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How long can chemical prices go up?


Date:

2017-09-07

In the third quarter of this year, the prices of chemical products generally bottomed out and rebounded. Especially with the recent environmental inspections in many places, the prices of some products have skyrocketed.

In the third quarter of this year, the prices of chemical products generally bottomed out and rebounded. Especially with the recent environmental inspections in many places, the prices of some products have skyrocketed. However, when the price has risen to the current stage, how much room is left in the future has become the core issue of the market's follow-up attention. From the perspective of static supply and demand, the current operating rate is indeed very high, the room for further improvement is limited, the demand is still growing steadily, and the logic of supply and demand imbalance is almost unsolved. But in the real commodity world, "the only constant is always changing", and rising prices themselves will change supply and demand, and all the high operating rates we speak of are vulnerable to extremely high prices. We judge the future price increase space, which depends not only on the government's tolerance for prices, but also on the external constraints of overseas prices. The specific logic and our recent views on the cycle are as follows, for your reference:

1. The price increase is the result of the market's spontaneous clearing: the current mainstream view in the market is that this round of rebound in cyclical products is caused by the country's supply-side reform, and it is more to help high-debt state-owned enterprises out of trouble, which reflects the will of the country, rather than the industry's own supply and demand improvement. However, chemical industry is different from steel and coal. The proportion of state-owned enterprises is not high, and there are many products. The volume of a single category is limited. It is difficult to become the focus of supply-side reform. There are also few supply-side policies for chemical industry. The result of a spontaneous market clearing. Before the supply-side reform was proposed in 2016, the chemical industry had already lost two years of production capacity, and the industry's net interest rate continued to rebound. Even without the supply-side reform, there is a high probability that the economy will reverse in 2017. The supply-side reform has only further strengthened production capacity constraints through environmental protection inspections, making the rise in advance and the rise expanded, but it has not changed the overall trend of the industry's operation.

2. Environmental protection is to adjust the structure, not to control the total amount: This year, the market generally attributed the price increase to the supply contraction caused by environmental protection, but from the data, whether it is 2016 or the first half of this year, the demand growth rate is very fast. No supply contraction has been seen. Therefore, the real impact of environmental protection is not to reduce production, but to adjust the structure. Through the environmental protection card position, the small production capacity with serious pollution and scattered high energy consumption in the middle reaches is shut down, which improves the market space and bargaining power of high-quality production capacity. And through the price increase of raw materials, it will force the downstream small enterprises that do not have the ability to pass the cost to exit. The increase in the concentration of upstream and downstream also simplifies unnecessary circulation links. Through such a cold winter, the survival of the fittest in the entire industry chain has been achieved. While improving the environment, it has also completed the improvement of the quality of the national economy.

3. Domestic and foreign constraints on price increases: Looking forward to next year, new supply will be very limited. As long as demand grows steadily, supply and demand will be further unbalanced, and prices may increase rapidly, which will inevitably lead to the start of domestic and foreign constraint mechanisms. In order to maintain price stability, the government will likely speed up the approval of rectification and resumption of production and new production of compliant production capacity, and it will not even rule out the purchase restriction and suppression of real estate, by reducing infrastructure investment and raising interest rates to curb demand. This is also the core logic of cyclical investment that starts with price increases and ends with inflation as mentioned in our previous report "Inflation is Endless, Cycles Are Not Ending". In addition, domestic prices have risen too fast, and if they are significantly higher than overseas prices, exports will also be reduced, and even the space for import arbitrage will be opened, and overseas production capacity will also become new supply in disguise. At this stage, my country's economy has been deeply embedded in the global market, and commodity prices will eventually be constrained by the global supply and demand balance sheet.

4. Future market outlook: After the recent cyclical stocks rose sharply, there have also been a lot of corrections. In the long run, we are still optimistic. This round of rise is essentially the result of the market's spontaneous clearing, rather than the pure state will. This also means that this cycle will be a big market that lasts for several years, with magnificent waves, and one wave after another, rather than a simple staged game market. However, no matter how long the cycle is, it will not end in one wave, and there will still be twists and turns in the process. In the past two months, individual stocks in the chemical industry have risen by more than 50%. In the next 1-2 months, there is a high probability that the sector will enter a period of differentiation, the hype of pure price elasticity will weaken, and market attention will increasingly focus on leading companies with good performance and low valuations. In fact, the essence of cyclical stocks is "stocks with a period of weeks for the main rising wave". Although the logic of supply and demand is long, the catharsis of market sentiment is very fast. Even if the changes in the industry can be calculated, who can predict the madness of human nature. Therefore, when the market sentiment is high, it is the way to maintain profits and maintain prosperity in the investment cycle when you can think of leaving a little bit of bargaining chips for later generations.

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