PE market shifts from geopolitical-driven to supply-demand fundamentals

In H1, geopolitical tensions in the Middle East, rather than supply-demand fundamentals, drove PE price movements. Entering August, maintenance restarts and a massive wave of new capacity are set to reshape the supply-demand balance. Downstream demand remains weak at 30-40% operating rates, with peak-season recovery uncertain. Low inventories offer some support but have largely been priced in. Late August is the tipping point---supply surge vs. demand resilience will decide the market's direction.

In the first half of the year, under the combined effects of geopolitical conflicts in the Middle East, a sharp contraction in import supply, and domestic plant maintenance and production cuts, supply-demand dynamics ceased to be the dominant factor in the PE market. Price movements were essentially dictated by developments in the Middle East. Entering August, the market's price has continued to fluctuate, with Middle East geopolitics still exerting significant influence, while the weight of supply-demand factors on prices is gradually increasing. Particularly with plant restarts and maintenance coexisting, coupled with a massive wave of new capacity launching in the second half of the year, PE market's supply-demand balance is poised for a dramatic shift.

In the short term, plant maintenance and restarts coexist. Recently, China domestic PE operating rates have edged down from their highs, mainly due to the concentrated shutdowns of PE plants. At the same time, some plants are expected to restart recently, which will lead to a notable recovery in operating rates. Between these opposing forces, although supply has not surged abruptly in the short term, a gradual release is expected in mid-to-late August.

However, compared with the routine supply fluctuations from maintenance and restarts, the real pressure lies in the distant supply wave. In 2026, China's PE capacity expansion pattern has been quite extreme. In the first half of the year, only 500kt/year HDPE/LLDPE plant of BASF Zhanjiang Verbund Site Project and 300kt/year LDPE/EVA plant of Yulong Petrochemical have been launched. In August, two 450kt/year plants of PetroChina Tarim II have been launched.

Subsequently, Sabic Fujian Petrochemical II's two PE plants (totaling 1 million tons/year) are locked in for a late-August start-up, and Shandong New Era's two plants totaling 700kt/year are preliminarily scheduled for late August as well. Additionally, key projects such as ChinaCoal Shaanxi Yulin II and Huajin Aramco Petrochemical will be launched in Q4 or toward year-end.

On the demand side, the capacity to absorb such a massive supply surge appears rather weak. According to market feedback, the current composite operating rate of PE downstream sectors is around 30-40%, with some extreme off-season industries operating at only 10-20%. During the peak summer heat, end-user orders have seen insufficient growth. The market largely pins its hopes on the seasonal recovery of northern China's autumn greenhouse film orders in late August and the subsequent peak season in Sep and Oct. However, based on historical patterns, downstream demand performance remains uncertain. In recent years, the peak-season characteristics have gradually weakened, with their boosting effects largely priced in advance. Downstream players have adopted a cautious low inventory and essential procurement strategy, with concentrated restocking rarely occurring.

From an inventory perspective, current inventories are at multi-year seasonal lows, which to some extent limits downside price risks. However, the supply pressures mentioned earlier remain a critical test as the market moves from its current stalemate toward a directional choice. The bullish impact of low inventories has largely been priced in. The pace of subsequent supply releases-whether from maintenance restarts or new capacity ramp-ups-will gradually test downstream absorption capacity.

Entering mid-to-late August, as supply growth transitions from expectations to reality, the influence of supply-demand factors on the market will continue to strengthen. Barring extreme developments in the Middle East, if supply pressures are concentrated in their realization while demand fails to keep pace, market price may face downward pressure amid continued fluctuations. Conversely, if essential demand under low inventories proves more resilient than expected, the market may seek a new equilibrium after passing the stress test.