Debon Securities: Short-term domestic polyurethane demand is recovering under the industry's drive, and China's chemical industry is expected to achieve a green cost advantage in the future

According to the Zhitong Finance APP, Debang Securities released a research report stating that under the pressure of global chemical product demand, China was the only region to achieve positive production growth in 2023, according to BASF statistics, reflecting the comparative advantages of the Chinese market in terms of market and cost. In addition, the polyurethane business is also trending towards green development. In October 2023, BASF successfully produced the world's first biomass-balanced (BMB) MDI and announced in January of the following year that its monomer business unit would collaborate with Asahi Kasei on a biobased MDI strategic partnership in synthetic leather applications, continuously supporting the green transformation of the polyurethane business. Considering the impact of the EU carbon tax, the firm believes that China's chemical industry is expected to achieve a transition from cost advantages to green cost advantages in the future, creating more excess returns for enterprises. Debang Securities' main viewpoints are as follows: Introduction: MDI is one of the chemical products with the highest technical barriers, showing an oligopolistic pattern globally, with major production capacity and core technology mainly held by four overseas giants (BASF, Covestro, Huntsman, Dow) and domestic company Wanhua Chemical, with these five companies accounting for over 90% of total production capacity. In this article, the firm will start from the recent financial situation of the five major polyurethane producers to forecast the supply and demand pattern and development trends of polyurethane in the next three years. From the perspective of financial statements, companies' pricing power is gradually strengthening. Through analysis, the firm found that only Wanhua Chemical effectively smoothed the cyclical volatility with excellent cost control, while the other four overseas polyurethane producers have generally faced operational pressure in recent years, with 2023 revenues down 20% to 30% year-on-year, and net profit margins and ROE indicators showing a significant downward trend over the past three years. In addition, the cost-saving plans and asset optimization measures initiated by overseas companies also reflect the deterioration of their financial situations. Considering that the profitability of polyurethane products has been at a low point for some time, the firm believes that the current demand for companies to concentrate on price recovery may gradually strengthen, particularly for Covestro and Huntsman, whose core business is polyurethane. Given the highly concentrated supply of MDI/TDI, companies can easily form a collective pricing power, and the current bottoming out of inventories for some products is expected to further support the pricing logic and promote profit improvement. Based on corporate vision assumptions, polyurethane supply and demand may improve. In the outlook for polyurethane demand from several major producers, the firm found that in the short term, domestic demand is recovering driven by industries such as home appliances, automobiles, and formaldehyde-free boards, while overseas demand, especially in the construction sector, remains under pressure. In the long term, companies maintain a stable optimism about polyurethane demand, with Covestro predicting long-term average growth rates of 6% for MDI and 3-4% for TDI. Based on the vision assumptions of the aforementioned companies, the firm predicts the supply and demand balance for polyurethane over the next three years: ① MDI: On the supply side, new production capacity is very limited, with attention on Wanhua's 600,000-ton progress in Ningbo in 2025 and BASF's 200,000-ton project in the U.S. in 2026. On the demand side, the main application areas for polymer MDI, such as white goods and automobiles, are expected to continue benefiting from domestic replacement policies and companies' proactive overseas strategies, achieving year-on-year growth; emerging fields such as formaldehyde-free boards and refrigerated containers are expected to maintain high growth rates under market promotion and industry trends; the construction sector is also expected to see a recovery in the final year of the 14th Five-Year Plan The downstream of pure MDI is mainly concentrated in the textile and apparel sector, which is expected to see a demand rebound under the policy of promoting domestic demand. Additionally, the expansion cycle of spandex and other materials will further drive the demand for upstream MDI. In summary, the bank expects the domestic MDI supply-demand differences for 2025-2027 to be -160,000/-20,000/-320,000 tons respectively. ② TDI: On the supply side, the trend is expected to show characteristics of overseas facilities exiting and domestic leaders expanding production. Among the new capacities in the next three years, only the 360,000 tons from Wanhua Fujian is relatively certain, expected to be completed in 2025; while Mitsui Chemicals plans to reduce its capacity by about 78,000 tons in 2025. With a more orderly industry expansion, the concentration is expected to further increase, and the structure is expected to be optimized. On the demand side, mainly soft foam materials, with end-users concentrated in the soft furniture sector, which is expected to benefit from the increase in soft furniture production, maintaining an upward trend in demand. The bank expects the domestic TDI supply-demand differences for 2025-2027 to be -60,000/-20,000/-100,000 tons respectively. Related targets: Wanhua (600309.SH), Cangzhou Dahua (600230.SH), etc. Risk warning: The progress of enterprise production may not meet expectations, downstream demand may not meet expectations, changes in domestic and foreign policies, significant fluctuations in energy prices, etc