Why are chemicals considered the next non-ferrous metals?

Lately, many friends have been asking me: is it still safe to chase the chemical sector?

It’s true — chemicals have surged sharply over the past six months, with the entire sector up roughly 70% and countless stocks doubling. But the stronger the rally, the more anxious people become: afraid of buying at the top, yet also scared of missing out.

As someone with 15 years in the materials industry — who lived through the 2016 supply-side reform and witnessed countless cycles — I want to break down the fundamental logic behind this chemical rally. My goal is to help you answer one critical question:

Why are chemical stock prices doubling, even when product prices are flat or falling?

The Apparent Contradiction: Stock Prices Skyrocket, But Product Prices Don’t Move

Let’s start with a striking observation.

From May last year to now, the chemical sector has performed extremely well. But looking back at our lab’s purchasing records:

• PTAin January 2026 cost around 5,200 yuan per ton — roughly the same as in May 2025.
• Soda ashhas weakened further, falling from 1,300 to 1,200 yuan per ton.
• MDI, TDI, and other key chemicals remain near historical lows.

Worse still are corporate earnings. At an industry conference last month, a technical director from a listed chemical company told me wryly:

“Our company lost 300 million yuan in Q3, but our stock rose 50%. Even I can’t explain it.”

This is the market’s biggest paradox:Stocks are euphoric, products are stagnant, and companies are losing money.

By normal logic, this sounds like a greater-fool game.

But consider this: in January 2026 alone, the chemical sector saw 120 billion yuan in net capital inflows. Who was buying? Institutions, not retail investors. These players are not pouring in real money just to catch a falling knife.

So what exactly are they seeing?

To Understand Today, You Must Understand 2016

To grasp this rally, you first need to understand what happened in 2016.

When I entered the industry in 2010, chemical plants operated under a brutal logic:

“Whoever expands capacity dies, but whoever doesn’t expand dies faster.”

Take one example. In 2014, we worked with a PTA producer running at only 60% capacity, yet they kept producing at a loss. Why? Because shutting down meant losing customers and market share. Everyone thought the same way, creating a vicious cycle of industry-wide losses.

The 2016 supply-side reform broke this deadlock.

I know the National Bureau of Statistics figures by heart:From 2016 to 2020, the chemical industry eliminated more than 30% of outdated capacity.But even more important: new capacity expansion was effectively capped.

Starting in 2017, I led environmental impact assessment (EIA) applications for several new projects. I personally experienced how difficult approval became: layers of checks for environmental protection, safety, and energy consumption. A small project often took two years to approve — let alone large-scale facilities.

Then, from 2022 to 2025, the chemical industry suffered consecutive years of losses. The result?Virtually no major new capacity is scheduled to come online in 2026–2027.

What does this mean?Supply across the chemical industry is effectively locked down for years to come.

Why Do Expectations Move Before Reality?

You might ask: I get that supply is constrained, but demand is still weak. Why are stocks rising first?

Let me share a story.

In 2016, shortly after I joined my current company, I led a technical upgrade on an old plant. A neighboring chemical factory had closed, and its equipment was being scrapped and sold as scrap metal. My boss at the time — a 30-year industry veteran — looked out the window and said something I still remember:

“When prices rise later, we’ll be the ones calling the shots.”

I didn’t fully understand it then. Now I know he was right.

When only a few major players remain on the supply side, pricing power shifts completely.The old logic was: If you don’t cut prices, someone else will.The new logic is: If you raise prices, others will follow.This isn’t monopoly; it’s a natural evolution of market structure.

Smart money doesn’t wait for prices to rise before buying.It buys when it sees the inevitability of a price rebound.

That’s why expectations precede reality.

Take soda ash as a real-world example. At 1,200 yuan per ton, it’s clearly at a low level. But think about this:If supply is locked, even a modest recovery in demand could trigger a sharp price jump.

Chemicals have a U-shaped cost curve. The cost of marginal capacity is extremely high. Once demand picks up, prices can jump sharply above marginal cost.

Institutions are betting on that “once.”

How to Read the Current Rhythm

By now, you might think I’m blindly bullish. I’m not.

Long-term logic and short-term price action are two different things.

In my experience, cyclical sectors like chemicals never move straight up. They advance two steps, retreat one — sometimes even one up, two down. Why? When expectations become too unanimous, some investors rush in early, while others take profits.

I saw a similar script in 2017. After supply-side reform was announced, optimism exploded and stocks surged. Then the 2018 trade war crushed demand expectations, and prices gave back most of their gains. But by 2019–2020, companies with real cost advantages and technical barriers hit new highs.

Here’s my current approach:

• I won’t chasestocks that have doubled but still operate at a loss.
• Instead, I focus on segments where capacity has been fully cleared, with no new supply in the next two years, and where players have cost or technical moats.

Examples include:

• MDI: Only a handful of global producers, almost no new capacity — massive upside if demand recovers.
• Certain specialty fine chemicals: Smaller market caps but high technical barriers, keeping new competitors out.

A Thought-Provoking Hypothesis

Finally, I’d like to propose a potentially bold hypothesis.

Viewing this rally only as a “cyclical reversal from locked supply + recovering demand” may be too simplistic.

Could the valuation framework of the chemical industry be undergoing a complete restructuring?

In the past, chemicals were treated as pure cyclical stocks, often valued at a P/E ratio of around 10x.But going forward, if supply remains constrained long-term, leading companies will see much narrower profit volatility, more stable cash flow, and stronger dividend capacity.

Will they still be cyclical stocks?Or could they gradually shift toward a valuation logic closer to utilities or consumer staples?

I’ve already started allocating part of my holdings based on this view. Of course, this is only a hypothesis — time will tell if it proves correct.