According to the Zhitong Finance APP, Xinda Securities released a research report stating that with the elimination of backward production capacity in the petrochemical industry, private integrated refining enterprises are expected to benefit from the increase in market share brought about by industry structural adjustments. At the same time, private integrated refining has significant advantages in scale, cost, technology, and efficiency. Considering that bulk chemical products may reach a turning point in 2026, private large-scale refining has characteristics such as low yield of refined oil and a long industrial chain of chemical products, which are expected to benefit first during the upcycle of bulk chemical profitability. Additionally, their continuous layout in new chemical materials enhances the high added value of products, providing a certain degree of risk resistance during the downturn of the industry boom cycle. The report strongly recommends leading private large-scale refiners with scale advantages, long chemical industrial chains, and rich layouts of high added value products, as well as domestic refining industry giants and leading gas station operators.

Key points from Xinda Securities are as follows:

Refining supply expansion and weakening demand, coupled with high costs, have led to the current downturn in the refining cycle.

From the supply and demand perspective, the current refining downturn cycle mainly spans from the end of the 13th Five-Year Plan to the present. During the 13th Five-Year Plan, the refining industry saw strong profitability, the rise of private refining, and increased capital expenditure on the supply side. After entering the 14th Five-Year Plan, the growth rate of domestic refining capacity has relatively slowed. In 2021, due to controlled pandemic conditions and the promotion of resumption of work and production, the supply-demand pattern improved temporarily. However, in 2022, the demand side was significantly disturbed by the pandemic, while real estate and household consumption both weakened, leading to a widening marginal supply-demand pattern. In 2023, after the optimization of domestic pandemic prevention measures, the demand for petrochemical products significantly increased, and the supply-demand pattern improved somewhat, but the increment mainly came from refined oil, with limited demand increase for chemical products affected by weak real estate investment.

The continuous expansion of refining capacity has exacerbated the surplus of refined oil, while the significant expansion of chemical raw materials has triggered supply-demand contradictions in petrochemical products.

From the cost perspective, the bank reviewed the historical relationship between polyethylene profitability and oil prices, taking polyethylene as a representative. When oil prices are below $60, changes in oil prices are positively correlated with polyethylene profitability, while when oil prices are above $60, the cost side may significantly squeeze chemical product profitability.

Compared to chemical products, refined oil has a better capacity to withstand medium to high oil prices. Under a central oil price of $80 per barrel, refining profitability performs relatively well. Overall, in recent years, due to the cost side being at a medium to high level, coupled with weak supply-demand performance, refining profitability has been compressed, leading to the current downturn in the refining cycle.

Refining profitability is mainly influenced by marginal supply-demand changes, and the industry may enter a phase of improvement in profitability in the future.

The profitability patterns of refineries in the Asia-Pacific region and domestically are mainly influenced by the marginal supply-demand difference of refining products. When marginal supply-demand tightens, industry profitability may rise; conversely, it may decline. Looking ahead, the evolution of the refining supply-demand pattern is anticipated.

From the supply side, it is expected to remain in a parallel phase of eliminating backward refining capacity and launching new refining capacity. The industry capacity structure may further optimize, and leading companies' market share is expected to continue to increase. The bank has made scenario assumptions regarding the pace of eliminating backward refining capacity. Under different scenarios, it is estimated that domestic refining capacity may peak in 2026, with peak capacity expected to be around 990-1,000 million tons From the demand side, the penetration rate of new energy vehicle sales is a key variable that affects the peak time of oil demand and the incremental space for demand before reaching the peak. In this regard, the bank has assumed different scenarios for the evolution of new energy vehicle sales penetration rates and predicted the trend of domestic oil demand changes.

Based on the comprehensive forecasts from both the supply and demand sides, it may still take time for refined oil demand to peak. Coupled with the gradual slowdown in supply-side growth, the bank expects that starting in 2025, the marginal supply and demand in refining will improve. From 2025 to 2027, refined oil profitability is expected to rise, and the market price guidance for refined oil will also become more effective, which may continuously benefit the retail channel profitability of compliant leading enterprises and state-owned enterprises. However, after 2027, as capacity elimination gradually slows down and demand shrinks accelerates, the overall marginal supply and demand in refining may decline, and the industry may enter a phase of reasonable low margins and continuous structural adjustments.

The prosperity of bulk chemicals is synchronized with the operating rate, and the bank expects that petrochemical products are likely to reach a bottom turning point around 2026.

Olefins are the most important chemical raw materials in the petrochemical field, and polyolefins are representative among bulk petrochemical products. This article mainly focuses on polyolefins as the research object for petrochemical products. From the historical profitability patterns of polyolefins, whether from a global or domestic perspective, the prosperity trend of polyolefins has a high correlation with the operating rate. For the future outlook of polyolefin prosperity, the bank aims to identify the turning point of future operating rates to determine the prosperity turning point of bulk petrochemical chemicals.

In the process of forecasting future operating rates, the bank refers to planned new production capacity on the supply side and considers the historical consumption of polyolefins, which shows a good correlation with GDP on the demand side. The bank conducts scenario assumptions based on future GDP growth rates.

Currently, demand recovery is a key factor for the turning point of the petrochemical bulk chemical cycle, and changes in its growth rate will directly impact the operating load and marginal supply and demand of chemical products, thereby affecting the cycle turning point. According to the bank's forecast results, under a neutral assumption, petrochemical bulk chemicals may still be in the stage of probing the bottom of prosperity in 2025, but the phenomenon of marginal supply surplus may improve. Around 2026, petrochemical bulk chemicals are expected to gradually emerge from the cycle bottom and welcome a prosperity turning point. In an optimistic scenario, the cycle bottom for bulk chemicals may advance to 2025; in a conservative scenario, the cycle bottom turning point may be after 2026, and the upward trend in prosperity will still need to wait.

Investment Recommendation: The prosperity turning points for the refining and petrochemical industries are expected to arrive sequentially between 2025 and 2026, and the industry will gradually emerge from the trough period, welcoming improvements in prosperity and an upward cycle.

In terms of specific investment targets, the bank strongly recommends private refining leaders with scale advantages, long chemical industry chains, and rich layouts of high value-added products: Hengli Petrochemical (600346.SH), Rongsheng Petrochemical (002493.SZ), and Dongfang Shenghong (000301.SZ). Additionally, considering that it will still take time for refined oil to peak, coupled with the elimination of backward capacity in the industry and more effective guidance on refined oil prices, the profitability of compliant leading enterprises in the refined oil sales sector is also expected to improve. The bank emphasizes recommending domestic refining industry giants and leading gas station operators, Sinopec (600028.SH) and PetroChina (601857.SH) Risk Factors: 1. Risk of demand-side recovery falling short of expectations; 2. Risk of refining obsolete capacity elimination falling short of expectations; 3. Risk of significant increase in sales penetration rate of new energy vehicles; 4. Risk of significant fluctuations in crude oil prices; 5. Risk of substantial decline in profitability of chemical products during the bottoming phase of operating rates; 6. Risk of new capacity exceeding expected deployment; 7. Risk of major international trade disputes