Petrochemicals – Structural oversupply delays recovery

We maintain a cautious view on the petrochemical sector as capacity additions continue to exceed demand growth across most major product chains. While consumption remains healthy, particularly in India and South Asia, new capacity additions continue to delay utilization-rate recovery and cap margin expansion. We expect industry balances to remain challenging across aromatics and polyolefins over the medium term. Despite ongoing geopolitical tension in the Middle east, product spreads have eased in 3Q26, implying lower profit QoQ. PTTGC (OUTPERFORM) is our top pick for the sector with TP raised from Bt48 to Bt63, based on 0.9x PBV (5-year average).

Recovery is likely to be gradual and structurally driven rather than cyclical. Unlike previous downturns, we believe the current cycle increasingly reflects structural changes in global supply dynamics. Industry rationalization has begun, but announced closures remain below planned capacity additions. Consequently, recovery in petrochemical margins is likely to depend more on capacity discipline and utilization-rate improvement than on demand growth alone.

Industry rationalization is gaining momentum. Weak profitability is beginning to force capacity closures across the global petrochemical industry. According to Wood Mackenzie, approximately 10mt of global ethylene capacity is currently being rationalized through permanent shutdowns and closures, primarily among high-cost assets in Europe and Asia. While rationalization should eventually improve industry balances, ongoing capacity additions continue to exceed capacity reductions, limiting the near-term benefit to industry fundamentals.

Aromatics and polyolefins remain under China-driven supply pressure. China continues to dominate PX demand while rapidly expanding domestic capacity across major petrochemical chains. More than 9.5mt of new PX capacity is expected globally, alongside China’s planned additions of around 15mt of PE and 9mt of PP capacity through 2030. Although India and South Asia remain key demand growth engines, China’s accelerating self-sufficiency and rising export availability could intensify regional oversupply, keeping Asian utilization rates, product spreads, and producer margins under sustained pressure.

Feedstock flexibility becomes increasingly important. Compressed margins are making feedstock economics a critical differentiator. Ethane could account for around 41% of global ethylene production by 2030 due to its cost advantage over naphtha. Asian producers are increasingly securing long-term ethane supply, while crude-to-chemicals and coal-to-chemicals improve economics and energy security. Integrated producers with flexible feedstocks and diversified portfolios should be better positioned than stand-alone commodity producers.

Investment view remains cautious. Demand growth remains positive but is insufficient to absorb ongoing capacity additions. Persistent oversupply, greater feedstock availability, and sustainability-driven substitution are likely to keep margins subdued for longer than in previous cycles. We favor companies with feedstock flexibility, strong integration, exposure to higher-value products, and credible circular economy strategies. PTTGC remains our top pick. We raise our TP to Bt63 from Bt48, based on a higher PBV of 0.9x from 0.6x, reflecting resilient earnings, feedstock flexibility, cost advantages, and recovery potential.

Key risks. Downside risks include greater-than-expected Chinese capacity additions, weaker global manufacturing, faster recycled-material adoption, rising Chinese exports into Southeast Asia, and slower industry rationalization. Upside risks include more rapid capacity closures, stronger India and South Asia demand, and accelerating specialty chemical demand, which could support an earlier and stronger margin recovery.