Shenwan Hongyuan Group Co.,Ltd. has released a research report indicating that in Q2 2026, as geopolitical tensions gradually eased and the risk premium on crude oil faded, cost volatility triggered downstream destocking, causing chemical product prices to retreat from recent highs. Benefiting from inventory gains and improved supply-demand fundamentals, the sector's earnings saw a substantial year-on-year and quarter-on-quarter uplift.

The chemical sector recorded Q2 2026 revenue of RMB 655.1 billion (up 19% YoY, up 17% QoQ) and net profit of RMB 58.5 billion (up 65% YoY, up 33% QoQ). The industry's gross margin expanded by 2.9 percentage points YoY and 1.8 percentage points QoQ to 20.9%. The average debt-to-asset ratio across the sector currently stands at 50.1% (up 0.1% YoY). Fixed assets plus construction-in-progress rose 4.2% YoY and 1.2% QoQ, with construction-in-progress declining 10.7% YoY and 1.0% QoQ — marking the sixth consecutive quarter of annual decline and pointing to a clear deceleration in capital spending.

Where the gains came from

Geopolitical conflicts escalated persistently from March onward, pushing the crude oil price center sharply higher. This hit overseas supply particularly hard, and with cost support and supply contraction, prices for most global chemical products rose significantly. However, downstream buyers adopted a wait-and-see stance, and from April the supply chain gradually moved into a destocking phase, with chemical prices peaking and then softening. After June, tensions eased and expectations of reopened shipping lanes pressured oil prices lower, compounded by a slow demand season, keeping chemical prices on a downward trajectory.

In Q2 2026, the average spot price of Brent crude was $104.36 per barrel (up 53% YoY, up 28% QoQ). The average price of 5,500 kcal thermal coal at Qinhuangdao port stood at RMB 819 per tonne (up 27% YoY, up 14% QoQ). Although chemical prices fell from their highs in the quarter, the inventory gains captured in April were substantial. Combined with price spreads widening for certain products that benefited from overseas supply shocks and improved domestic supply-demand conditions, the sector's profitability improved markedly.

The chemical sector's Q2 2026 revenue reached RMB 655.1 billion (up 19% YoY, up 17% QoQ). Along with wider product spreads and easing cost-side pressure, net profit came in at RMB 58.5 billion (up 65% YoY, up 33% QoQ), in line with market expectations. The improvement in supply-demand balance pushed gross margin up 2.9 points YoY and 1.8 points QoQ to 20.9%.

Inventories rose 15% YoY and 5% QoQ in Q2 2026, as higher oil prices boosted the value of stockpiles, while volatile raw material costs kept downstream replenishment on hold after March.

Segment highlights from the interim reports

Looking at sub-sectors in the 2026 interim results, the push against "involution" continued, higher oil prices made alternative energy sources more attractive, and improved supply-demand dynamics supported the upward cycle. Segments including silicones, viscose, potash, spandex, coal chemicals, polyurethane, dyes and polyester saw notably stronger profitability.

According to Wind data, the sub-sectors with the fastest net profit growth in the first half of 2026 were silicones, viscose, potash, spandex, coal chemicals, polyurethane, dyes and polyester, while the weakest performers included inorganic salts, carbon black, food and feed additives, and coatings and inks. In Q2 2026, segments such as titanium dioxide, carbon black, civil explosives, chlor-alkali, spandex, polyester, soda ash, polyurethane, coal chemicals and dyes delivered strong quarter-on-quarter earnings growth as the cycle continued to improve amid seasonal factors.

Investment strategy across four key chains

The firm maintains its "Overweight" rating on the sector, recommending positioning across four themes: the textile-apparel chain, the agrochemical chain, the overseas property chain and the anti-involution beneficiaries.

First, in the textile-apparel chain, inventories sit at historically low levels due to geopolitical shocks, while capital spending in the industry has slowed and competitive dynamics have improved. For polyester, watch Tongkun Group, Hengli Petrochemical and others. For spandex, focus on Huafon Chemical. For dyes, monitor Zhejiang Longsheng. For viscose, watch Sanyou Chemical. For nylon and caprolactam, track Luxi Chemical.

Second, in the agrochemical chain, rising cultivated acreage both domestically and overseas supports steady growth in fertilizer demand, while higher genetically modified crop penetration underpins long-term pesticide demand. A higher oil price center also supports crop prices. For nitrogen fertilizer and coal chemicals, watch Hualu Hengsheng, Baofeng Energy and Luxi Chemical. For phosphate fertilizer and phosphorus chemicals, focus on Yuntianhua and Xingfa Group. For potash, watch Asia Potash International and Salt Lake Industry. For compound fertilizer, track Xinyangfeng, Yuntu Holdings and Stanley Agricultural. For pesticides, monitor Yangnong Chemical, Rainbow Agrochemicals and Xin'an Chemical. For food and feed additives, watch NHU and Meihua Bio.

Third, overseas property markets are showing signs of a bottoming recovery. For fluorochemicals, watch Juhua Co, Sanmei Chemical, Yonghe Co, Haohua Technology, Dongyang Sunshine and Jinshi Resources. For MDI, focus on Wanhua Chemical. For silicones, watch Xingfa Group and Xin'an Chemical. For tires, monitor Sailun Tires and Prince Rubber.

Fourth, as anti-involution policies intensify and backward production capacity is phased out faster, with dual-carbon assessments moving into a rigid assessment phase, new capacity faces strict constraints. For chlor-alkali, watch Xinjiang Tianye. For soda ash, focus on Boyuan Chemical. For civil explosives, monitor Xuefeng Technology, Yipuli and Guangdong Hongda.

Growth themes and emerging catalysts

For growth stocks, the core focus remains on the AI-related semiconductor materials theme. Key targets include Yoke Technology, Aisen Semiconductor, as well as Dinglong Co, Guanggang Gas, Xingfu Electronics, Luwei Optoelectronics and Capchem. In the commercial aerospace direction, watch Sinocera and Ruihuatai. For innovative drugs, focus on Sunresin. In the robotics sector, watch Guoen Co and Kingfa Science. For catalytic materials, monitor Kaili New Materials. Additionally, Tianlu Technology and Jianghua Micro stand out for their strong alpha potential.

Key risks

The firm flags four core risks: 1) new project progress in the industry falling short of expectations; 2) demand declines or export constraints causing product prices to fall sharply; 3) significant volatility in oil prices; and 4) intensifying industry competition.