Guolian Minsheng Securities: The supply-side constraints in the chemical industry are expected to show medium to long-term sustainability. Leading low-carbon companies in the sector are expected to significantly benefit.

Guolian Minsheng Securities released a research report stating that in the context of the draft of the "Ecological Environment Code" involving legal constraints on "dual carbon," the legalization of carbon market responsibilities, and the strengthening of the circular economy system, the supply-side constraints in the chemical industry are expected to show medium to long-term sustainability. The guidance of "implementing a dual control system for total carbon emissions and intensity" is expected to promote the transformation and upgrading or elimination of high carbon emission-low output capacity in the chemical industry. Leading companies in low carbon emissions in segmented industries are expected to benefit significantly. The company recommends focusing on: (1) the entire industry chain of oil-based chemicals; (2) the entire industry chain of coal-based chemicals; (3) leading companies in low emission sub-industries of basic chemicals. The main viewpoints of Guolian Minsheng Securities are as follows: Fundamental navigation for dual carbon policies On March 12, 2026, the Fourth Session of the Fourteenth National People's Congress of China voted to pass the Ecological Environment Code of the People's Republic of China. As the second comprehensive law named "code" after the Civil Code, the company's analysis of the draft suggests that it may complete a full chain of "goalssystemsregulationssupervisionpunishmentscompensation" or elevate carbon emission constraints from administrative guidance to legal responsibilities, shifting carbon costs from "expected variables" to "legal costs." If formally enacted, this will profoundly change the supply logic and capital expenditure behaviors of cyclical industries, especially the chemical industry, significantly increasing the intensity of supply-side constraints and enforcement certainty. Legalization of the carbon market and quota clearance responsibilities, strengthening the rigidity of emission reduction responsibilities The draft of the Ecological Environment Code specifies the responsibilities of relevant departments of the State Council for managing product carbon footprints and regulating carbon market trading. It also clarifies that key greenhouse gas emission units included in the national carbon emission trading market must fulfill mandatory emission reduction responsibilities as prescribed by the state. Units that fail to fully clear their carbon emission quotas will be legally liable. In the future, carbon costs will no longer be "expected variables" but "legal costs," and low-emission, high-output enterprises will gradually replace high-emission, low-output enterprises, becoming a major highlight of green transformation. Circular economy and resource reduction principles further extend supply-side constraints upstream The draft of the Ecological Environment Code clearly outlines the goal of developing a circular economy, emphasizing reduction, reuse, and resource transformation. This indicates that future industry competition will shift from "scale expansion" to "unit resource efficiency and carbon efficiency competition." "Dual carbon" is receiving unprecedented attention and is sprinting into the "14th Five-Year Plan" The company tracked 57 provincial party secretaries and 18,916 public movements from 2020 to 2025 and found that starting in September 2025, the attention of provincial party secretaries to "dual carbon" has significantly increased by 137% compared to the same period last year, with a peak growth of over 58% compared to the peak during the energy conservation and emission reduction period in 2021. September 2025 was when the General Secretary made a commitment to carbon emissions reduction as part of the Nationally Determined Contributions (NDC) at the United Nations Climate Change Conference. The company believes that the promotion of "dual carbon" during the "14th Five-Year Plan" will significantly exceed previous efforts. The "dual carbon control" and the "three-dimensional management system for carbon" during the "14th Five-Year Plan" are likely to become powerful constraints for cyclical industries, pushing local governments to optimize industrial structures according to local conditions and drive the transformation and upgrading or elimination of some "high-emission, low-output" capacity in cyclical industries, especially the chemical industry. Industries with high carbon emission intensities in segmented industries may be the first to be restricted From the perspective of dual carbon emissions control, local governments may impose strict restrictions on industries with high intensity to meet their emission reduction intensity targets. Sectors such as ammonia fertilizers, coal chemicals, and chlor-alkali may face limitations on new production capacity, as their growth models based on capital expenditure expansion have essentially come to an end. With the expansion of the national carbon market and tightening quotas, high carbon emission intensities will directly significant carbon quota costs, continuously squeezing the living space of high-cost, low-efficiency capacity in the industry. Trend of capital expenditure contraction in the chemical industry Since 2024, the capital expenditures of the petroleum and petrochemical and basic chemical sectors have shifted from positive to negative year-on-year, continuing the downward trend in the first three quarters of 2025. The willingness for supply expansion has significantly decreased. Against the backdrop of the continued strengthening of the three-dimensional management system during the "14th Five-Year Plan" and the accelerated advancement of carbon assessments, the company assesses that the approval of new high carbon production capacity will be more cautious, leading to a systemic reduction in supply elasticity. If marginal improvements in demand combine with a loosening liquidity environment, the industry's profit center is expected to rise. Risk warning: Risks of data errors and errors in sources affecting results; risks of differences between the text of the code and the draft; risks of policy enforcement intensity falling short of expectations; risks of demand recovery falling short of expectations; risks of carbon cost transmission facing obstacles; risks of delays in technological transformation and transition progress; risks of significant fluctuations in raw material and energy prices.