Shenwan Hongyuan Group: Supply and demand resonance draws industry turning point, prosperity recovery opens a new stage in the silicone cycle.

Shenwan Hongyuan Group released a research report stating that it is expected that China's silicone industry will continue to seize overseas market share with cost advantages, and there is potential for resonance in both domestic and international demand for silicones. The silicone industry has reached a turning point, with a positive supply-demand pattern and significant upward elasticity. The firm believes that integrated enterprises with economies of scale and industrial chain advantages, as well as companies excelling in downstream processing, including Hoshine Silicon Industry (603260.SH), Shandong Dongyue Silicone Material (300821.SZ), Hubei Xingfa Chemicals Group (600141.SH), Zhejiang Xinan Chemical Industrial Group (600596.SH), Luxi Chemical Group (000830.SZ), and Tangshan Sanyou Chemical Industries (600409.SH), are well positioned in the industry. Main points of Shenwan Hongyuan Group: Excellent performance of silicone materials, widely used in various sectors of the national economy The upstream of the silicone industry chain mainly consists of metallurgical silicon, with monomers and intermediates in the middle, and downstream includes deep-processed products such as silicone rubber, silicone oil, and silicone resin. The structure of silicone products contains both organic groups and inorganic structures, giving them unique properties and superior performance such as bonding and sealing, temperature resistance, weather resistance, etc. Silicone products are widely used in various sectors of the national economy, including construction, electricity, electronics, automobiles, textiles, personal care, etc. Resonance between domestic and international demand boosts prosperity, and new energy catalyzes incremental demand China's consumption of silicone accounts for approximately 60% of the global total. 1)Domestic demand: According to Bai Chuan Ying Fu data, the apparent consumption of silicone DMC in China is expected to reach 1.82 million tons by 2024, with a year-on-year growth of 21%, and an increase of 24% in the first half of 2025, maintaining a high level of prosperity. In recent years, the consumption structure of silicones has been continuously transforming, with the proportion of downstream demand from real estate declining year by year and now accounting for less than 25%, while demand from new energy vehicles and photovoltaics remains strong, promising continued high demand for silicones. 2)Foreign demand: Per capita consumption of silicone is closely related to per capita GDP levels, with significant growth potential in emerging countries such as Asia, Africa, and Latin America. By 2024, China's exports of polydimethylsiloxane are expected to reach as high as 545,600 tons, a year-on-year growth of 34%. Despite short-term fluctuations due to macroeconomic demand and tariff expectations, the expected continued cost advantages of China's silicone industry are likely to further seize overseas market share, leading to a potential resonance in domestic and international demand for silicones. Reduction of overseas production capacity, peak of domestic production capacity, industry cost curve flattening, strong demand for profitability recovery 1)Overseas production capacity: Influenced by costs and environmental factors, overseas production capacity of silicone DMC has been gradually withdrawn in recent years, with the current total overseas production capacity of silicone DMC at 800,000 tons per year, and the possibility of further reductions in the future. 2)Domestic production capacity: Following the prosperous cycle in 2021, domestic production capacity of silicone DMC has rapidly expanded, reaching 3.44 million tons by the end of 2024, nearly doubling compared to 2020, with the current expansion cycle coming to an end and high industry concentration, with a CR5 of 62%. 3)From a profitability perspective, the cost differences in DMC silicone intermediates among various manufacturers are small, and although some companies can improve profitability through downstream processing, the overall sector has experienced a long period of losses, with DMC prices and price differentials at 1% and 6%, respectively, indicating a strong demand for industry profitability recovery. Industry turning point has appeared, supply-demand pattern is positive, with significant upward elasticity By reviewing historical prices of silicone intermediate DMC, it is usually characterized by significant elasticity, driven by demand and cost factors. From the current standpoint, China's silicone DMC production capacity has peaked on the supply side, while overseas production capacity is expected to withdraw; on the demand side, the marginal impact of real estate is slowing down, while the demand for photovoltaics and new energy vehicles remains strong, driving domestic apparent consumption to maintain double-digit growth; in terms of exports, short-term impacts from external environments are present, but in the long term, China is expected to continue seizing overseas market share with cost advantages. In conclusion, China's silicone DMC industry capacity utilization rate is expected to increase from 67% in 2024 to 76%/83% in 2025/26, with a gradual improvement in supply-demand pattern supported by strong cost factors, potentially leading to a bottoming out and reversing the industry trend. Risk warning: 1)Risk of fluctuating raw material prices; 2)Downstream demand not meeting expectations; 3)Risk of macroeconomic and external environmental fluctuations.