After entering the 15th Five-Year Plan period, China's petrochemical industry is facing dual pressures. On the one hand, capacity in traditional chemical products has expanded rapidly, and most products are expected to be in long-term surplus by 2030, dragging prices down. On the other hand, demand for refined oil products has already peaked and is now on a clear downward trend. With diesel peaked around 2018-2019 and gasoline in 2021, surplus refining capacity remains difficult to absorb.
1 | Overcapacity, rising costs, and declining profitability anchor the policy direction toward expanding high-value new chemical materials in the 15th Five-Year Plan.
First, the rapid expansion of traditional capacity has created long-term overcapacity. During the 14th Five-Year Plan, capacity growth for basic chemical products significantly outpaced demand growth, and structural oversupply has basically been locked in.
Second, rising costs and compliance requirements are squeezing profit margins. Fluctuations in feedstock prices and increasing environmental-compliance costs, superimposed on overcapacity, have pushed many small and medium-sized enterprises into a dilemma of higher output without higher income. The decline in refined-oil demand has further compressed overall refinery margins, so the profitability of the traditional "refining + basic chemicals" model has clearly weakened.
Against this backdrop, shifting from fuels to chemicals remains a necessary path. Primary refining capacity has already peaked, and new capacity will be strictly controlled over the next five years, while inefficient capacity will be gradually phased out. Reducing low value-added fuels and increasing the share of high value-added new chemical materials are the core measures for easing overcapacity and restoring profitability. National targets for the 15th Five-Year Plan also clearly list raising the share and self-sufficiency of new chemical materials as key tasks.
2 | Policy tightening and green incentives accelerate the shift toward high-end chemical materials.
Stricter approval for traditional capacity. Policy documents issued in 2025 make it clear that new capacity for traditional bulk chemical products will be strictly controlled. Green upgrading and capacity-replacement projects are encouraged instead, to curb incremental overcapacity at the source.
Targeted support for high-end segments. Nine key areas have been designated as priority development directions, including electronic chemicals, high-end polyolefins, high-performance fibers, specialty rubber and high-performance membranes. These segments currently have relatively low self-sufficiency and exhibit clear structural supply gaps.
Green incentives combined with restraints. Consumption tax is expected to be shifted downstream to the retail end, with a likely window between 2026 and 2027, which will indirectly raise the cost of fuel products. At the same time, green chemical projects can obtain tax incentives and green-finance support, steering the industry away from a simple pursuit of scale toward a "green + high-end" development model.
3 | Persistent technology barriers, structural mismatches and fragmented upstream - downstream linkages are slowing the expansion of high-end materials.
Technological bottlenecks remain prominent. Core technologies for many high-end products are still controlled by foreign companies. Closing this gap domestically requires breakthroughs along the entire chain - from equipment and processes to formulations, so it is difficult to fully fill the gap in the short term.
Significant supply-demand mismatches. On one side, traditional products are oversupplied; on the other, high-end materials remain in short supply. Developing high-end products requires large upfront investment and has long payback periods, which many small and medium-sized enterprises struggle to bear. Moreover, if new high-end capacity is not closely anchored to downstream demand, capacity utilization rates can also end up low.
Disconnection between production bases and demand centers. Some chemical parks still focus on basic chemicals and have not yet formed effective linkages with downstream emerging industries such as new energy vehicles, electronics and green power. As a result, many high-end materials are "produced far from where they are needed," pushing up both logistics and market-alignment costs. For a more detailed discussion of supply gaps in high-end chemical materials, please refer to the full report.
4 | Strategic positioning, green-policy leverage and cluster-based layouts are becoming the core pathways for a successful petrochemical transition.
A successful transition hinges on aligning development strategies, financing tools and supporting conditions. The key tasks can be grouped into three directions:
Target Niche Gaps and Avoid Oversupplied "Red Oceans"
Abandon the mindset of blindly pursuing large-scale and full product ranges, focus instead on niche products within the policy-supported high-end fields where market gaps are clearly defined. Detailed sub-segments within the nine priority tracks are provided in the report. These often feature higher technological barriers and richer margin space, making it easier to build differentiated competitive advantages.
Make Full Use of Green-Policy Dividends to Reduce Transition Costs
- Pilot subsidies. Industrialization pilots for green liquid fuels can receive subsidies of up to the maximum allowable share of total investment. Refinery green-hydrogen projects are given priority access to medium and long-term manufacturing loan quotas.
- Park incentives. Enterprises that locate in zero-carbon industrial parks may be exempted from some energy-saving assessments and carbon-emission evaluations, and can enjoy fiscal and tax incentives, significantly reducing compliance and capital costs.
Align Capacity Layout with Industrial Clusters and Downstream Demand
Replan layout under the logic of seven national petrochemical bases and downstream industrial clusters. For example, the Yangtze River Delta and Pearl River Delta can be tightly linked with the automotive and battery industries. Northwest China is closely connected to green-power supply, while Hainan focuses on high-end projects serving foreign trade. Matching production bases with demand centers can lift utilization rates and help profits materialize more quickly.
The combination of depressed profits and overcapacity in chemical products is not only forcing the industry to shift toward refining less and producing more chemicals, but also creating an opportunity to optimize industrial structure. Over the next five years, the industry's focus will shift from blind capacity expansion to capturing policy-supported high-end segments, staying closely aligned with downstream demand, and making full use of green fiscal and financial support. Enterprises that manage to achieve these three goals are expected to see substantial improvements in profitability and competitiveness during the transition, while those that fail to adjust in time will face the risk of being phased out by the market.
The full report dives deeper into:
- Detailed overcapacity lists and data for traditional chemical products
- Sub-segment breakdowns and subsidy-application guidelines for the nine high-end tracks
- downstream-demand matching guidance and layout recommendations for the seven national petrochemical bases.
The above content is the major conclusions and highlights extracted from China (Energy Transition) Policy Perspective produced by GL Consulting. Click the hyperlinks for the full text or email glconsulting@mysteel.com.
