UBS is bullish on China's chemical industry: it is expected to start a new 3-year upward cycle.

UBS's latest research report focuses on the Chinese chemical industry. UBS believes that, with multiple positive factors resonating, the Chinese chemical industry will usher in a new upswing cycle in 2026-2028, with industry profit recovery and valuation revaluation expected. After four years of adjustment, the chemical industry is approaching historical lows, with capacity expansion pressure easing and marginal demand improvement providing support, making further downward space extremely limited. In 2025, industry capital expenditure decreased by 8% year-on-year, corporate financial pressure and depressed project profit expectations are driving industry self-discipline improvement, signaling the end of the era of uncontrolled capacity expansion. The policy direction is clear: tighten new project approvals, optimize the standards for phasing out outdated capacity, strengthen industry self-discipline, and include chemical products in the carbon trading market. Against the backdrop of the global chemical industry's low profitability, overseas high-cost capacity is accelerating its exit. Currently, the Chinese chemical industry's P/BV valuation of 1.5 times is at the 43rd percentile over the past 20 years, with the overweight ratio of active equity funds in the chemical sector hitting a low in Q4 2025 and at a 10-year low. Historical data shows that when PPI year-on-year turns positive, the chemical sector often achieves excess returns. The UBS macro team predicts that PPI will return to positive growth mode from late 2026 to early 2027, highlighting the industry's allocation value.