China's Industrial Growth Slows, Chemical Sector Faces Multiple Low Points

The National Bureau of Statistics officially released the latest economic data on April 18. According to it, the real growth rate of China's industrial output above designated size reached 5.4% in September from a year earlier, a significant acceleration of 0.9 percentage points from the previous month (note that the growth rate mentioned here is adjusted for prices). Specifically, the oil and gas extraction industry achieved a growth rate of 2.0%, while the chemical raw materials and chemical products manufacturing industry achieved a growth rate of 4.6%. Looking further at the data for the first nine months of this year, the year-on-year growth rate of industrial output above designated size was 5.8 per cent. During the same period, the oil and gas extraction industry grew by 2.8 per cent, while the chemical raw materials and chemical products manufacturing industry grew by an even more impressive 9.0 per cent.

In addition, last week, the international oil price has a large fluctuation, WTI oil price fell 8.4%, the closing price of 69.22 US dollars/barrel. In terms of industry sub-areas, the prices of some products showed significant changes last week. Specifically, prices of pure MDI, viscose staple fiber, TDI, DMF, rubber, and polymerized MDI increased by 2.8%, 2.2%, 1.9%, 1.7%, 1.2%, and 0.5%, respectively. At the same time, the prices of VA, VE, urea, ethylene glycol, acetic acid, calcium carbide PVC, liquid methionine, silicone, vinyl PVC fell by 27.9%, 5.7%, 3.2%, 2.5%, 2.2%, 1.4%, 1%, 0.7% and 0.6%, respectively. In addition, the prices of titanium dioxide, solid methionine, spandex, caustic soda, viscose filament, light soda ash and heavy soda ash remained stable and did not fluctuate significantly.

Among the top five chemical products, we note that the price of carbon dioxide (Shandong region) has increased by 20.6%, the price of liquid oxygen (Shandong Hangzhou Oxygen) has increased by 12.5%, the price of SBS dry glue has increased by 5.7%, and the price of MTBE and ammonium sulfate have increased by 4.5%.

It is particularly noteworthy that the domestic BDO market experienced a bottoming out last week, with a weekly increase of 4.17%. This change is mainly affected by the slow logistics transportation in Xinjiang and the larger production reduction of installations in other regions, resulting in a low overall supply level and tight supply of goods in the market. At the same time, the continuous consumption of factory inventories has also provided strong support for the rebound of market prices. In the pure MDI market, prices also showed an upward trend last week, with a week-on-week increase of 1.67%. This is mainly due to the adjustment of the rectification ratio of some plant units, the slow release of goods from the factory and the reluctance of dealers to sell at low prices.

In terms of stock market performance, the basic chemical sector outperformed the CSI 300 index last week. Specifically, the basic chemical sector rose 2.41 percent, while the CSI 300 index rose 0.98 percent. In the sub-industries of Shenwan classification, non-metallic materials III, rubber auxilaries, paint inks, other rubber products and film materials had a larger weekly increase, reaching 15.04%, 9.55%, 9.32%, 8.33% and 7.06%, respectively.

We note that the chemical sector may face multiple lows (including price, ROE, inventory and PB, etc.) in the first quarter of 2024. In particular, industry PB in the first quarter of 2024 has fallen to its lowest level since 2000. Considering that since the second quarter of 2022, the growth rate of domestic chemical industry under construction has peaked and the pressure of new production capacity has inhibited the profit expectations of the chemical sector, we recommend the investment layout from the two main lines of hard assets and boom. Specifically, one is to focus on high-quality development of "hard assets", such as Wanhua Chemical and Yangnong Chemical and other high-quality enterprises; The second is to find structural opportunities in the recovery of the economy, focusing on the strong demand resilience and is expected to gradually usher in the recovery of agriculture, tires and other plates, as well as refrigerants, OLED materials, sugar and other areas with growth.

Finally, it needs to be reminded that in the investment process, it is also necessary to pay attention to the risk of large fluctuations in raw material prices such as crude oil, the risk of large expansion of production capacity, the risk of safe production and environmental protection, and the potential risk factors such as the demand for chemical products is not as expected.