Smart Finance and Economics APP learned that Minsheng Securities released research reports stating that Inner Mongolia Baofeng coal-based new materials project, as the world's largest single plant scale olefin production project, is of great significance in improving the region's energy structure, promoting regional high-quality development, and facilitating industrial transformation and upgrading, with an expected contribution of 3.0% ethylene incremental capacity and 2.3% propylene incremental capacity. Domestically, olefins demand in September showed stable growth year-on-year, weakening month-on-month, with the anticipation of demand warming up following the implementation of subsequent policies. Internationally, geopolitical risk premium is unwinding, Brent oil prices have steeply declined, olefin and filament price spreads are expected to rebound. With the continuous release of additional industry capacity, it is expected that the advantages of leading companies will become more prominent.

The main points of the Minsheng Securities report are as follows:

According to reports, Ningxia Baofeng Energy Group's coal-based new materials phase 1 project with an annual capacity of 2.6 million tons of coal-to-olefins and supporting 0.4 million tons/year of implantation green hydrogen-coupled olefins project, as the world's largest single plant scale olefin production project, is expected to start trial production in November, with the potential to contribute to a 2.6% increase in olefin production capacity.

The new project will contribute 3.0% and 2.3% of incremental production capacity for ethylene and propylene, respectively.

Inner Mongolia Baofeng Energy Group's coal-based new materials project, as the world's largest single plant scale olefin production project, with an initial investment of 47.8 billion yuan, will produce 7.42 million tons of methanol, 1.5 million tons of polyethylene, and 1.5 million tons of polypropylene annually. In addition to the 2.6 million tons/year capacity of coal-to-olefins, it also includes 0.4 million tons/year of implantation green hydrogen-coupled olefins production capacity. This project is a key driver for the high-end, low-carbon, and clustered development of the coal-based new materials industry, playing an important role in improving the region's energy structure, promoting regional high-quality development, and facilitating industrial transformation and upgrading. According to Bai Chuan Yingfu data, domestic ethylene installed capacity is 50.39 million tons/year, and propylene installed capacity is 65.51 million tons/year. Therefore, it is expected that after the commissioning of Inner Mongolia Baofeng Energy Group's coal-based new materials phase 1 project, it will contribute 3.0% and 2.3% of incremental production capacity for ethylene and propylene, respectively.

Olefin demand in September showed stable growth year-on-year, weakening month-on-month, with the hope that the subsequent policy implementation will stimulate demand recovery.

According to iFind data, the ethylene consumption in the first nine months of 2024 was 25.6 million tons (consumption = production + imports - exports), a year-on-year increase of 1.9%. Among them, the growth rate slowed down in September, with a consumption of 2.84 million tons, a year-on-year increase of 1.1%, and a month-on-month decline of 4.1%; the propylene consumption in the first nine months was 26.8 million tons, a year-on-year increase of 5.8%, with the growth rate also slowing down in September, the consumption was 3.08 million tons, a year-on-year increase of 3.4%, and a month-on-month decline of 0.8%. With the government introducing a package of increment policies at the end of September and early October, the subsequent policy implementation is expected to boost demand recovery.

Brent oil prices have plummeted, and olefin and filament price differentials are expected to rebound.

Despite the ongoing tensions in the Middle East over the weekend, Israel did not attack Iran's nuclear facilities and oil fields, thus the geopolitical support for oil prices was insufficient. The geopolitical risk premium receded. According to Wind data, on October 28, the price of Brent crude oil plummeted by 5.80% to $71.64 per barrel, with the decline in raw material prices, the differentials of olefins and filaments are expected to rise. From the latest data, naphtha prices have rapidly declined, thus, on October 28, the price differentials of ethylene/propylene and naphtha expanded by 18.5%/14.5% compared to the previous weekend; polyester filament saw a smaller increase in differentials than olefins due to more intermediate products and a relatively longer conduction process, with FDY/POY/DTY differentials on October 28 expanding by 0.9%/1.2%/0.6% compared to the previous weekend.

Investment advice: With the continuous release of new industry capacity, it is expected that the advantages of leading companies will become more prominent. It is recommended to focus on Ningxia Baofeng Energy Group (600989.SH), Xinfengming Group (603225.SH), and Tongkun Group (601233.SH).

Risk warning: Risks of fluctuating raw material prices; risks of downstream demand falling below expectations.