Cailian Press App learned that Donghai Securities released research reports stating that reviewing the petrochemical industry cycle since 2000, under the background of economic globalization, the trend of regional petrochemical indices is highly correlated and convergent with the trend of crude oil. However, with the development of deglobalization, regional trends have started to diverge. Since 2020, domestic ethylene production capacity has entered a second period of rapid growth, and China's new ethylene production capacity is expected to have a cost advantage globally. With the Fed initiating an interest rate cut cycle, the current petrochemical cycle has basically reached its bottom, entering a phase of capacity replacement and price exploration, and is expected to enter a recovery phase in the second half of next year as global demand improves.

The main points of Donghai Securities are as follows:

Reviewing the petrochemical industry cycle since 2000

Generally, the petrochemical cycle lasts around 7 years. During the uptrend phase, extreme events may bring short-term downturns but do not alter the cyclical logic; during the downtrend phase, major negative events will accelerate the cycle and often accompany the accelerated elimination of outdated production capacity, bringing the next round of recovery closer.

Under the background of economic globalization, the trend of regional indices is highly correlated and convergent with the trend of crude oil, but with the development of deglobalization, regional trends have started to diverge. Generally, due to the significant impact of the U.S. dollar repatriation cycle on the global economy, the Fed's initiation of an interest rate cut cycle often signifies the bottom of a petrochemical cycle.

China's new ethylene production capacity is expected to gain a global cost advantage.

Since 2020, domestic ethylene production capacity has entered a second period of rapid growth. Compared to outdated international production capacity, China's mainly new/upgraded ethylene production capacity has various advantages, including: lower operating costs (technological advancements, Industry 4.0), lower raw material costs (heavy oil cracking, ethane cracking, etc.), updated equipment requiring shorter maintenance periods, leading to the gradual shift of domestic new ethylene production capacity average cash cost towards the left end of the cost curve.

According to calculations, by 2027, with Brent oil price at $65 per barrel, the average cash cost of new/upgraded ethylene production capacity in China is approximately $688 per ton, already positioned on the left side of the cost curve. Some ethane cracking capacity costs even reach the lowest global range. The cost advantage of MTO ethylene production capacity mainly depends on regional coal prices and equipment scale advantages.

With the Fed starting an interest rate cut cycle, the current petrochemical cycle has basically reached the bottom, entering a phase of capacity replacement and exploring bottom oil prices. In the future, with the improvement of global demand, it is expected to enter a recovery phase in the second half of next year.

Overall, Brent oil price is expected to be supported in the short term at $65 per barrel, with short-term geopolitical conflicts continuing to provide some support for oil prices. Long-term crude oil is greatly influenced by demand; with further Fed rate cuts, the risks of crude oil correction increase. It is anticipated that Brent will fluctuate between $55-80 per barrel throughout the next year. In the short term, the domestic refining industry will benefit from the time difference in finished oil price adjustment mechanisms. Downstream, the filament production capacity and inventory cycle have basically reached the bottom, while polyolefin still faces issues of capacity and demand mismatch, with overall rebound relying on external demand recovery.

Investment advice:

It is recommended to focus on domestic leading companies with integrated high-quality oil & gas resources, strong risk resilience, such as PetroChina (601857.SH), Sinopec (600028.SH), etc.;

Invest in companies with strong advantages in importing ethane to produce ethylene and related targets such as Satellite Chemical (002648.SZ);

Develop the COTC industry for transformation and upgrading, with high yield and low cost, focusing on Hengli Petrochemical (600346.SH);

Ningxia Baofeng Energy Group (600989.SH) has the advantage of large-scale coal-to-olefin production.

Jiangsu Eastern Shenghong (000301.SZ), Hengli Petrochemical (600346.SH), Rongsheng Petrochemical (002493.SZ) and others actively layout new materials business to develop ethylene demand and profit.

Previously oversold with low PE, PB features, potential future benefit from overseas filament demand recovery include Tongkun Group (601233.SH), Xinfengming Group (603225.SH), etc.

Risk warning: Risk of capacity not meeting expectations; Risk of raw material price fluctuations; Risk of geopolitical issues; Downstream demand falling below expectations.