According to Sina Finance, Petrochemical profits are affected by the dual factors of ‘rising costs and tightening supply’; large-scale refining and petrochemical enterprises are more resilient or have a more comprehensive industrial chain;

within China’s chemical industry, the phase-out of independent refiners is accelerating, large-scale refining and petrochemical enterprises are demonstrating resilience, and the coal chemical sector is benefiting.

Rising uncertainty in raw material supply and a significant increase in costs are causing substantial disruption to independent refiners, accelerating the exit of small and medium-sized enterprises;

Petrochemical profits are being affected by the dual factors of ‘rising costs and contracting supply’; large-scale refining and petrochemical enterprises are demonstrating greater resilience due to their more comprehensive industrial chains;

The coal chemical sector is benefiting from rising product prices, and profits may see a marked improvement.

We believe that the US-Iran conflict and disruptions to shipping through the Strait of Hormuz have reduced the stability of Middle Eastern crude oil supplies, leading to significantly increased uncertainty regarding raw material supply and cost pressures for local refineries, particularly those in Shandong. The reliance on discounted crude from non-mainstream sources such as Iran, coupled with a procurement structure dominated by spot purchases, has exposed local refineries to considerable vulnerability in the face of energy shocks. Whilst the conflict persists, Shandong’s independent refiners’ refining operations will suffer across-the-board losses; even if the conflict subsequently eases, oil prices are unlikely to return to pre-conflict levels in the short term and are expected to fluctuate at relatively high levels for the remainder of the year. We believe that widespread losses coupled with increased uncertainty over raw material procurement will accelerate the exit and consolidation of small and medium-sized independent refiners. National policy has set clear phase-out targets for small refineries with an annual production capacity of less than 2 million tonnes, whilst requiring refineries with a capacity of 2–5 million tonnes to optimise and upgrade through capacity reduction and replacement, as well as mergers and reorganisations; no new independent small-to-medium-sized capacity is permitted. Against a backdrop of high oil prices and tightening feedstock supplies, marginal small and medium-sized local refineries face dual pressure for elimination from both policy and market forces.

We believe that whilst the stability of raw material supplies for integrated refining and petrochemical enterprises is protected to some extent by long-term contracts, procurement prices are still facing a significant rise. Compared to independent refiners, integrated refining and petrochemical enterprises possess a certain degree of resilience in their raw material procurement. Major private refining and petrochemical firms such as Rongsheng and Hengli have signed long-term supply agreements with major oil suppliers such as Saudi Aramco, offering relatively greater assurance regarding the stability of raw material supply. However, against the backdrop of ongoing geopolitical conflicts in the Middle East, risks of delivery delays and rising transport costs remain. In terms of supply chain resilience, Saudi Arabia’s long-term contract supplies can bypass the Strait of Hormuz via the East-West Pipeline (Petroline) and the Port of Yanbu. The East-West Pipeline has a designed crude oil transport capacity of approximately 7 million barrels per day, whilst the Port of Yanbu has a loading capacity of approximately 4.5 million barrels per day. Currently, both channels are operating at full capacity, presenting an objective bottleneck in terms of crude oil transport capacity. Regarding the pricing mechanism, Saudi Aramco uses the OSP (Official Selling Price) formula to price its long-term crude oil contracts for Asia (including China): OSP = (Platts Dubai spot average price + DME Oman futures average price) ÷ 2 + fixed/monthly premium or discount. The core of the pricing mechanism is the “benchmark average price plus premium or discount”. Under this long-term contract mechanism, which guarantees volume but not price, procurement costs remain closely tied to international benchmark oil prices, meaning that enterprises’ production costs continue to be significantly affected by fluctuations in global energy prices.

We believe that the profit margins of petrochemical enterprises amid the US-Iran conflict are affected by the dual factors of “rising costs and contracting supply”, with price differentials evolving differently across various segments of the industrial chain. Large integrated refining and petrochemical enterprises, owing to their more comprehensive industrial chains, may demonstrate greater operational resilience amidst cost fluctuations, whilst downstream chemical product enterprises, due to impeded cost pass-through and limited scope for price increases, may face more pronounced cost pressures. Although costs have risen significantly, the supply of certain global chemical products has contracted due to attacks on Middle Eastern facilities, reduced operating rates at Asian refineries and disruptions to shipping through the Strait, thereby supporting price differentials for relevant products. Profit divergence between products is expected to be pronounced. For instance, Iran is the world’s largest methanol exporter, with the Middle East accounting for approximately 35% of global seaborne methanol trade; Iran’s urea production capacity also stands at around 10 million tonnes, and the conflict has widened the global supply gap. Products such as methanol, urea and olefins have been significantly affected by the disruption to Middle Eastern production capacity; following the conflict, spreads have widened considerably, and profit levels for the year may recover. In contrast, end-use chemical products targeting highly competitive consumer markets such as textiles and plastics have limited pricing power, and rising costs may directly squeeze profit margins. We believe that large integrated refining and chemical enterprises, leveraging their full industrial chain from refining to chemical products, coupled with the domestic industry’s efforts to ‘counter-cannibalisation’ by phasing out outdated capacity and controlling new capacity additions, will be able to some extent to utilise upstream profit margins to offset cost pressures on downstream products amidst rising raw material prices.

We believe that coal-based chemical enterprises will benefit significantly from the current surge in energy prices, with improved annual profitability and a likely reduction in financial leverage. Against the backdrop of sharply rising crude oil prices, coal—as an alternative energy source and chemical feedstock—has seen price increases significantly lower than those of crude oil. The widening spread between oil and coal prices has created a clear window of cost advantage for coal-based chemical enterprises. As of the end of March 2026, the cost advantage of coal-to-olefins production stood at nearly 4,000 yuan per tonne. We anticipate that even if the conflict eases somewhat, oil prices are unlikely to return to pre-war levels in the short term, and it will take time to resolve the global supply shortfall in chemical products. Consequently, coal chemical enterprises are expected to maintain healthy profit margins, thereby driving down financial leverage; however, long-term improvement in the sector’s performance remains dependent on a recovery in demand and optimisation of the supply landscape. Furthermore, as some coal enterprises have simultaneously expanded into coal chemical operations, the improved profitability of the chemical segment will also provide a valuable boost to their overall cash flow.

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