Why has the chemical industry recently adjusted, and what is the outlook for the future?

Why do coal chemical companies benefit against the trend amid rising oil prices?

Recently, the chemical sector has experienced significant pullbacks. Upon reviewing the recent trends of the chemical sector alongside oil prices, observant investors may notice the following phenomenon:

Since mid-February, the petrochemical industry index (referring to the CSI Petrochemical Industry Index (H11057.CSI), hereinafter the same) has gently risen along with oil prices, performing well. At this time, the Brent crude oil price was approximately at $70 per barrel.

As geopolitical conflicts in the Middle East escalated sharply, oil prices began to rise rapidly. On March 2, the Brent crude oil price broke through $80 per barrel, and the chemical sector subsequently entered a period of volatility.

After the Brent oil price surpassed the $100 per barrel mark on March 12, the chemical sector showed a noticeable trend reversal.

So why has there been a significant pullback in the chemical industry recently? What is its relation to oil prices? Looking ahead, how should we view the chemical industry market? Is it still a good time to invest? Today, we will provide a detailed analysis.

Chart: Trends of oil prices and chemical indexes since the outbreak of conflicts in the Middle East

Data Source: Wind, as of March 24, 2026

1. Why has the chemical sector adjusted recently? Mainly due to risk aversion in the stock market.

Recently, there has been a significant marginal change in the market— the escalating conflict in the Middle East may last longer than previously expected, and oil price expectations may need to be raised to $100 per barrel. The delayed occurrence of risk events has led to a rapid contraction in market risk appetite, prompting stock market funds to seek safe havens. Specifically, the stock market is avoiding three risks:

(1) Avoiding the risk of “global economic recession”: Concerns that high oil prices will damage demand.

The market is worried that persistently high oil prices will drive up inflation expectations, thereby affecting interest rate cuts, forcing tighter monetary policies to persist longer, ultimately suppressing total demand and potentially leading to a recession.

(2) Avoiding the risk of “profit-taking”: Since the chemical sector had previously risen, funds choose to cash in first.

The chemical sector has seen a certain increase since the second half of 2025. As geopolitical conflicts amplify uncertainties, some profitable funds tend to lock in profits, leading to a chip structure and emotional sentiment that easily results in “rapid adjustments after rising significantly.”

(3) Avoiding the risk of “long-term high oil prices”: Concerns that downstream cannot bear the costs and price transmission is not smooth.

If oil prices remain above $100 per barrel for an extended period, some downstream product companies serving end consumers may find it difficult to pass on costs amid sluggish demand recovery, potentially opting to delay purchases or directly source lower-priced inventory, which could disrupt the price transmission chain of chemical products, forcing chemical companies to absorb the profit losses from rising oil costs.

2. Contrarian thinking: Which “real benefits” have been wrongly punished by pessimistic sentiment?

When sentiment turns excessively pessimistic, it often serves as the starting point for contrarian thinking.

In fact, the current situation is not only not a negative for some chemical companies but may actually be a positive, such as for coal chemical companies. The US-Iran conflict has driven up crude oil prices, significantly increasing the costs of oil chemical companies’ products, thus driving up the overall selling prices of chemical products. Meanwhile, domestic coal prices remain relatively stable, allowing coal chemical companies to utilize relatively cheaper coal to sell high-priced chemical products (such as olefins, methanol, etc.) that are rising with oil prices, thereby significantly increasing profits, yet they have been wrongly punished by recent risk aversion sentiment.

Looking ahead, as downstream companies exhaust their inventories and realize that oil prices remain high, they will abandon the notion of “waiting for a drop to buy” and initiate concentrated procurement to restock (i.e., starting a replenishment cycle). At that time, chemical companies will no longer be dragged down by high costs, but instead will be able to leverage price increases to further expand profit margins.

3. Looking at the long term, how should we view the future of the chemical industry?

If we ignore the noise of geopolitical conflicts, the chemical sector still represents a core investment direction with considerable value. This is supported by two major long-term trends:

Foreign competitors are being rapidly eliminated, and Chinese chemical companies are likely to see market share expansion.

This energy crisis has a profound and irreversible impact on the global chemical landscape. Regions like Europe, Japan, and South Korea, which heavily rely on Middle Eastern oil and gas, are facing significant cost pressures. For example, in Europe, exorbitant energy costs combined with strict carbon taxes are leading to accelerated shutdowns of its chemical production capacities (such as polyurethane).

The downfall of competitors is an opportunity for Chinese companies. With a complete industrial chain, stable energy costs, and economies of scale, leading Chinese chemical companies are entering a golden window for rapidly seizing global market share.

The “dual carbon policy” restricts supply expansion, and the profit center of the chemical industry is expected to systematically improve.

2026 marks the beginning of the comprehensive implementation of the “14th Five-Year Plan” carbon emission dual control. Carbon emissions will become a rigid indicator for local governments, meaning that the approval of new high-energy-consuming chemical projects will be extremely difficult. The historical “boom and bust” cycles in the chemical industry often occurred when companies expanded production during high industry prosperity, leading to oversupply.

However, under the current “dual carbon policy,” the addition of new capacities in the chemical industry will become extraordinarily difficult, which is expected to systematically elevate the profit center of the chemical industry in the long run.

In summary, the recent adjustments in the chemical sector are more about emotional risk aversion under a contraction in risk appetite. When long-term oil prices retreat from extreme high levels, the explosive demand for restocking under reasonably elevated oil prices, combined with the exit of overseas capacities and domestic policy restrictions on supply expansion, may make the rationale for chemicals even more solid.

For investors who wish to seize the trend of global market share increase + domestic supply rigidity in the chemical industry but find it difficult to delve into individual stocks, they can pay attention to the CSI Petrochemical Industry Index (H11057.CSI), which conveniently packages leading chemical companies such as Wanhua Chemical and Hualu Hengsheng. From an industry distribution standpoint, its holdings in basic chemicals and petroleum refining account for over 92%. The largest ETF product linked to this index is the Chemical Industry ETF by E Fund (516570, connecting fund A/C: 020104/ 020105), with a latest size of 2.27 billion (as of March 23, 2026), making it a quality tool for positioning in the chemical market.