China Securities Co., Ltd.: Sulfur prices rise to suppress price differentials, focusing on the mid-term allocation value of fertilizer companies.

China Securities Co., Ltd. released a research report stating that the market has not fully priced in the height of the central upward movement of oil prices. It is recommended that investors set their basis for investment on the upward movement of oil prices and take preventive measures against potential liquidity risks by first positioning in assets with certainty. From a medium-term perspective, China's chemical industry has strengthened its relative competitive advantage globally, and the market skew towards inflation rise is also more favorable for profitable HALO assets. After the oil price shock, it is advisable to look for smooth transmission, core chemical assets with strengthened relative competitive advantage. Key points from China Securities Co., Ltd.: Last week, the China Securities Co., Ltd. chemical industry index was 104.80, with a MoM change of -0.35% and a YoY change of +43.86%; industry price percentile over the past 10 years was 35.98%, with a MoM change of -0.20%; industry price spread percentile over the past 10 years was 0.50%, with a MoM change of -6.52%; industry inventory percentile over the past 5 years was 85.48%, with a MoM change of -0.72%; industry operating rate was 66.28%, with a MoM change of -0.44%. The rise in sulfur prices has suppressed price differentials, with a focus on the medium-term allocation value of fertilizer companies. According to BaiChuan Yingfu statistics, as of June 14th, the average price of sulfur in the market was 11,600 yuan/ton, a significant increase from the 8,400 yuan/ton of the previous week. In the short term, 1) sulfur demand is expected to decrease in the short term due to the downstream decline in phosphate fertilizer production, and if the US-Iran conflict gradually eases, sulfur costs are expected to gradually return to a rational range; 2) leading companies can ensure cost control through various means such as securing supply sources and purchasing smelting acid diversely. In the medium term, 1) the phosphogypsum-to-sulfuric acid process route is mature, and leading companies have capital expenditure capabilities and plans, such as Yunnan Yuntianhua announced on June 9th that it plans to invest in the construction of a phosphogypsum-to-cement co-production sulfuric acid resource recycling demonstration project. 2) Fertilizer demand is insulated from oil price fluctuations and also serves as an option for grain price increases. Restrictions on transportation radius and other factors have decoupled acetic acid trends from sulfur prices since May. In the medium term, 1) the phosphogypsum-to-sulfuric acid technology route is mature, the head has the capital expenditure capability and planning, such as Yunnan Yuntianhua announced on June 9 that it plans to invest in the construction of a phosphogypsum-to-sulfuric acid resource recycling demonstration project, after the leading companies projects are successively put into operation, the domestic sulfur supply pressure will be greatly eased. 2) With restrictions on transportation through the Hormuz Strait and international sulfur and gas price rises pushing up international fertilizer prices, the impacts of shortages in fertilizer supply during the spring planting season and a decline in farmers' application intentions may be reflected in grain prices in the 26H2-27H1 period, combined with downstream inventory at low levels, fertilizer demand has both defensive attributes and upside options. Britain may delay the pace of refrigerant reduction as leading companies raise prices, leading to overseas supply shortage. The UK Department for Environment, Food and Rural Affairs recently announced that it would postpone the scheduled reductions set by the F-Gas Act, giving clues to an impending shortage of third-generation refrigerants. In addition, Beijer Ref UK, the UK's largest refrigeration and air conditioning wholesaler, announced a 60% increase in the price of R410a refrigerant. This price increase will come into effect on May 20, with a 60% increase for R407c, and 35% and 30% increases for R134a and R32, respectively. This announcement of the postponement of the F-Gas Act by the UK indicates that third-generation refrigerants still hold a significant share in the local market, making it difficult for fourth-generation refrigerants to replace them in the short term. Coupled with recent price increases by leading companies, the overseas demand for third-generation refrigerants in 2026 remains strong. With limited domestic refrigerant production capacity, the majority relies on imports, and this delay in reduction means a delay in imports, indicating that high-profit duration for domestic third-generation refrigerants is likely to be extended. Structural differentiation in chemical product exports in April: Petrochemical and other products continue to see significant increases in exports, while varieties affected by previous export tax policies are expected to retreat as planned. 1) Petrochemicals: Ethylene and downstream products maintain a high growth rate. PE and PP saw a YoY growth rate of 484.1% and 123.5%, respectively; MMA, acrylic acid, and butadiene saw YoY growth rates of 66.1%, 126.4%, and 958.2%, respectively. 2) Polyurethane: Export growth continues to accelerate. MDI and TDI saw a YoY growth rate of 43.7% and 92.0%, respectively; the YoY growth rate of epichlorohydrin was 695.7%. 3) Coal chemicals: Most products saw an increase YoY. Methanol and ethylene glycol had YoY growth rates of 218.1% and 951.4%, respectively; acetic acid and vinyl acetate had YoY growth rates of 34.2% and 763.9%, respectively. 4) Fluorine chemicals: Fluorspar saw a YoY growth rate of 570.7%. 5) Silicone chemicals: Industrial silicon continued to grow MoM, with a YoY growth rate of 14.7%. 6) Chlor-alkali: Most products saw an increase YoY. Caustic soda and soda ash had YoY growth rates of 40.1% and 58.4%, respectively. A new round of chemical industry configuration opportunities is approaching. The market previously chose not to bet when oil prices were unclear, and after tracking oil prices, it chose to act as if it had already ended before the situation actually concluded. However, time has passed, the Strait remains closed, more oil well capacities have been forced to shut down, and the longer it takes, the more difficult it becomes to resume production, leading to more serious real-world problems. With the digestion of low-priced crude oil and downstream inventory, rising upstream costs, and downstream demand supporting procurement, along with strong overseas export demand, the fundamentals are expected to drive the chemical sector forward. The market will soon break the impression that "chemicals priced above $80 cannot be transmitted," and ultimately, it will return to the fundamentals of supply and demand. A new round of chemical industry configuration opportunities is approaching. Carbon neutrality assessment methods are introduced, providing further catalysis for the chemical supply side. The Communist Party of China Central Committee and the State Council have issued the "Comprehensive Evaluation and Assessment Method for Carbon Peak and Carbon Neutrality," which is officially implemented. The assessment method clearly states that starting from the year 2026, it will conduct a comprehensive evaluation and assessment of carbon peak and carbon neutrality for the party committees and governments of each province (autonomous region, municipality directly under the Central Government), setting control indicators and support indicators. The assessment results will serve as an important reference for the comprehensive assessment, selection, appointment, and supervision of provincial leadership and relevant leading cadres. China Securities Co., Ltd. believes that the implementation of dual carbon goals will increase costs and promote industry upgrades for the typically high-energy-consumption chemical industry. Looking for targets to benefit from short-term and medium-term EPS certainty. After this round of corrections, the share prices and fundamentals of the chemical industry have synchronized. Due to the large gap in overseas supply and the structural issues in domestic finished oil products, chemical prices are expected to be more strong. Although there are still disagreements in the market on the pricing of future oil prices, targets that benefit from short-term and medium-term EPS certainty, represented by coal chemicals and gas head chemicals, deserve close attention. Risk Warning: (1) Unexpected ups or downs in oil prices: Oil prices are highly correlated with international political and economic situations and have large fluctuations. Significant fluctuations in oil prices can affect downstream industry chain price differentials and profit stability, thereby affecting the profitability of certain sectors or companies. (2) Changes in industry competition: There are many refining and chemical supporting projects in China, which may cause localized oversupply of a certain type of product and increase industry competition, squeezing the profit space within the industry. (3) Macroeconomic fluctuations and global economic downturn: The downstream branches of the chemical industry are numerous and widely distributed, and are highly correlated with the macroeconomic situation. Economic downturns may affect industry product demand.