Guotai Junan Securities: The State Council's executive meeting proposed to resolve structural contradictions in key industries, focusing on the pace of the exit of backward production capacity in the chemical industry

According to the Zhitong Finance APP, Guojin Securities released a research report stating that on February 10, 2025, Li Qiang presided over a State Council executive meeting to study policies and measures to resolve structural contradictions in key industries. The meeting reiterated the need to promote the exit of backward and inefficient production capacity, which is conducive to the clearing of production capacity in the process industry and optimizing the industry structure. Once there are implementable policies in the future, it is expected to drive significant changes in the cyclical sub-products. It is recommended to pay attention to bulk high-energy-consuming sub-industries such as coal chemical and phosphorus chemical industries.

The main points of Guojin Securities are as follows:

The meeting pointed out that efforts should be made from both the supply and demand sides to address structural contradictions in key industries and other issues, promoting healthy industrial development and quality upgrading. It is necessary to optimize the industrial layout, strengthen standard guidance, promote integration and reorganization, push for the exit of backward and inefficient production capacity, and increase the supply of high-end production capacity. Market regulation should be optimized, industry self-discipline strengthened, and a fair competition and survival of the fittest market order should be jointly maintained.

The chemical industry has continuously released production capacity for more than a year, and the supply pressure in the bulk sector is constantly increasing.

Since 2021, the compound annual growth rate of fixed asset investment in chemical raw materials and products in China has reached 15.9%, while the compound annual growth rate of fixed asset investment in chemical fibers has reached 13.0%. The investment growth rate has significantly exceeded the previous two phases of chemical development, leading to a substantial increase in supply pressure. As production capacity gradually transitions from the construction phase to the production phase, the supply pressure in the industry has begun to accumulate.

In 2024, the investment growth rate of fixed assets in chemical raw materials and products is still 8.6%. Although this represents a slowdown compared to the investment growth rate of the past three years, it is still significantly higher than the demand growth rate in the previous two phases. The current supply pressure in the industry continues to rise, and some bulk products have shown significant price adjustments, entering a bottom price operating range.

The meeting proposed to resolve structural contradictions in the industry and reiterated the need to promote the exit of backward and inefficient production capacity, which is conducive to the clearing of production capacity in the process industry and optimizing the industry structure.

Since the second half of 2024, the PPI of China's chemical raw materials and products industry has continuously performed below 100, showing a significant downward price trend in the industry, which has greatly squeezed the profits of enterprises within the industry. Following the introduction of the "2024-2025 Energy Conservation and Carbon Reduction Action Plan" at the end of May 2024, this meeting again mentioned the elimination of backward production capacity, indicating that policies targeting the supply side have sustained attention.

Compared to the past, the demand in this cycle has slowed down against a high base, and relying solely on natural demand growth to digest production capacity takes relatively longer. Therefore, external policies on the supply side are an important factor in shortening the industry's rebalancing time. Although this meeting did not further specify sub-tracks and products, the importance of related policies is continuously increasing.

Based on previous chemical supercycles, demand plays a stabilizing role, but the impact from the supply side is particularly important.

Whether it is supply-side reform or energy consumption control, both have a huge impact on improving the supply-demand structure of the industry and are important drivers for enhancing product price elasticity. Currently, the new production capacity in the industry is gradually entering the later stage of release, and the industry is in a bottom range of fluctuations. Some products have already entered the marginal production capacity resistance phase. If there can be changes on the supply side, it is expected to accelerate the transformation of the supply-demand structure in the industry and drive products that have entered the bottoming stage to improve profitability Under the background of significant energy consumption control, the profitability improvement of some high-energy-consuming products is expected to continue for a long period, forming an increase in central profitability.

Investment Recommendations

Although this meeting did not directly implement specific industries or tracks, the general direction has attracted attention. If there are landing policies in the future, it is expected to drive significant changes in cyclical sub-products. According to the discussions at the meeting, it is necessary to optimize industrial layout, strengthen standard leadership, promote integration and restructuring, and push for the exit of backward and inefficient production capacity. Leading quality enterprises are expected to achieve profitability improvement and market share increase, further enhancing the industry's discourse power. It is recommended to pay attention to bulk high-energy-consuming sub-industries such as coal chemical and phosphorus chemical industries, and to focus on leading enterprises such as Baofeng Energy (600989.SH), Hualu Hengsheng (600426.SH), and Wanhua Chemical (600309.SH).

Risk Warning: Risks of policy implementation, risks of new industry production capacity exceeding expectations, risks of energy consumption monitoring falling short of expectations, and risks of prolonged exit of backward production capacity, etc