As China approaches the 15th Five-Year Plan period (2026–2030), the refining and basic chemicals sector is entering a structurally different phase from the past decade.
The policy focus is shifting away from encouraging new capacity toward managing existing capacity through economic and regulatory constraints, reshaping both investment behavior and competitive dynamics across the industry.
1 | Policy inflection: from "expansion tolerance" to incremental restraint
During the 14th Five-Year Plan, policy signals implicitly tolerated capacity expansion, particularly for integrated refining-chemical projects. That stance is now reversing.
Early indicators suggest that the investment cycle in traditional refining and bulk chemicals is losing momentum. Growth in under-construction projects across the basic chemicals sector has already slowed markedly, signaling tighter approval discipline and rising funding constraints.
Importantly, this does not imply an immediate administrative halt to new projects. Instead, incremental capacity is being screened more strictly, with approval logic increasingly tied to integration level, oil-to-chemical conversion capability, and industrial park alignment.
The result is a gradual but meaningful slowdown in traditional capacity growth over the next one to two years.
2 | Exit logic upgrade: compliance costs replacing administrative cuts
Production capacity rationalization under the 15th Five-Year Plan is unlikely to rely on blanket shutdown orders.
The more significant shift lies in how exit pressure is transmitted.
Policy design is increasingly centered on raising the ongoing cost of compliance rather than enforcing one-off eliminations. Energy efficiency benchmarks, carbon constraints, tax compliance mechanisms, and financing discipline are converging into a layered cost structure that disproportionately affects inefficient and marginal units.
This approach produces two effects:
- In the short term, effective supply reduction remains limited, as many exits involve long-idled or low-utilization assets.
- In the medium term, the economics of maintaining legacy capacity deteriorate steadily, accelerating voluntary or forced withdrawals without explicit administrative intervention.
3 | Timing and sequencing: "looser first, tighter later"
The implementation path is expected to be uneven.
In the early stage of the 15th Five-Year Plan, macroeconomic and employment considerations are likely to temper the pace of capacity exits. Policy emphasis will focus on institutional preparation, standard setting, and enforcement consistency rather than aggressive closures.
As the 2030 carbon peak target approaches, regulatory tolerance is expected to narrow. Local governments face rising KPI pressure on emissions and energy intensity, increasing the likelihood that high-energy, high-emission capacity becomes the primary adjustment margin.
4 | Structural divergence on the demand side
On the demand front, the recovery profile remains uneven.
Traditional bulk chemical demand linked to property and infrastructure shows limited elasticity, constraining price recovery for generic products. In contrast, downstream manufacturing sectors, including automotive, energy transition-related industries, and advanced materials, are increasingly performance-driven rather than volume-driven.
This shift elevates requirements for product consistency, purity, and functional performance, effectively raising entry barriers across parts of the chemical value chain.
5 | Market implications: concentration, divergence, and external exposure
These policy and market dynamics are reinforcing structural divergence within the industry.
Integrated players with stronger balance sheets, compliance capabilities, and flexibility in product mix are better positioned to absorb rising costs and consolidate market share. Smaller, less efficient operators face mounting pressure from both regulation and market competition, with limited ability to offset costs through expansion.
At the same time, export dependence is becoming structural for many bulk chemical products as China's domestic absorption weakens. While exports are not directly restricted, reliance on low-price volume strategies increases exposure to trade frictions and anti-dumping risks, further shifting the basis of competition toward non-price factors.
The 15th Five-Year Plan does not signal a contraction of China's refining and chemical industry. Rather, it marks a transition from scale-driven growth to cost-driven selection.
Production capacity remains abundant, but survivability is being redefined. The key question is no longer how much capacity exists, but which capacity can operate sustainably under rising compliance, carbon, and capital constraints, and which players are positioned to adapt as China's role in global chemical supply chains evolves.
The above reflects our initial assessment of the evolving policy framework. A more detailed assessment of policy mechanisms, cost transmission pathways, production capacity exit scenarios, and global market implications is available in the January issue of China (Energy Transition) Policy Perspective (produced by GL Consulting).
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