As rising oil prices drive increases in upstream resource products and raw materials, concerns have emerged regarding the potential squeeze on midstream manufacturing profitability. However, when assessing the impact of upstream price hikes on midstream earnings, it is crucial not only to evaluate the dependency of midstream industries on upstream materials but also to dynamically observe changes in their ability to pass on costs.
Reviewing four cycles of upstream price increases since 2010, it is observed that as prices of upstream resources and raw materials—such as non-ferrous metals, steel, chemicals, and petroleum—rise, midstream manufacturers generally exhibit the ability to transfer costs by raising their own prices. However, the extent and efficiency of such price transmission vary significantly across cycles, influenced by factors including industrial trends, demand strength, competitive landscape, and bargaining power.
To quantify the cost-pass-through capability of midstream manufacturing, the following metric was constructed: regression analysis was conducted for each of the four upstream price hike periods, where the dependent variable (y) represents the year-on-year change in the Producer Price Index (PPI) for midstream manufacturing, and the independent variable (x) is the year-on-year change in the PPI for upstream resources and raw materials. The resulting beta coefficient is defined as the cost-pass-through capability of midstream manufacturing, indicating how much midstream prices change in response to a one-unit change in upstream prices.
A comparison of the four cycles reveals that the cost-pass-through capability of core midstream manufacturing sectors in China has significantly strengthened compared to previous periods, suggesting that the impact of the current oil price surge on midstream profitability should not be overestimated. In the first three cycles, the cost-pass-through coefficient remained below 0.1, but since June 2025, it has risen to nearly 0.2. This improvement reflects enhanced supply rationalization, increased industry concentration, and the expansion of export market share among competitive manufacturers, which have collectively strengthened global pricing power and bargaining ability. Consequently, the effect of rising oil prices on midstream earnings is likely more muted than in the past. Following the upward shift in oil price trends, the key factors driving midstream manufacturing profitability are China’s growing energy independence, supply chain resilience, expansion in export share, and enhanced global bargaining power.
Risk Warning: This analysis is based on publicly available information and does not constitute a research opinion or investment recommendation.
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