Guotai Junan Securities: The competitiveness of overseas ethylene facilities is declining, and China's production capacity is ushering in development opportunities

According to the Zhitong Finance APP, Guosen Securities released a research report stating that the average operating rate of global ethylene in the past two years is about 80%, the average return on investment is negative, and international ethylene prices are at relatively low levels. The ethylene industry in Europe and South Korea is experiencing an intensive wave of facility exits, indicating the bottom of the ethylene cycle. China's ethylene raw materials are mainly naphtha, with coal/methanol to olefins and light hydrocarbon cracking processes complementing each other. Coal-to-olefins has formed a unique competitive advantage due to resource endowment, technological breakthroughs, and industrial chain resilience, accelerating the process of raw material lightening. It is recommended to invest in domestic leading companies with coal and ethane to olefins production capacity, including BAOFENG ENERGY (600989.SH), STL (002648.SZ), and PETROCHINA (00857).

The main points of Guosen Securities are as follows:

Ethylene is the cornerstone of the petrochemical industry chain.

As an important basic chemical raw material, ethylene has a wide variety of derivative products and is widely used in packaging, agriculture, construction, textiles, electronics, automobiles, and other fields. The upstream raw materials of the ethylene industry chain mainly include naphtha, ethane, and coal. Among the downstream derivative products, polyethylene accounts for the largest share, followed by ethylene glycol, styrene, etc. These products are further processed to manufacture plastics, synthetic fibers, rubber, and other materials. In 2022, China surpassed the United States to become the world's largest ethylene producer and consumer. According to Precedence Research data, the global ethylene market size is projected to be USD 146.22 billion in 2024, with an estimated CAGR of about 5.68% from 2025 to 2034.

Low prices and operating rates, many facilities face exit risks, indicating the bottom of the ethylene cycle.

In the past two years, the average operating rate of global ethylene is about 80%, the average return on investment is negative, and international ethylene prices are at relatively low levels. Recently, the ethylene industry in Europe and South Korea is experiencing an intensive wave of facility exits, with Europe expected to permanently lose 4.6 million tons of ethylene capacity by the end of 2027; South Korea has initiated industrial restructuring, with ten leading companies agreeing to reduce naphtha cracking capacity by 25%.

Oil prices are running at mid-to-high levels, with advantages in ethane and coal-to-olefins.

The global ethylene raw materials are showing a trend of lightening and diversification, with the proportion of light hydrocarbons such as ethane continuously increasing, weakening the dominant position of naphtha. The Middle East and North America have outstanding competitiveness in ethylene cash production costs due to their raw material advantages, while ethylene production in Western Europe and China largely relies on naphtha or mixed feed, significantly increasing cash production costs due to the influence of crude oil prices compared to the Middle East and North America. The European ethylene industry is impacted by high costs and weak demand, with capacity optimization and raw material transformation proceeding in parallel; Japan is strengthening competitiveness through deep corporate restructuring; North America's ethylene expansion is entering a phase of slowdown; and the Middle East's ethylene capacity remains stable, with ethane pricing advantages supporting its export competitiveness.

Northeast Asia's ethylene and derivatives still rely on imports.

Due to high volatility and high transportation costs, the proportion of monomer trade for ethylene is low, with derivative trade becoming the core reflection of the flow. The report uses the total ethylene equivalent corresponding to the trade volume of ethylene monomers and three main derivatives as the total ethylene equivalent, showing that North America and the Middle East lead in net export volumes, while Northeast Asia has the largest net import volume, indicating that ethylene chain products in Northeast Asia are still in short supply By 2030, China and India will be the main drivers of ethylene capacity expansion.

GlobalData indicates that during the global ethylene capacity expansion cycle from 2022 to 2030, the total ethylene capacity from new and expanded projects in Asia will exceed 60 million tons, contributing 60% of the world's new capacity share, with China and India being the main contributors. China's ethylene feedstock is primarily naphtha, and the coal/methanol-to-olefins and light hydrocarbon cracking processes complement each other. The coal-to-olefins process has formed a unique competitive advantage due to resource endowment, technological breakthroughs, and industrial chain resilience, accelerating the lightweighting of feedstock.

Investment Recommendations

The firm recommends leading domestic companies with coal and ethane-to-olefins capacity.

1. BAOFENG ENERGY: A leader in coal-to-olefins, with capacity layout in Ningxia, Inner Mongolia, and Xinjiang. The company's main business is the rapid expansion of coal-to-olefins capacity, significantly increasing capacity after the Inner Mongolia project is put into operation, with planning and advancement of the Xinjiang project;

2. STL: A leader in the ethane-to-ethylene industry, with continuous capacity expansion. The company focuses on the integrated light hydrocarbon industrial chain layout, continuously broadening the C2+C3 industrial chain, with low-cost capacity expansion contributing to profit growth;

3. PETROCHINA: A comprehensive energy leader in China, the company relies on its own ethane resources and coordinates across multiple regions to layout ethane-to-ethylene capacity.

Risk Warning: Market risk, technological risk, safety risk, policy risk, resource risk, overcapacity risk, financial risk, etc