The ongoing policy against internal competition, or "anti-internal competition," has been deepening since July of last year, yielding initial results in capacity governance for certain sectors. This has led to positive shifts in supply-demand dynamics and competitive landscapes. The recent escalation of conflict in the Middle East, which has triggered energy supply shocks, introduces a new external variable into China's ongoing anti-internal competition efforts.
We posit that the Middle East conflict may interact with the anti-internal competition policies in related industries through both supply and demand channels, with chemicals, coal, and new energy (particularly photovoltaics) serving as typical examples. On one hand, the conflict has led to a passive contraction in energy supply. Shortages in oil and gas could directly cause production declines in energy-intensive industries, while rising energy prices also curb the "internal competition" style of rivalry previously enabled by low energy costs. On the other hand, the conflict is boosting demand for certain domestic industries through three substitution effects: export substitution for overseas competitors highly dependent on oil and gas imports, import substitution for products reliant on overseas raw materials, and incremental demand from short-term (coal vs. oil/gas) and medium-to-long-term (new vs. old energy) energy substitutions. This contributes to optimizing the supply-demand structures in these sectors.
For the chemical industry, domestic chemical prices have risen significantly following the conflict outbreak, with operating rates for some products also increasing. The growth rate and share of chemical product exports are expected to improve further. Given that the temporary energy supply shock has not yet affected capacity changes, our calculations indicate that increased demand could raise the chemical industry's capacity utilization rate by approximately 2.3 percentage points. The Middle East conflict also brings additional demand for coal through coal-chemical applications and exports, leading to a moderate increase in coal prices. We anticipate coal consumption could rise by about 0.8 percentage points, further improving the coal supply-demand balance. From a medium-to-long-term perspective, heightened strategic reserve needs for energy materials among nations, driven by energy security concerns, may provide some support for coal's overall demand and price. From an energy transition viewpoint, the global energy structure may accelerate its shift towards renewable sources. Currently, China's photovoltaic sector still faces significantly low capacity utilization rates. The Middle East conflict could generate incremental demand of about 5 percentage points for the PV industry, partially helping to optimize its supply-demand relationship.
The anti-internal competition policy has been advancing steadily, with initial successes in capacity governance. Since the Politburo meeting in July 2024 first raised the issue of preventing "internal competitive malpractices," anti-internal competition has become a key policy direction for industries. Subsequent meetings and government work reports have reinforced this signal, leading to self-regulation and rectification measures in sectors like coal, steel, cement, chemicals, photovoltaics, and new energy vehicles. As we move into the 15th Five-Year Plan period, these policies are expected to continue and become more refined.
Following the implementation of these policies, positive changes are evident in the chemical, coal, and photovoltaic industries. Price indices have stopped declining and begun to recover, reflecting improved supply-demand conditions. Production volumes have been compressed by 2.4% to 20.4% since last July, while capacity utilization rates and gross margins saw improvements in the latter half of the year. Return on equity for listed companies in these sectors also showed marginal improvement from the third quarter onward.
The recent geopolitical conflict introduces a new external variable, not only raising global energy cost benchmarks but also facilitating a restructuring of supply and demand in certain domestic industries. Firstly, the conflict has caused a passive contraction in energy supply. Disruptions like the Strait of Hormuz blockade and attacks on energy facilities in major oil-producing countries have led to global shortages of oil and gas, reducing output in energy-intensive industries. The subsequent rise in energy prices, transmitted along industrial chains, undermines the economic feasibility of the low-price competition previously based on cheap energy.
Simultaneously, the conflict boosts demand for certain domestic industries through three substitution effects: export substitution (replacing competitors reliant on imported oil/gas), import substitution (replacing products dependent on foreign raw materials), and energy substitution (short-term coal-for-gas/oil and long-term renewable-for-fossil fuels). This helps optimize related industrial structures.
Regarding export substitution, China's higher energy self-sufficiency, lower reliance on net oil/gas imports, and greater energy reserves compared to export-oriented competitors like ASEAN, the EU, Japan, and South Korea provide a higher safety margin for its manufacturing supply security. For import substitution, supply gaps for certain basic chemicals previously exported from the Middle East may be filled by domestic capacity. For energy substitution, high oil/gas prices enhance coal's relative economics short-term, while accelerating the energy transition long-term, driven by desires for supply and price autonomy.
Focusing on the chemical industry, the blockade of the Strait of Hormuz—a critical chokepoint for oil, gas, and some chemical raw materials—has caused supply shortages and increased production costs. By late March, the domestic chemical price index had risen approximately 24% compared to late February. This price increase is more pronounced and elastic than during the Russia-Ukraine conflict in 2022, likely due to the optimized supply-demand landscape from anti-internal competition policies. Improved industry concentration and cost-pass-through efficiency have enhanced pricing power.
Beyond price increases, the conflict significantly affects chemical supply and demand. China's chemical sector demonstrates stronger resilience compared to some exporting nations, potentially increasing export and import substitution demand. China's competitive position in the global petrochemical industry, along with the enhanced economics of coal-chemical routes due to high international oil prices versus stabilized domestic coal prices, supports this trend. For instance, in the PVC industry, coal-based production routes in China benefit, while oil-based routes in regions like Europe, Japan, and South Korea face challenges.
Short-term data shows operating rates for most chemical products increased in March, confirming rising substitution demand, especially for coal-chemicals like coal-based PVC. Overall, despite some negative supply shocks for import-dependent products, the domestic chemical industry shows resilience. Increased demand could boost chemical export growth by about 13%, potentially lifting domestic chemical production by roughly 3.0 percentage points and capacity utilization by about 2.3 percentage points. Medium-term, geopolitical risk premiums might lead to higher safety inventory levels, generating restocking demand. Long-term, however, global competition could intensify as countries bolster domestic capacity for security reasons.
In the coal sector, anti-internal competition governance has shifted focus from无序扩张 to balanced, high-quality development. The ratio of coal inventory changes to consumption has declined for three consecutive years, indicating improved supply-demand balance. The Middle East conflict, by raising international oil prices, generates substitution demand that mildly pushes up domestic coal prices. However, due to abundant domestic reserves and long-term contract pricing mechanisms, domestic price fluctuations are smaller than overseas. The conflict boosts coal demand mainly through increased coal-chemical use (potentially raising coal consumption by ~0.7 percentage points) and enhanced export competitiveness (adding ~0.1 percentage point). Long-term, coal's strategic value may be reassessed for energy security, with potential for maintained capacity margins and emergency reserves.
For new energy, particularly photovoltaics, the industry is recovering from a 2024 profit trough, aided by anti-internal competition measures that curb capacity expansion. Geopolitical conflicts elevating fossil fuel prices could boost demand for renewables, especially in markets like Europe where gas price hikes increase electricity costs and drive PV and storage demand. Estimates suggest the conflict could increase China's new energy product exports by 10.5%, with PV equipment exports rising 17.5%. This could potentially raise domestic PV demand by about 4.8%. While PV chain operating rates saw a slight uptick in March, they remain at low levels (e.g., 34%-48%), meaning external demand increases could partially alleviate oversupply pressures.
Long-term, global energy security strategies may evolve towards "Energy Sovereignty 3.0," emphasizing not just supply autonomy but also price autonomy through renewables—a paradigm where China is central. While climate change was the primary driver for energy transition, future shifts may increasingly be motivated by strategic security concerns due to geopolitical risks. Higher costs and premium risks for traditional energy enhance the investment returns and economics of renewables. Economies highly dependent on imported oil and gas are likely to accelerate PV, wind, and energy storage deployment. As the global hub for new energy supply chains, China, with its mature capacity and technological expertise, is poised to benefit from external demand growth, aiding the recovery of domestic supply-demand balance and helping the sector exit the internal competition dilemma.
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