China's State Council Addresses Structural Issues in Key Industries Amid Capacity Pressure

On February 10, 2025, Premier Li Qiang chaired a State Council meeting to discuss policies aimed at resolving structural contradictions in key industries. The meeting emphasized a dual approach from both supply and demand sides to address these issues, ensuring healthy industrial development and quality upgrades. Key strategies include optimizing industrial layout, strengthening standards, promoting consolidation, and phasing out outdated low-efficiency capacities while increasing supply of high-end production.

In recent years, the chemical industry has seen a continuous increase in production capacity, leading to mounting supply pressure. From 2021 to 2024, fixed asset investment in chemical raw materials and products grew at a compound annual growth rate of 15.9%, significantly outpacing prior development phases. Although the investment growth rate has slowed to 8.6% in 2024, it still exceeds previous demand growth rates, resulting in heightened supply pressures and noticeable price adjustments for some bulk products.

The meeting's focus on resolving structural issues reinforces the commitment to eliminating outdated capacities, which is crucial for achieving industry capacity clearance and optimizing market structure. Since the second half of 2024, the Producer Price Index (PPI) for chemical raw materials has consistently fallen below 100, squeezing profitability for companies in the sector. The recent introduction of the 2024-2025 Energy Saving and Carbon Reduction Action Plan further highlights ongoing policy attention to supply-side reforms.

Historically, demand has played a stabilizing role in the chemical cycle, but supply-side factors are equally influential in shaping the supply-demand landscape. Current trends indicate that the industry is entering a period of stabilization, with some products hitting marginal cost resistance. Any changes on the supply side could accelerate the transition to a more balanced supply-demand situation, potentially improving profitability for products currently at the bottom of the pricing curve. High-energy-consuming products may see sustained profitability improvements under stringent energy controls.

Investment recommendations suggest that while the meeting did not specify detailed policies for particular sectors, the broader direction warrants attention. If concrete policies emerge, significant changes in cyclical products may follow. The focus on optimizing industrial layouts and strengthening standards could benefit leading companies in industries such as coal and phosphorus chemicals. Firms like Baofeng Energy, Hualu Hengsheng, and Wanhua Chemical may experience improved profitability and market share.

However, investors should be aware of potential risks, including the execution risks of policies, unexpected surges in new capacity, insufficient energy monitoring, and delays in the exit of outdated capacities.