China Securities Co.,Ltd.: The inflection point of the chemical industry's capacity cycle has arrived; extremely low inventories are brewing a new round of the bullwhip effect.

China Securities Co.,Ltd. released a research report stating that the profitability of the chemical industry has already moved up from the bottom, but the valuation level is constrained by oil prices and remains at a low point. At present, the conditions for the resonance of domestic and overseas chemical capacity cycles have been met. Once the inventory cycle starts, supply tightness in chemical products is imminent. The resonance of the Kondratieff downturn and the downward order cycle has catalyzed resource nationalism, and crude oil may enter a new pricing cycle. The attribute of Chinese chemicals as core assets is undervalued by the market. Asia, Africa, and Latin America entering a period of accelerated urbanization and industrialization is expected to drive shortfalls in industrial goods and help reprice China's chemical core assets. China Securities Co.,Ltd.'s main views are as follows: Domestic and overseas chemical capital expenditure is declining simultaneously, and the inflection point of the capacity cycle has arrived. China's cumulative year-on-year growth in fixed asset investment in chemicals has been negative for about 16 consecutive months. The capital expenditure growth rate of overseas sample chemical leaders fell to -28.1% in 2026H1, the lowest since 2000. Historically, every time overseas chemical capital expenditure bottomed out, it corresponded to the starting point of a bull market in Chinese chemicals. Coupled with dual-carbon constraints on capacity approvals, leaders with technological and scale advantages will continue to benefit from a rising profit center. The inventory cycle is gathering momentum, and extremely low inventories are brewing a new round of the bullwhip effect. This round of destocking has lasted more than four years, and downstream segments are in an extremely compressed state. Against the backdrop of anti-globalization raising the desired inventory level, the contradiction between "extremely low actual inventories and higher desired inventories" is where the greatest opportunity of the next major chemical cycle lies. Crude oil has entered a new resource nationalism pricing cycle, and the market needs to adapt to a higher oil price center. The core of pricing power in this round has shifted from spare capacity to transportation routes. Global inventories of crude oil, diesel, and LNG are all at low levels, and the U.S. Strategic Petroleum Reserve has fallen to its lowest since 1982; replenishing strategic reserves has higher priority than commercial restocking, which may keep oil prices in a high-level range-bound pattern for a long time. Energy security drives a new round of capital expenditure, and coal chemicals open up a cost advantage. The world may experience a capital expenditure cycle driven by energy security. Under China's resource endowment dominated by coal, coal-to-oil-and-gas is expected to become the next industrial trend that combines economic viability and energy security. The scarcity of core assets is becoming prominent, and the possibility of industrial goods inflation is brewing. The capital market has entered a stage of "punishing capital expenditure," with opportunities concentrating in leaders with good cash flow, and first movers' early positioning advantages creating a snowball effect. Asia, Africa, and Latin America entering a period of accelerated urbanization and industrialization is expected to drive demand for industrial goods and promote long-term inflation in industrial goods. Risk warnings: 1. Risk that the inflection point of the inventory cycle falls short of expectations. Currently, downstream segments are in an extremely low inventory state, but low inventories do not equal immediate restocking. If the U.S. interest rate cycle turns slowly, domestic policy stimulus is slower than expected, or exchange rate pressure in Asia, Africa, and Latin America persists, global restocking may continue to be delayed, the period of sluggish apparent demand may last longer than expected, and the time gap between the reversal of the capacity cycle and the start of the inventory cycle may lengthen. 2. Uncertainty in the direction of geopolitical evolution. If the intensity of war escalates and causes oil prices to rise sharply out of control, interest rate suppression and demand destruction may backfire on chemical profitability; if the war quickly ceases, the oil price risk premium may fade faster than expected. Both directions would change the report's projected path, and geopolitics is the largest exogenous variable. 3. Risk that the pace of advancing anti-involution and dual-carbon policies falls short of expectations. Policies such as upward transfer of capacity approval authority, expansion of the carbon market, and dual control of energy consumption are important prerequisites for the contraction of supply elasticity. If policy implementation intensity or pace falls below expectations, inefficient capacity will be cleared slowly, the industry may fall back into a cycle of capacity expansion and price competition, and the logic of a rising profit center will be weakened. 4. Risk of renewed impulse in industry capital expenditure. If corporate profit recovery triggers a new wave of investment impulse while top-level design constraints fail to keep pace in a timely manner, excess capacity may return, and the process of supply clearing may repeat. 5. Risks from European demand and trade protection. The exit of European chemical capacity gives China market share, but at the same time the probability is rising that Europe will impose additional tariffs on Chinese chemical products and set up trade barriers. If the scope of trade protection exceeds expectations, the exposure of Chinese chemical products to exports to Europe will face contraction pressure. 6. Risk related to the pace of implementation of coal chemical projects. If the oil price center moves lower or project approval and infrastructure supporting progress fall short of expectations, the realization timeline for economic advantages and the industrial trend may be postponed. 7. Risk of mismatch between market narrative and valuation. Allocation to the chemical sector requires the support of market narrative, and the timing of repricing chemical assets may lag behind the fundamental inflection point, so left-side positioning requires bearing time costs.