are set to remain accommodative; prices in the second half of the year are forecast to range between $990 and $1,110 per tonne. Downstream PTA is also grappling with capacity expansion, while polyester utilization rates have fallen to near ten-year lows—by early July, polyester operating rates were down 10.62 percentage points year over year. A brief, modest rebound is anticipated during the peak textile season in August–September, but processing margins are likely to continue contracting in other periods, making a sustained upward trend for the full year unlikely.

The olefins sector may experience structural divergence, but capacity constraints will continue to weigh on the market in the second half of the year. In polyethylene, taking linear low-density polyethylene (LLDPE) as an example, prices exhibit seasonal fluctuations: demand for agricultural film remains subdued during the July–August off-season, while a stocking cycle in September–October could trigger a temporary uptick; following the peak season in November, the ramp-up of new capacity may once again put downward pressure on prices. The propylene segment shows marked differentiation: PDH units face significant operating‑rate volatility due to imported propane, whereas coal‑to‑propylene facilities, benefiting from cost advantages, demonstrate robust operational resilience; moreover, during periods of rising crude oil prices, integrated coal‑based producers enjoy considerable room for margin recovery. In the third quarter, with butadiene plants undergoing concentrated maintenance and no new capacity coming online, stable downstream demand from the tire industry provides firm support, keeping prices within a range of RMB 8,500–12,000 per tonne.

Low industry operating rates, coupled with tiered port inventory levels, further underscore a broadly accommodative supply‑demand dynamic. In the first half of 2026, the utilization rates of the 47 major petrochemical units under mainstream observation have fallen to near five-year lows for the same period. On the operating‑rate front, Shandong’s independent refineries saw their atmospheric‑vacuum distillation units average 55.72% in 2025, rising to 59.25% in the first half of 2026; by contrast, state‑owned refiners’ average utilization dipped to 80.08% in 2025, before easing to 74.22% in the first half of 2026. The underlying divergence stems from tightening crude‑oil quotas, competition from new energy sources squeezing refined‑product demand, and related policy constraints. Inventory trends have become markedly stratified: commodities with high Middle Eastern import dependence, such as methanol and ethylene glycol, continue to see destocking, while domestically sold products like gasoline, diesel, and PTA are experiencing ongoing inventory buildups. A short‑term rebound in oil prices is unlikely to alter the current inventory structure; following the release of additional supply in the second half, most products may still face continued inventory accumulation.

End‑user demand has been mixed, with limited incremental growth. The real estate sector remains in an adjustment phase, weighing on demand for chemical products such as pipes, coatings, and rigid polyurethane foam. Meanwhile, the textile industry entered its traditional off‑season in July, and autumn/winter orders are expected to recover only modestly in September–October. Under the drag of high overseas interest rates, export growth for polyester and tires is likely to remain constrained, leaving external sales insufficient to provide meaningful support to market conditions. Only the new‑energy vehicle and integrated circuit sectors have spurred some increase in demand for certain chemicals, but the scale is relatively small and may not be enough to reverse the overall weakness in downstream demand. At present, downstream manufacturers are only replenishing essential inventories, with no signs of large‑scale, concentrated stockpiling.

Second-Half Petrochemical Market Outlook and Operational Risk Alerts

In the second half of the year, overall market trends may face downward pressure. In the third quarter, geopolitical factors and supply‑demand dynamics will exert influence, while the fourth quarter could see phased recovery opportunities. In the short term, from July to September, concurrent headwinds—including geopolitical tensions and the commissioning of new production facilities—could cap upside potential; even if oil prices rebound temporarily, the incremental supply is likely to constrain further gains in chemical prices. By October, textiles and plastics typically enter a seasonal restocking phase, yet substantial new capacity will continue to come online in the fourth quarter, making sustained unilateral price increases unlikely. Looking ahead, the industry’s overarching themes are shifting toward supply‑chain security restructuring and a strategic pivot in refining and petrochemicals toward “reducing oil output and increasing chemical production.” Industry concentration is expected to rise further, with integrated leading players seeing their competitive advantages increasingly amplified.

The U.S.–Iran negotiation process and the concentrated ramp-up of new production capacity are the two key areas of concern. With geopolitical tensions in the Middle East resurging and Strait of Hormuz traffic once again constrained, rising oil prices are squeezing processing margins across the chemical industry chain. In the third quarter, plant commissioning has progressed faster than expected, and with some refineries completing maintenance and resuming operations, supply is expected to gradually increase. Even amid ongoing geopolitical support, chemical products remain under pressure. Going forward, it will be crucial to monitor the extent to which different commodities depend on Middle Eastern sources in response to geopolitical risks, allowing for the strategic buildup of safety stock. As for the impact of additional capacity coming online in the second half of the year, inventory levels should be adjusted appropriately to avoid losses from holding excessive stocks at elevated price levels.

In the first half of 2026, the petrochemical market was dominated by a Middle East geopolitical premium. Following the resumption of navigation through the Strait of Hormuz in June, pricing dynamics briefly shifted back to supply-and-demand fundamentals. However, renewed U.S.–Iran tensions in July once again drove a rebound in crude oil and chemical prices. In the second half of the year, the underlying imbalance—strong supply and weak demand—will remain largely unchanged, with geopolitical disruptions continuing to weigh on raw-material supply stability and keep costs elevated, thereby dampening industry profitability. Companies across the value chain will need to manage inventory levels prudently, implement tiered inventory controls based on their reliance on Middle Eastern sources, optimize domestic–export sales allocations, and hedge against the potential risks posed by U.S.–Iran tensions.