Internally, the regulatory authorities are assessing central state-owned enterprises with the &#34;one benefit and five rates&#34; approach and guiding high-quality development through &#34;anti-involution&#34; policies, strictly controlling the expansion of inefficient capacity;
Externally, the number of trade remedy investigations targeting Chinese chemical products has surged to about 40, and the path of overseas expansion to digest excess capacity is becoming increasingly narrow. <img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/55c5b14b-ccc5-4e69-982d-137ddb7bfe1f.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/55c5b14b-ccc5-4e69-982d-137ddb7bfe1f.png"/>
As the marginal returns of scale expansion in the entire industry sharply decline, an industry-wide conscious action of &#34;sacrificing part of the existing market share to exchange for an overall improvement in return rate&#34; is spreading. From self-disciplined production cuts in polyester bottle flakes and organosilicon to a renewed understanding of resource value in phosphorus chemicals, the industry logic is shifting from &#34;quantitative growth&#34; to &#34;qualitative returns.&#34;
In 2026, the chemical industry is expected to welcome a reversal of its difficulties. The capacity frenzy of the past five years will push the industry towards a dual bottom in profits and valuations in 2024-2025. However, as capital expenditure peaks cyclically, global energy constraints become evident, and domestic &#34;anti-involution&#34; policies deeply intervene, the shadow of supply-demand mismatch in the chemical industry is gradually dissipating. The current moment presents a rebound window for the chemical industry: the rigid constraints on the supply side and the emergence of new productive forces on the demand side will jointly drive the industry into a long cycle of valuation recovery and profit rebound.
<h2>II. Why is it important? Understanding Industry Restructuring</h2>
The first layer of logic in industry restructuring lies on the supply side.
① The &#34;darkest moment&#34; on the supply side has passed: capital expenditure peaks and the forced clearance of the capacity cycle.
The cyclical nature of the chemical industry is essentially tied to the cycle of capital expenditure. The current round of capacity expansion in the chemical industry began in 2021 and reached a historical high in the year-on-year growth rate of construction projects in Q4 2022 (the peak since 2012). This intensive investment will enter a period of explosive capacity release in 2024, directly leading to most chemical product price spreads hitting historical bottom ranges
Data shows that the fixed asset investment growth rate of the entire chemical industry began to decline in Q1 2023 and is expected to officially turn negative in the second half of 2025. This indicates that the large-scale capacity expansion cycle that has lasted nearly four years has come to an end. It typically takes 2-3 years from project approval to production, making 2026 a &#34;turning point year&#34; when the pressure from newly added capacity will significantly decrease. When capital no longer blindly flows into traditional bulk chemical products, the profitability recovery of existing capacity will become certain. <img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/0e23a4df-4e78-4622-9988-47a395e41a9f.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/0e23a4df-4e78-4622-9988-47a395e41a9f.png"/>
② &#34;Anti-involution&#34; policies and the reconstruction of expectations for state-owned enterprises
For a long time, Chinese chemical companies have relied on &#34;cost advantages + market share&#34; as their core competitiveness. However, in the wave of anti-involution, the State-owned Assets Supervision and Administration Commission (SASAC) has begun to change the assessment guidelines for central state-owned enterprises, shifting performance indicators from &#34;scale&#34; to &#34;ROE (Return on Equity)&#34; and &#34;cash flow,&#34; completely severing the logic of blind expansion in the future. On the policy front, measures such as dual control of energy consumption, carbon emission quotas, and requirements for unit energy efficiency have indirectly raised the entry threshold for the industry. This &#34;capacity reduction&#34; from top-level policy design is different from previous market-driven clearing and is more coercive and long-lasting.
③ &#34;Soft upper limit on capacity&#34; under global energy constraints
One logic that may be overlooked by the market is that electricity is becoming the &#34;ceiling&#34; for chemical production. The production of high-energy-consuming products like PVC is highly dependent on cheap and stable electricity supply. However, against the backdrop of explosive growth in computing power demand, developed countries are facing aging power grids and electricity shortages, while developing countries lack the capacity for construction. Although China leads in electricity, under the dual carbon goals, the allocation of electricity to high-energy-consuming industries is becoming increasingly cautious. Data shows that during the four fastest years of domestic chemical expansion from 2021 to 2025, PVC capacity only increased by 16%, far below the average growth rate. This &#34;supply rigidity&#34; formed by energy constraints is becoming a key driver of industry profit recovery. <img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/6382c992-22cb-4787-adf6-9a4f94d67c90.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/6382c992-22cb-4787-adf6-9a4f94d67c90.png"/> As construction projects in the chemical industry gradually transition to fixed assets, the depreciation and amortization of leading enterprises tend to stabilize, while the reduction in capital expenditures means a significant improvement in free cash flow (FCF). Leading enterprises are expected to optimize asset quality and convert the market share advantages accumulated in the early stages into shareholder returns. Although most varieties are currently below 30% of historical percentiles, the stabilization of upstream raw material prices such as coal and crude oil has led to a rebound in industry gross profit levels, which is expected to bottom out in Q3 2025.
Another layer of logic in the industry's restructuring lies on the demand side. Although the traditional real estate chain continues to objectively drag down chemical demand, &#34;new productive forces&#34; represented by AI, semiconductors, humanoid robots, and energy infrastructure are becoming new growth poles for the chemical industry
① The &#34;Invisible Support&#34; of AI and Advanced Semiconductor Manufacturing
2026 will be a critical period for the localization of semiconductor materials and advanced packaging materials. From wet electronic chemicals to high-end photoresists, the gross margins in these niche areas far exceed those of traditional bulk chemicals. With the strengthening of the domestic supply chain, chemical companies are no longer just &#34;brick movers,&#34; but rather the &#34;material foundation&#34; of high-end manufacturing. <img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/5bc5a2d1-52e1-4659-8ddf-a03d6c7bfad2.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/5bc5a2d1-52e1-4659-8ddf-a03d6c7bfad2.png"/>
② The Resonance of Humanoid Robots and New Materials
The demand for lightweight materials (such as special engineering plastics and high-performance carbon fibers) in robot joints, as well as the pull for new lithium salts and coating materials from solid-state batteries, is opening up hundreds of billions in incremental space for the chemical industry. These areas have extremely high technical barriers and are becoming a &#34;safe haven&#34; for chemical companies to escape homogeneous competition.
③ Global Substitution from European Capacity Clearance
Due to high natural gas prices and pressure from environmental policies, European chemical capacity is undergoing irreversible clearance, with leading chemical companies in Germany and other countries shifting capacity to China. The operating rate of European chemical companies continues to be below the long-term average. This presents a historical opportunity for Chinese chemical companies to penetrate the global market share. Chinese enterprises are shifting from &#34;exporting products&#34; to &#34;exporting technology and capital.&#34;
<h2>III. What to Focus on Next? Three Main Lines in the Industry Emerge</h2>
In 2026, the chemical industry will focus on &#34;profit recovery&#34; and structural growth after the contraction of the supply side. Attention should be paid to three main lines and five major directions.
<blockquote>
① Main Line One: Cyclical leaders with strong cost moats and high dividend potential. Focus on companies with resource endowment advantages or high levels of integration, such as Wanhua Chemical and Hualu Hengsheng. These companies will have strong cash flow return capabilities after capital expenditure reductions.
② Main Line Two: Subcategories benefiting from energy constraints and supply-demand reversals. Pay close attention to varieties that are limited by electricity or extremely difficult to expand, such as PVC, soda ash, and organic silicon. As demand recovers, their profit elasticity will explode first.
③ Main Line Three: New chemical materials deeply involved in new productive forces. Focus on leading companies that achieve technological breakthroughs in semiconductor, humanoid robot, and solid-state battery materials and enter the mass production stage.
</blockquote>
The reversal moment in the chemical industry essentially signals the end of the chaotic expansion of capital expenditure and high growth &#34;involution.&#34; When the industry no longer sacrifices profits for scale, and when the rigid constraints of supply become a consensus, the logic of the chemical industry will shift from &#34;gambling on cyclical fluctuations&#34; to &#34;holding quality assets.&#34; In 2026, the chemical industry will start a new cycle of high-quality development with &#34;supply-demand rebalancing&#34; as its starting point.
Focusing on five major tracks likely to lead value reassessment, the following five directions are expected to become the focal points in this round of value reassessment in the chemical industry:
<blockquote>
<ol>
<li>
MDI: The King of Optimal Structure Change. Against the backdrop of a highly concentrated industry structure and strategic cooperation between Wanhua and potential competitors, the change in the operating strategy of the leading company will greatly enhance the industry's pricing power and profit stability
</li>
<li>
Petrochemicals: Giants turn around, reshaping order. The strategic adjustments of state-owned giants (such as optimizing capacity and enhancing added value) will significantly improve the supply and demand expectations of the entire petrochemical system. Private giants with similar industrial chain structures will also benefit from the overall ecological improvement of the industry.
</li>
<li></li>
<li>
PVC: Global demand illuminates strong constraints on capacity. PVC is a typical high-energy consumption and strongly policy-constrained industry, with very limited new capacity added globally. The rapid advancement of urbanization and infrastructure in emerging developing countries such as India and Southeast Asia is bringing strong import demand.
</li>
<li>
Polyester bottle flakes: A validated recovery paradigm. As a &#34;pioneer&#34; in this round of industry self-adjustment, the polyester bottle flakes industry has successfully crossed the turning point, entering an upward channel of prosperity. Under a highly concentrated pattern, the production discipline of leading enterprises has formed an effective mechanism. As inventory continues to deplete, its recovery path provides an observable blueprint for other industries.
</li>
</ol>
</blockquote>
In summary, the Chinese chemical industry is at a historic watershed. The core logic driving the industry forward is shifting from external expansion &#34;β opportunities&#34; to internal optimization &#34;α opportunities.&#34; This &#34;paradigm revolution,&#34; driven by policies, markets, and entrepreneurial mindsets, essentially represents the industry's transition from the scale racing of youth to the value cultivation of maturity, which is worth paying attention to.


Risk warning and disclaimer
The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk.

The chemical industry is experiencing a reversal of supply and demand and industrial restructuring, and it is expected to face a turnaround by 2026. Internal regulatory policies are guiding high-quality development, while an increase in external trade relief investigations has led to a widespread conscious action within the industry, emphasizing profit quality rather than merely production growth. As capital expenditures peak and policy interventions take place, the mismatch between supply and demand is gradually improving, and the industry is expected to enter a long cycle of valuation repair and profit recovery

Reversal of the Chemical Industry's Predicament: Supply and Demand Reversal, Industrial Restructuring, Expectation Reshaping