Changjiang: It is expected that there will be very limited new production capacity put into operation next year. We are optimistic about the marginal improvement in the organic silicon industry.

Changjiang released a research report stating that as the expectation of a US interest rate cut heats up and emerging economies like India continue to develop rapidly, the demand for silicone overseas is expected to continue to recover, greatly driving China's silicone exports. Domestically, the penetration rate of downstream silicone products in various fields continues to increase, with rapid growth in sectors such as new energy vehicles, photovoltaics, and household appliances, leading to an expected continuous increase in silicone demand. Silicone is expected to continue its bottom-up recovery, with a focus on key companies increasing overseas demand, slowing domestic supply, and the outlook for the industry continuing to improve. Additional capacity is expected to be in place by 2024, with very limited new capacity expected to be added in 2025, indicating a positive improvement in the silicone industry's outlook. Changjiang's main points are as follows: Silicone: The continually increasing penetration rate of silicone, a new material, refers to compounds where carbon elements are bonded to silicon elements through Si-C bonds, and at least one organic group is directly connected to a silicon atom. The mainstream product currently has the main chain [Si-O-Si]n, with two additional methyl groups on the silicon atoms forming a dimethylcyclosiloxane mixture known as DMC, which is an organic silicone intermediate. There are numerous downstream products of silicone with various applications. Deep-processed silicone products mainly include silicone rubber, silicone oil, silicone resin, and silicone coupling agents. Due to the framework of silicone being [Si-O-Si]n, which is more stable than CC bonds, silicone has better temperature resistance, electrical insulation performance, chemical inertness, and low surface tension, leading to the derivation of many products. New application fields such as new energy vehicles and photovoltaics are continuously expanding, leading to a continually increasing penetration rate. Demand: Strong overseas demand and stable domestic growth Overseas: Benefiting from the improvement in the overseas economic environment and the rapid development of emerging economies, as well as the gradual end of the overseas destocking cycle, since 2024, China's silicone exports have shown signs of improvement compared to the significant decline in the second half of 2022. From January to July 2024, China's polydiphenylsiloxane exports reached 319,000 tons, a year-on-year increase of 39.1%. With the increasing expectations of a US interest rate cut and the rapid development of emerging economies like India, it is expected that overseas silicone demand will continue to recover, greatly driving China's silicone exports. Domestic: The apparent consumption of DMC in China has been rapidly increasing, with a compound annual growth rate of 9.0% from 2019 to 2023. With the continuous increase in the penetration rate of downstream silicone products in various fields, rapid growth is maintained in sectors such as new energy vehicles, photovoltaics, and household appliances, leading to an expected continuous increase in silicone demand. Supply: Limited new capacity, industry structure improving Overseas: Due to the high production costs of silicone overseas and the hazardous nature of this product, foreign companies have been gradually exiting the silicone production sector in recent years. By the end of 2023, the total mono silicone production capacity overseas reached 2.05 million tons per year, accounting for 26.4% of global mono silicone production capacity. In recent years, overseas energy prices have been high, and silicone is classified as a hazardous material. The competitive advantage of overseas enterprises is not obvious, which makes the possibility of expanding mono silicone production overseas very low. In addition, there have been continuous exits of overseas production capacity for silicone, leading to a decrease in operating rates under market influence. It is expected that global silicone production capacity will continue to concentrate in China. Domestic: By the end of August 2024, China's mono silicone production capacity reached 6.38 million tons per year, with the CR5 ratio increasing from 59.0% in 2017 to 63.2%, showing a relatively high industry concentration. Since 2019, China's silicone industry has been driven by high prosperity, with a compound annual growth rate of production capacity of 17.4% from 2019 to 2023. A significant amount of new planned production capacity has been put into operation by September 2024, with the production capacity expected to decrease significantly in 2025. This round of expansion cycle has entered its final stage, leading to a marginal improvement in the industry's supply structure. Prosperity: Positive margin improvement Over the past few years, the industry has experienced significant fluctuations in prosperity. Due to the impact of the "dual control" policy on energy consumption, production of raw material silicon has decreased significantly since 2019, providing cost support. On the other hand, driven by downstream application demand, silicone prices have been rising steadily, reaching 60,000 yuan per ton in October 2021. After the second half of 2022, the price of raw material silicon fell, and with a significant expansion of supply, the price of DMC began to decline. At the same time, the price difference rapidly narrowed, with prices and raw material costs turning upside down. In 2023, new capacity continued to be released, while domestic downstream real estate demand weakened, and the overseas market entered a destocking cycle, leading to an oversupply stage in the industry and noticeable losses for enterprises. Since 2024, the overseas destocking cycle has essentially come to an end, with a significant recovery in export volume, and as the planned domestic production capacity has been put into operation, the price difference has started to turn positive, and inventories have begun to fluctuate downwards. It is expected that the industry's prosperity will see continuous marginal improvement. Recommendations for focus: Hoshine Silicon Industry (603260.SH) and Hubei Xingfa Chemicals Group (600141.SH), among others. Risk factors: Overseas silicone demand falling short of expectations; fluctuation in raw material prices.