Shandong (JLC), August 22, 2025--A significant revolution is reportedly to be carried out in petrochemical and refining industries in China. It aims to phase out small facilities and upgrade backward production capacity, as well as attract investment in advanced materials sector. Proposals intend to increase output by upgrading about 40% of the petrochemical units that have been in operation for over 20 years, and transform basic chemicals to specialty fine chemicals that can be applied to artificial intelligence, robotics, semiconductors, bio-medical devices, batteries and renewable energy, etc. There is a possibility that small refineries with an annual capacity of less than 2 million mt/yr may be shut down in response to the decline in gasoline and diesel demand. Measures aimed at curbing long-standing overcapacity in low-value-added sectors in the petrochemical industry are expected to be unveiled next month, though the Ministry of Industry and Information Technology of China has yet to confirm these reports.
Background: At the Political Bureau meeting of the CPC Central Committee in July 2024, the concept of "anti-involution" was proposed for the first time. Subsequently, the Central Economic Work Conference in December emphasized the comprehensive rectification of "involution-style" competition and the regulation of local governments' and enterprises' behaviors. In 2025, the Government Work Report in March and the sixth meeting of the Central Financial and Economic Commission in July stressed the issue of "anti-involution" again. The Political Bureau of the CPC Central Committee emphasized at its meeting on July 30 that it is necessary to further advance the construction of a unified national market, continuously optimize market competition order, govern disorderly competition among enterprises in accordance with laws and regulations, promote capacity governance in key industries, and standardize local investment attraction practices.
In fact, to address the issue of low-end overcapacity, China introduced the concept of "supply-side structural reform" as early as 2015. The current "anti-involution" initiative, transitioning from earlier emphases on "strengthening industry self-regulation and facilitating the exit of outdated production capacities" to the present focus on "addressing key challenges to ensure the orderly withdrawal of outdated capacities," along with the petrochemical industry's shift from "reducing oil and increasing chemicals" to a clear emphasis on high-value transformation directions in the future, signifies the policy's entry into a new phase.
Uncertainties in exports and tepid domestic demand encounter capacity expansion, which weighs heavily on China’s petrochemical enterprises. Particularly, enterprises are experiencing shrinking production margins amid the rising supply, intensified homogenous competition and lowering product prices. Notwithstanding self-adjustment in lowering their operating rate, production margin losses continue in the industry. In the first half of 2025, the output of crude oil, natural gas, fertilizer and agricultural chemical all increases in general. Besides, apparent consumption, imports and exports of basic chemicals and synthetic materials all rise on the whole as well. However, petrochemical enterprises are experiencing declines in their revenue, profits and total import & export value due to the slipping product prices amid intensified competition in the market.
Impact of “anti-involution policy” on petrochemical industries
Energy: JLC’s statistics indicate that there are nearly 40 enterprises with CDU capacity of 2 million mt/yr or less, and the total capacity reaches 40 million mt/yr. The eliminated production capacity is basically in long-term shutdown, and a few independent refineries mainly produce semi-finished products, which have limited effects on refined oil supply. With the elimination of outdated production capacity, the upgrading of refining enterprises has also been promoted in the meanwhile. For instance, the overall shutdown, relocation and upgrade of PetroChina Dalian Petrochemical signal a crucial step in high quality development of China’s refinery industry, as well as the compliance with safety and environmental protection requirements. With the implementation of “reducing oil and increasing chemicals” strategy, refineries are making an effort to increase the capacity of high-end chemical products. In the future, anti-involution in the energy sector will not only be the removal of backward production capacity, but the accelerated steps towards a concentrated, intelligent and integrated production that complies with the requirement of low-carbon production and capacity upgrading. In the meanwhile, with the saturation of demand in China's refined oil market and the rapid development of alternative resources, refined oil exports in the energy industry are likely to be liberalized to some degree in consuming the surplus of resources.
Chemical: The National Development and Reform Commission and other departments stressed that it is crucial to prevent enterprises from selling below cost and expanding production capacity recklessly, and improve industry concentration through technological innovation, merger and restructuring. The Ministry of Industry and Information Technology and other five departments jointly issued the "Notice on Carrying out a Thorough Assessment of Old Equipment in the Petrochemical and Chemical Industry", requiring a thorough evaluation of coal chemical plants that have been in operation for more than 20 years to promote green and intelligent transformation or elimination. This will lead to a short-term withdrawal of certain capacity. The tightening supply, therefore, will push up some coal chemical products’ prices. The medium- and small-scale or high energy consumption enterprises are bearing great pressure in eliminating their obsolete capacity, while major enterprises, such as Ningxia Baofeng Energy and Shandong Hualu Hengsheng are likely to further consolidate their positions by mean of technology advancement and large production capacity. In the long run, however, through mergers and acquisitions, as well as capacity replacement, the chemical industry will focus more on major enterprises. In addition, policy-driven revolution in transitioning from coal chemical products to high-end products (coal-to-olefin and coal-to-MEG), and green products (green methanol) will prompt enterprises to revolutionize technology innovation. As approval for capacity expansion plans tends to be strict, and the backward capacity is gradually being phased out, the supply-demand fundamentals in the chemical industry is expected to reach a balance, which will stabilize market prices progressively.
Rubber and plastic: In response to the prominent structural contradictions of oversupply, intensified market competition, and continuous decline in efficiency in recent years, multinational companies are carrying out strategic evaluation and repositioning. They are accelerating layout adjustments and strategic restructuring, with a focus on efficiency and sustainable development capabilities, to prepare for the next economic cycle and new opportunities for development. Simultaneously, China’s enterprises are making adjustments in layout and industry chain patterns as well, driven by the supply-side structural reform. For example, Sinopec Yanshan Petrochemical comprehensively adjusts the strategic layout of products and relocates PE production lines to Inner Mongolia, deploys high-end rubber products in Tianjin, and keeps high-end products with less energy consumption in Beijing to meet the needs of high-end markets. Sinopec Qilu Petrochemical shuts their units down for overall upgrade as well. Besides, enterprises in East China plan to make adjustments based on policies of reducing oil and increasing chemicals; those in South China are upgrading and renovating devices that have been in operation for over 20 years. Chlor-alkali industry will carry out overall industry restructuring in the future, given the current severe problems of high energy consumption and homogenous competition, etc. The rubber and plastic enterprises will strive for technology innovation and improving core competitiveness to catch up with foreign enterprises.
Overall, the anti-involution and the elimination of obsolete production capacity will prompt enterprises to make transitions from reckless capacity expansion to high quality development. The industry may experience pains in a short term, but it is beneficial to the whole industry pattern, by means of technology innovation and improvement in competitiveness. Relying on resources and scale advantages, leading enterprises will benefit from policies, while small- and medium-sized enterprises can hold together or based on small and beautiful technical advantages to cultivate niche fields, otherwise they may face the risk of exiting the market. In the future, the petrochemical industry will focus more on low-carbon, high-end, and intelligent development in initiating balanced supply-demand fundamentals. With further clarity of the industrial policy, the petrochemical industry is waiting to transform like a butterfly breaking free from its cocoon.
