CITIC Securities: Profit improvement in the refining and chemical industry and the resonance of "anti-involution" clearing, bottom recommendation

According to the Zhitong Finance APP, CITIC Securities has released a research report stating that the current petrochemical industry is at the bottom of costs, profits, and inventory levels, and may be catalyzed by "anti-involution" policies, with demand expected to improve. They strongly recommend key companies in the private large-scale refining industry.

The main points of CITIC Securities are as follows:

"Anti-involution" is expected to promote the elimination of backward production capacity in the refining industry.

"Anti-involution" and stable growth requirements: In the report analyzing the economic situation and economic work at the Central Political Bureau meeting in July 2024, it was proposed for the first time to strengthen industry self-discipline and prevent "involution-style" vicious competition; the Central Economic Work Conference at the end of 2024 clearly stated: comprehensively rectify "involution-style" competition and regulate the behavior of local governments and enterprises; the "Government Work Report" in March 2025 emphasized breaking through the bottlenecks restricting economic circulation in terms of market access and exit, and factor allocation, and comprehensively rectifying "involution-style" competition. The petrochemical industry currently has a significant amount of backward production capacity and is one of the industries targeted for "anti-involution" rectification. In July 2025, the Ministry of Industry and Information Technology proposed to implement a new round of stable growth work plans for ten key industries, including steel, non-ferrous metals, petrochemicals, and building materials, to promote structural adjustment, optimize supply, and eliminate backward production capacity, with specific work plans to be released in the near future.

Policy requirements before 2025: The "Carbon Peak Action Plan Before 2030" (hereinafter referred to as the "Plan") issued by the State Council in 2021 clearly requires that by 2025, domestic crude oil primary processing capacity be controlled within 1 billion tons, and the capacity utilization rate of major products be increased to over 80%. According to the "Guidance Catalog for Industrial Structure Adjustment (2024 Edition)" issued by the National Development and Reform Commission, "200,000 tons/year and below atmospheric distillation units (excluding those in Golmud, Qinghai and Zedang, Tibet)" are explicitly listed in the "elimination" projects. According to data from the Petroleum Planning Institute, China's existing refining capacity is 960 million tons, with 4-5% of units still below 200,000 tons. Independent refineries currently have low capacity utilization rates; according to Baichuan data, from August 8 to 14, the capacity utilization rate of independent refineries in China was 56.55%, an increase of 0.36 percentage points week-on-week; the capacity utilization rate of main refineries was 82.65%, an increase of 0.26 percentage points week-on-week. Given the current low capacity utilization of local refineries and the policy requirement to eliminate production capacity below 200,000 tons/year, there is a possibility of some clearance in the local refining industry.

"Anti-involution" may further promote the clearance of production capacity: According to the website of the All-China Federation of Industry and Commerce Petroleum Industry Chamber, to implement the decisions and deployments of the State Council, the General Office of the Ministry of Industry and Information Technology, the General Office of the National Development and Reform Commission, the General Office of the Ministry of Ecology and Environment, and other five departments recently issued a notice on conducting a baseline assessment of old facilities in the petrochemical industry, clearly stating the need to carry out baseline assessments of old facilities in the petrochemical industry. The assessment targets mainly include production facilities in the petrochemical industry that have reached their designed service life or have been in actual production for more than 20 years as of May 30, 2025. The main items of the baseline assessment include the basic situation of old facilities, safety assessments, and other evaluations. The basic situation refers to the number of old petrochemical facilities in the region, facility names and scales, enterprise pollutant discharge permit numbers, industry affiliation, production site, whether located in recognized chemical parks, production start time, designed service life, etc Under the requirement of "anti-involution," there is a possibility of further elimination of backward and underutilized capacity in local refineries, and continuous attention should be paid to policy requirements and local government implementation.

Ethylene supply and demand gradually oversupplied, old capacity urgently needs to be eliminated.

According to Baichuan Yingfu data, from 2020 to July 2025, ethylene capacity expanded from 33.73 million tons to 58.29 million tons. In terms of demand, from January to July 2023-2025, consumption was 47 million, 45.08 million, and 29.17 million tons respectively, gradually shifting from insufficient capacity to an oversupply trend. High-end polyolefin products still need to be imported, and capacity needs structural improvement. According to the petrochemical industry’s 14th Five-Year Plan: starting from 2020, the expansion of refining, PX, and ethylene project capacity will be strictly controlled. In 2022, the National Development and Reform Commission notified that it requires the acceleration of the elimination and exit of domestic ethylene units with a capacity of 300,000 tons/year and below in the next three years. The mainstream scale of single ethylene units in China is 800,000 to 1.4 million tons/year, with about 30 ethylene cracking units of 300,000 tons/year and below, accounting for about 9% of the capacity. In the current situation of capacity oversupply, backward small capacity is expected to be eliminated first.

The large refining and chemical industry is improving profitability, bottom recommendation.

According to data from the Petrochemical Federation, the total profit of the petroleum and chemical industry in 2023 decreased by 20.7% year-on-year, and is expected to decrease by another 8.8% year-on-year in 2024, with a further decrease of 10.1% year-on-year in the first five months of this year. The petrochemical industry is currently at a stage of cost bottom, profit bottom, low inventory, and may have "anti-involution" policy catalysis, with demand expected to improve, strongly recommending key companies in the private large refining and chemical industry.

1. From the cost side, the supply and demand of crude oil are in a loose balance, the Russia-Ukraine conflict has gradually eased recently, and there have been no large-scale conflicts in the Middle East recently. It is expected that crude oil prices will maintain a low fluctuation range of $60 to $65 per barrel, and the cost side will not suppress demand, with low refinery costs opening up upward profit space.

2. In terms of the profit cycle, domestic refineries have experienced four consecutive years of downturn from 2022 to 2025, with poor profitability in main refineries, and some local refineries are losing money, with profits at a bottom state. The profitability of chemical products continues to be poor, and some chemical product units of overseas giants are suffering severe losses and gradually shutting down and exiting. The industry supply and demand are experiencing a spontaneous situation of both supply and demand deficits, with the bottom basically confirmed;

3. In terms of inventory, most downstream products in polyester, textiles, and home appliances are in a low inventory state. The replenishment demand caused by price fluctuations may drive prices to continue to rise, alleviating or improving the oversupply situation, thereby driving up chemical product prices;

4. From the policy side, there may currently be "anti-involution" policies for local refineries, promoting the elimination of backward capacity, which is favorable for private large refining and chemical enterprises. On the demand side, if real estate policies and domestic demand policies are timely introduced, demand improvement will also drive chemical product consumption. In summary, the refining and chemical industry is currently at a confirmed bottom, and if there are policy or demand catalysts, there is significant rebound space, actively recommending.

5. From the enterprise perspective, private large refining and chemical capital expenditures are basically coming to an end, and they are in the process of continuous profit improvement. Balance sheets are gradually being repaired. According to announcements from various companies, Hengli Petrochemical's new capacity will end in 2025; Rongsheng Petrochemical's holding Zhejiang Petrochemical's new capacity is expected to end in 2027, and Eastern Shenghong is expected to complete new capacity production within 1-2 years It is expected that the large capital expenditure cycle of private refineries is about to bottom out, and the debt-to-asset ratio is expected to gradually decline, with enhanced dividend expectations.

Risk Factors:

Policy implementation falling short of expectations; continued deterioration of domestic demand; overseas tariff disruptions; significant rise in crude oil prices; overseas demand falling short of expectations