China's Petrochemical Industry Extends Recovery Despite Oil Price Weakness

Business Conditions Overview

In October, the business conditions index for China's petroleum and chemical industry registered at 99.79, marking a month-on-month increase of 0.84 percentage points and signalling a continued recovery trajectory. However, performance varied significantly across different segments of the sector.

The upstream oil and natural gas extraction sector faced challenges, with its business climate index falling to 96.95, a decrease of 2.2 percentage points from the previous month. Key indicators for production activity, inventory turnover rate, and the cost-profit ratio all declined. This reflects a worsening scenario of 'falling prices and shrinking profits', primarily driven by persistently weak global crude oil prices. Analysts suggest that abundant supply and sluggish manufacturing demand indicate that crude oil prices are likely to remain subdued in the near term.

In contrast, midstream and downstream industries showed improvement. The business confidence index for the fuel processing sector rose by 1.25 percentage points to 105.15, moving from the normal into the overheated range. This shift was attributed to lower raw material costs, due to depressed crude oil, coupled with robust seasonal demand during the peak consumption period of 'Silver October' for petrol and diesel.

The chemical raw materials and chemical products manufacturing sector also saw growth, with its index increasing by 1.82 percentage points to 101.21. The sector reported higher production intensity, improved inventory turnover, and a better cost-profit margin, indicating a gradual absorption of previously high-priced raw material inventories and an easing of cost pressures. End-user demand continues to recover, supporting smooth coordination between production and sales.

Meanwhile, the rubber, plastics and other polymer products manufacturing sector recorded an index of 95.34, a significant month-on-month increase of 2.13 percentage points, returning it to normal territory from a previously subdued state. This recovery, marked by improvements in production, inventory turnover, and profitability, was largely driven by lower raw material costs and policy stimulus. The commencement of 'Double Eleven' promotional activities helped release stockpiling demand and accelerated the destocking of finished goods, though the sustainability of end-consumer demand remains a point of observation.

Divergence with Broader Manufacturing Data

China's official manufacturing Purchasing Managers' Index (PMI) for October contracted to 49%, down 0.8 percentage points from September. Within this, the production index fell 2.2 percentage points to 49.7%, indicating a slowdown in manufacturing output, while the new orders index declined 0.9 percentage points to 48.8%, signalling a contraction in market demand.

The divergence between the contracting PMI and the recovering petrochemical index is attributed to a time lag in production cycles. The PMI is a forward-looking indicator of 'future demand', whereas the petrochemical index reflects 'current production' based on orders received in previous months, such as September. In October, the industry was still processing these earlier orders while also benefiting from lower input costs. This has created a lag, where current production remains buoyant even as future demand signals have cooled, suggesting that the current industry prosperity may be vulnerable if subsequent demand fails to pick up.

Key Developments and Industry Outlook

1. 15th Five-Year Plan Proposals Unveiled

On 28 October, China published the proposals for its 15th Five-Year Plan, outlining a pivotal period for the petrochemical industry's transition. The plan emphasises quality upgrades in key industries, consolidating the global competitiveness of sectors like chemicals, and developing advanced manufacturing clusters. For the petrochemical sector, this is expected to accelerate the elimination of outdated production capacity in the short term. In the longer term, it will foster a more favourable environment for technologically advanced leading enterprises, directing capital and technology towards high-value-added areas such as advanced new materials and green processes.

2. Trade and Monetary Policy Shifts

During trade consultations held in Kuala Lumpur on 25-26 October, the US and China reached a consensus. The US will suspend for another year the 24% reciprocal tariffs on Chinese goods and remove the 10% 'fentanyl tariff' on Chinese imports. China will make corresponding adjustments to its counter-tariffs. Both sides also agreed to extend certain tariff exclusion measures. For China's petrochemical industry, this reduces export costs to the US, enhances product competitiveness, and provides a more stable trading environment for the next year. The easing of tensions between the world's two largest economies could also improve global market risk appetite and support demand recovery.

Separately, on 29 October, the US Federal Reserve announced a 25-basis-point cut to the federal funds rate, bringing the target range to 3.75%-4.00%. This second consecutive rate cut is anticipated to stimulate US investment and consumption, potentially benefiting Chinese exports. Globally, the move may encourage capital flows to emerging markets and support worldwide economic growth and petrochemical demand. However, Fed Chair Jerome Powell indicated that a further rate cut in December was not certain, citing internal disagreements and a lack of recent economic data.

3. Sector Outlook

The combination of eased Sino-US trade tensions and accommodative US monetary policy is expected to benefit Chinese petrochemical exports and bolster global market sentiment. A stable trade environment and supportive monetary conditions could contribute to growth in global demand, presenting new opportunities for the sector.

Regarding international crude oil, OPEC has slowed its production increase pace and decided to suspend its production expansion plan in the first quarter of 2026, reflecting a market gradually entering a state of oversupply. Barring major supply disruptions, the weak trend in crude oil prices is unlikely to reverse.

Domestically, with the conclusion of the traditional peak seasonal demand, the market is likely to be driven primarily by essential demand in the coming period. Current signs of declining production rates and inventory accumulation for some products suggest the business confidence index may decline in November. However, existing cost advantages and production inertia may provide some underlying support, potentially limiting the extent of any decline.