How do Middle East conflicts resonate with the "anti-involution" movement?

Summary

Since last July, the “anti-inevitable-involution” policy has continued to deepen, and initial results have emerged in capacity governance in some industries. The supply-demand relationship and competitive landscape have shown positive changes. Recently, the escalation of the conflict in the Middle East has triggered an energy supply shock, injecting new external variables into China’s ongoing “anti-inevitable-involution” process.

We believe that the conflict in the Middle East may resonate with the “anti-inevitable-involution” efforts in the relevant industries from both the supply and demand sides. Chemical, coal, and new energy (especially solar PV) are typical examples. On the one hand, the conflict in the Middle East leads to a passive contraction in energy supply. Oil and gas shortages may directly result in lower output in high energy-consumption industries, while rising energy prices also curb “involution-style” competition driven by low energy costs. On the other hand, the conflict in the Middle East also increases domestic demand for some industries through three types of substitution effects: export substitution by overseas competitors with high reliance on oil and gas imports; import substitution for products with high reliance on overseas raw materials; and incremental demand created by energy substitution in the short term (coal and oil and gas) and in the medium to long term (new and old energy), thereby optimizing the supply-demand structure in related industries.

For the chemical industry, after the outbreak of the conflict, domestic chemical product prices rose noticeably, and some chemical products’ operating rates increased in tandem. The export growth rate and market share of chemical products are expected to further improve, considering that the phased energy supply shock has not yet affected capacity changes. Our calculations show that increased demand can raise the chemical industry’s capacity utilization rate by about 2.3 percentage points. The conflict in the Middle East has also brought additional demand for coal-to-chemicals and exports to the coal industry. Coal prices have risen moderately, and we expect coal consumption to increase by around 0.8 percentage points as well, continuing to improve the coal supply-demand relationship. From a medium- to long-term perspective, from the viewpoint of energy security, countries’ strategic reserve demand for energy commodities increases, which may support coal’s total demand and price to some extent. From the energy transition perspective, the global energy mix may accelerate its evolution toward renewable energy. At present, China’s solar PV industry is still facing a situation where capacity utilization rates are significantly low. The Middle East conflict may bring about an incremental demand of around 5 percentage points for the solar PV industry, which can partially help optimize the supply-demand relationship.

Main Text

“Anti-inevitable-involution” continues to advance, with initial results from capacity governance

Since the July 2024 meeting of the Political Bureau of the CPC Central Committee first proposed “preventing ‘involution-style’ vicious competition” [1], “anti-inevitable-involution” has become one of the important policy directions related to industries. In July 2025, the sixth meeting of the Central Financial and Economic Affairs Commission emphasized the need to “govern low-price and disorderly competition among enterprises in accordance with the law and regulations” and “promote the orderly exit of backward capacity” [2], releasing a clearer signal for “anti-inevitable-involution.” Subsequently, industries such as coal, steel, cement, chemicals, solar PV, and new energy vehicles rolled out a series of self-discipline and rectification measures. Entering 2026, the government work report continued to emphasize the need to “carry out in-depth rectification of ‘involution-style’ competition” [3]. The “15th Five-Year Plan and the 15th Five-Year” (’15th Five-Year Period’) Outline for the period beyond “15th Five-Year Plan” (Outline) also proposes to “improve the capacity monitoring and early-warning mechanism and take measures such as planning guidance, capacity control, price governance, and industry self-discipline,” as a key task for “improving industrial regulation and the policy system” [4]. We believe this indicates that during the “15th Five-Year Period” “anti-inevitable-involution” policies will continue to advance, and governance measures are expected to be further refined.

Figure 1: Timeline of “anti-inevitable-involution”

Source: Websites of the Chinese government, Qiushi, and CICC Research Department

With the advancement of “anti-inevitable-involution,” initial results have emerged in capacity governance in some industries. This article focuses on three industries: chemicals, coal, and new energy (especially solar PV). From the price perspective, since the “anti-inevitable-involution” efforts began in the second half of last year, the PPIs of all three industries have stopped falling and rebounded, which may reflect improvements in industry supply-demand relationships. Among them, the coal industry is particularly obvious. In July last year, the National Energy Administration conducted verification of coal mine production, targeting the overproduction behavior of some coal mine enterprises “compensating price with volume” [5]. As of this February, the average monthly price of thermal coal at Qinhuangdao Port relative to July last year has risen cumulatively by more than 10%. From the output perspective, since last July, output compression in the chemical, coal, and solar PV industries has ranged from 2.4% to 20.4%. In the fourth quarter of last year, capacity utilization rates in industries such as chemicals and solar PV also increased. From the profit perspective, compared with the second quarter of last year, the gross margin rates of chemicals, coal, and solar PV for industrial enterprises in the second half of last year improved. Based on listed company data, since the third quarter of last year, the ROE of industries such as chemicals and solar PV also improved at the margin. These indicators suggest that, with the continued advancement of “anti-inevitable-involution,” the supply-demand structure in industries such as chemicals, coal, and solar PV has undergone positive changes.

Figure 2: Changes in prices, output, and profits for the three industries: chemicals, coal, and solar PV

Note: Price changes for the chemical, coal, and solar PV industries are estimated based on the PPI month-on-month changes from July 2025 to February 2026 for the chemical raw materials and chemical products manufacturing industry, the coal mining and washing industry, and the manufacture of PV equipment and components, respectively; output changes for the chemical, coal, and solar PV industries correspond to year-on-year changes in output in the second half of 2025 for various chemical products (such as chemical pesticides, caustic soda, soda ash, sulfuric acid, synthetic rubber, ethylene, etc.), raw coal, and solar PV cells; capacity utilization rates (or gross margin rates) for the chemical, coal, and solar PV industries correspond to quarter-on-quarter changes in capacity utilization rates (or gross margin rates) for industrial enterprises in the second half of 2025 for the chemical raw materials and chemical products manufacturing industry, the coal mining and washing industry, and the capacity utilization rates (or gross margin rates) for the electrical machinery and equipment manufacturing industry; the ROE for chemicals, coal, and solar PV corresponds to changes in ROE for the related second-level industries of listed companies in the third quarter of 2025 relative to the second quarter.
Source: Wind, CICC Research Department

The conflict in the Middle East has become a new variable for reshaping industrial supply and demand

Recent geopolitical conflicts have injected a new external variable into China’s “anti-inevitable-involution.” This shock not only lifts the global energy cost midline, but also drives the restructuring of supply-demand relationships in some domestic industries.

First, the conflict in the Middle East leads to a passive contraction in energy supply. Affected by the blockade of the Strait of Hormuz and the passive shutdown of key oil-producing countries in the Middle East, as well as attacks on some energy facilities, global oil and gas supply has fallen into shortage, resulting in lower output in high energy-consumption industries. Energy price increases transmit step by step along the industrial chain, which also makes “involution-style” low-price competition based on low energy costs no longer economically feasible.

At the same time, the conflict in the Middle East can also increase domestic demand for some industries through three substitution effects: export substitution by overseas competitors with high reliance on oil and gas imports in the short term; import substitution for products with high reliance on overseas raw materials; and increased demand brought by energy substitution in the short term (coal and oil and gas) and in the medium to long term (new and old energy), thereby optimizing the supply-demand structure in related industries.

► In terms of export substitution, compared with some export-oriented competitors, China has a higher self-sufficiency rate of energy supply, a lower reliance on net oil and gas imports, and relatively more energy reserves, meaning the manufacturing sector has a higher margin of supply security. In 2023, China’s net imports of oil and natural gas as a proportion of total energy supply were below 20%, lower than major regions such as ASEAN (about 26%), the European Union (about 58%), Japan (about 61%), and South Korea (about 62%) (Figure 3). The “complete consumption coefficient” of mining output in the Middle East (Saudi Arabia, the UAE, and Kuwait) for manufacturing industries in India, South Korea, Japan, and ASEAN is also higher than that in mainland China. As of December 2025, India and ASEAN have lower strategic petroleum reserves (SPR). Japan and Korea have higher SPR days, but their energy external dependence is high, and they lack support from large-scale domestic coal and natural gas production capacity like China. Their energy保障 system still faces severe challenges when dealing with the risk of prolonged supply disruptions. These countries’ energy-intensive industries may be more sensitive to high oil prices, creating opportunities for China’s related industries to substitute market share.

► In terms of import substitution, the Middle East is a major exporter of globally important basic chemical products. Any portion of domestic supply gaps caused by the conflict in the Middle East may be filled by domestic capacity, forming import-substitution demand.

► In terms of energy substitution, high oil and gas prices in the short term improve the relative economics of coal, triggering demand substitution from oil and gas to coal. From the medium to long term, energy shocks may strengthen countries’ demand for “supply self-reliance” and “price self-reliance” in energy. The pace of energy transition accelerates, driving continuous growth in demand for new energy.

► Next, we will discuss in depth three representative industries: chemicals, coal, and solar PV.

Figure 3: In 2023, China’s import dependence for oil and natural gas was lower than that of other export-oriented economies

Source: IEA, CICC Research Department

Figure 4: This round of energy supply shocks affects more countries with fewer strategic petroleum reserves

Note: Data as of December 2025
Source: International Energy Agency (IEA), CICC Research Department

Chemicals: Demand improvement may come through triple substitution

As the throat for transporting oil and gas and some chemical feedstocks, the Strait of Hormuz carries 20%-30% of global seaborne oil trade and 20% of the LNG trade volume. The blockade could affect 1/3 of global fertilizer seaborne trade volumes, nearly 50% of seaborne sulfur trade, about 35% of seaborne methanol trade volume, and 30% of global helium supply [6], directly causing supply shortages of relevant chemical products and raising production costs. As of March 20, 2026, the average value of China’s chemical price index [7] had risen by about 24% compared with the end of February (Figure 5).

Figure 5: Domestic chemical price index surged since the Iran conflict

Note: The chemical price index is calculated as the average of the price indices of chemical products such as liquid caustic soda, sulfuric acid, methanol, petroleum benzene, styrene, polyvinyl chloride, polyethylene, polypropylene, and polyester filament yarn.
Source: Wind, CICC Research Department

Compared with the Russia-Ukraine conflict period in 2022, the overall increase in chemical product prices in this round is higher and the elasticity is greater, which may be related to improvements in the industry supply-demand pattern under “anti-inevitable-involution.” In past years, increasing concentration in China’s chemical industry, together with last year’s “anti-inevitable-involution” governance, has initially formed an industry self-discipline and price coordination mechanism. The cost transmission efficiency in midstream links has improved significantly, and companies have demonstrated stronger pricing power in the face of energy shocks. During the Russia-Ukraine conflict, Brent crude rose from about $94 in late February 2022 to around $123 by the end of May 2022 (an increase of 31.3%). However, because domestic companies were in a peak period of capacity expansion at that time, competition to win market share intensified, and our calculated chemical price index increased by only 9.1%. In the current Iran conflict, due to the significant increase in concentration in “anti-inevitable-involution” industries, oil prices rose 54.8% and China’s chemical price index rose 24.1%, resulting in larger price increases for chemical products and higher elasticity.

Figure 6: Magnitude of price changes for key chemical products and crude oil

Note: Prices of various chemical products and energy are based on decadal (ten-day) data.
Source: Wind, CICC Research Department

Beyond chemical product price increases, the conflict in the Middle East also profoundly affects the supply-demand relationship in the chemical industry. First, compared with some chemical export and supply countries, China’s chemical industry has stronger resilience against risks. Demand for export substitution and import substitution is expected to rise. Looking at petrochemical product exports, in 2024 China, the United States, and the Netherlands are the global top three petrochemical product export economies. China’s export value accounts for 14.2% of the global share, the United States for 8.7%, and the Netherlands for 7.3%. Others include Germany (6.5%), South Korea (5.4%), India (4.6%), Japan (3.4%), and Singapore (3.3%) [8]. In terms of reliance on oil and gas resources, the “complete consumption coefficient” for the Middle East mining industry for chemical manufacturing in South Korea, India, Japan, and Southeast Asian countries is higher than in mainland China. This means they face bigger challenges from raw material supply disruptions and cost increases than China.

Figure 7: Global shares of chemical products’ imports and exports in 2024

Source: PIIE, CICC Research Department

Figure 8: The complete consumption coefficient of chemical products for Middle East mining in Japan, South Korea, and Southeast Asia is higher than that of mainland China

Source: ADB Input-Output Tables, CICC Research Department

Figure 9: Global petrochemical industry revenue distribution in 2024

Source: PIIE, CICC Research Department

Second, China’s petrochemical industry has relatively high concentration and strong competitiveness globally, which helps respond to national strategic demand and maintain supply-chain security amid complex geopolitical conditions. Research by PIIE on 21 global top petrochemical companies (accounting for the main shares of the global petrochemical industry) [9] shows that whether measured by the share of revenues located in the country or by controlling revenue shares, China’s mainland petrochemical industry demonstrates stronger competitiveness globally, contributing to maintaining supply-chain security.

Third, China’s coal-to-chemicals route is expected to capture substitution dividends. International oil prices remain high, while domestic coal prices are smoothed by long-term contract (LTC) pricing mechanisms, strengthening the relative competitive advantage of coal-to-chemicals routes. Historical data show that the oil-coal price ratio (Brent crude oil / Qinhuangdao Port 5500 kcal thermal coal) and the domestic chemical products’ coal consumption volume have a positive correlation. Under the current pattern of “oil is expensive but coal is cheap,” substitution routes using coal as a feedstock (such as coal-to-olefins, coal-to-methanol, and coal-based calcium carbide PVC) highlight clear cost advantages and expand profit margins. Meanwhile, some coal-to-chemicals product categories still have room for capacity release—for example, the operating rate of coal-to-ethylene glycol is currently only about 65.9% [10].

Polyvinyl chloride (PVC) is a typical snapshot of how supply and demand in the chemical sector is being reshaped under the conflict in the Middle East. In global PVC capacity, the ethylene method (oil-based) accounts for 66% (the overseas mainstream), while the calcium carbide method (coal-based) accounts for 34% (China’s mainstream). Under this round of shock, production routes show clear divergence:

► Oil-based routes are hit more severely. Due to the rise in cost rigidity and the risk of raw material supply disruptions, ethylene-based units in Europe, Japan, South Korea, and Southeast Asia—regions that are highly dependent on oil and gas imports—have already seen production cuts or even shutdowns as profit margins narrow and raw materials become scarce.

► Coal-based routes benefit, and market share is expected to expand. With its resource endowment of high coal self-sufficiency, China can keep relatively stable coal prices domestically protected by supply guarantees, even as international oil prices soar. Our calculations show that the oil-coal price ratio has risen to the 99.1% percentile since 2015, bringing coal-to-chemicals routes’ cost competitiveness to a historical high.

Figure 10: During the 2021-2022 global energy crisis, the EU increased its share of chemicals imported from China

Note: The EU’s share of chemicals imported from China is adjusted using a moving average
Source: Haver Analytics, CICC Research Department

Figure 11: When oil is expensive and coal is cheap, coal-to-chemicals economics stand out

Source: Coal Resource Network, CICC Research Department

Therefore, in the short term, driven jointly by demand-side export substitution, import substitution, and coal-to-chemicals substitution, the conflict in the Middle East may push China’s chemical product export market share and import substitution rate higher. Based on current high-frequency data on operating rates (Figure 12), compared with before the escalation of the Middle East conflict, most chemical products’ operating rates increased simultaneously in March. This provides some evidence that substitution-related demand has increased, especially the operating rate of coal-to-PVC (coal-to-chemicals related), which rose by 9%. For a few chemical products—such as fertilizers and some intermediate chemicals—with higher dependence on imported feedstocks, operating rates declined due to negative supply shocks. Overall, however, from the supply side, China’s chemical industry may show resilience in the face of negative supply shocks.

Figure 12: Changes in operating rates of major chemical products

Source: Baichuan Yingfu, Zuochuang Information, CICC Research Department

From the demand side, based on our earlier calculations, by referring to the magnitude of the increase in China’s chemical product export share globally in 2022, the growth rate of chemical product exports may rise by about 13% [11], which could pull China’s chemical industry’s output growth up by approximately 3.0 percentage points. Given that phased supply shocks may not yet affect chemical industry capacity, the capacity utilization rate for the chemicals and chemical products sector in the fourth quarter of 2025 was 74.1%. Our calculations show that with increased substitution demand, there is roughly about 2.3 percentage points of upside space for the chemical industry’s capacity utilization rate.

In the medium term, under the normalization of geopolitical risk premia, the level of inventory that downstream industries find acceptable may shift—from a zero-inventory or even negative-inventory model driven by “produce to sell”—toward building up safety stock. This would create replenishment demand and, to some extent, help improve the chemical industry’s supply-demand relationship. However, in the longer run (3-5 years and beyond), for energy and supply-chain security considerations, countries may increase domestic petrochemical capacity through measures such as subsidies at home and taxes on imports. This will intensify competition among global petrochemical companies as more overseas capacity comes on stream, and substitution demand may then face downside pressure.

Coal: From “supply-demand imbalance” to “strategic reserves”

China’s “anti-inevitable-involution” governance in the domestic coal industry has also achieved positive results. It is shifting from disorderly large-scale expansion in the past toward high-quality development focused on balancing supply and demand. One key metric is that the proportion of changes in domestic coal inventory (supply-demand gap) versus consumption has declined for three consecutive years. It dropped from 3.0% in 2023 to 1.6% in 2025 (Figure 13), indicating that under the planning guidance of “anti-inevitable-involution” and constraints from safe production requirements, production self-discipline has strengthened in the coal industry. The ineffective accumulation of low-efficiency capacity has been curbed to a certain extent, and the supply-demand pattern is moving toward improvement.

The conflict in the Middle East has pushed up international oil prices, which gently boosts domestic coal prices through substitution demand. Because coal has substitution effects for oil and gas in scenarios such as power generation, coal-to-chemicals, and district heating. Based on historical experience, international oil prices and domestic coal prices have a linkage effect. The correlation between the Qinhuangdao Port 5500 kcal thermal coal benchmark and the spot price of UK Brent crude is relatively high. However, with abundant domestic coal reserves and the stabilizing effect of the long-term contract pricing mechanism since end-2016, domestic coal prices’ volatility is generally smaller than that of overseas coal prices. Affected by the Middle East situation, overseas coal prices have risen rapidly since late February—for example, Australian Newcastle coal prices rose by about 17%. Meanwhile, domestic Qinhuangdao thermal coal prices rose only slightly (by about 2%), influenced by the off-peak season in consumption, accumulating port inventories, and the coal long-term contract mechanism.

Figure 13: The proportion of domestic coal inventory changes to consumption has fallen for three consecutive years

Source: Coal Resource Network, Wind, CICC Research Department

Figure 14: This round’s domestic coal price fluctuations have been smaller than overseas coal price fluctuations

Source: Coal Resource Network, CICC Research Department

We believe the conflict in the Middle East may boost coal demand—at least from two angles. On one hand, as discussed earlier, under the logic of “oil is expensive but coal is cheap,” the economic advantages of coal-to-chemicals routes strengthen, which may increase coal demand for chemical use. In 2025, coal consumption for chemical use is around 360 million tons, roughly 7.3% of the 4.99 billion tons of total coal consumption for the full year. If we assume that the Middle East conflict causes coal consumption for chemical use to grow by 10% year-on-year [12], it would correspond to a boost to total coal consumption of about 0.7 percentage points. On the other hand, rising international energy prices also increase the competitiveness of domestic coal exports. Historical experience shows that when international crude oil prices rise, China’s coal export volumes typically accelerate (Figure 16). For instance, in the context of the Russia-Ukraine conflict, when crude oil prices surged, coal export volumes rose by 54% year-on-year in 2022 (compared with -19% in 2021). However, currently coal export volumes (2025: 6.59 million tons) account for only about 0.13% of total domestic coal consumption for the full year. Additional exports would raise coal demand by about 0.1 percentage points, so the impact on improving the domestic coal supply-demand relationship may be relatively limited.

Figure 15: Changes in coal consumption for chemical use

Source: Coal Resource Network, Wind, CICC Research Department

Figure 16: Coal export volumes and international crude oil prices

Source: Wind, CICC Research Department

From a medium- to long-term perspective, under an environment where global geopolitical risks intensify, coal may undergo a strategic value reappraisal from the viewpoint of energy security. Global energy management is shifting from just-in-time supply to “prepare for the worst.” Countries’ demand for strategic reserves of energy commodities is increasing. China’s coal self-sufficiency rate has remained above 90% for the long term [13], providing a foundational guarantee and system-level adjustment role in the national energy supply system. The positioning of coal capacity may evolve from simply clearing supply to retaining some capacity margin for emergency reserves, and the strategic significance of coal-based routes is also expected to increase.

New energy: A boost to demand from “Energy Transition 3.0”

After China’s solar PV industry experienced a bottom period of compressed profits across the entire sector in 2024, as institutional constraints of the “anti-inevitable-involution” policy took effect (such as regulating sales below cost, capacity controls, raising energy consumption standards, canceling export tax rebates, and establishing an industry price coordination mechanism), real expansion of new capacity has been substantially restrained, and the profitability of the industrial chain is undergoing repair. According to the latest data, shown in Figure 17, entering the first quarter of 2026, the gross margin of the main solar PV industrial chain shows signs of marginal improvement—especially for battery and module gross margins, which have stabilized and rebounded.

Rising fossil energy price midlines caused by the conflict in the Middle East may boost demand for new-energy-related industries. This is particularly evident in the European market. In Europe, electricity prices are marginally priced based on gas-power generation units. Higher natural gas prices drive demand for European ground-mounted PV power stations. As wholesale electricity prices changes transmit to the end retail side, they will further increase demand for household PV and energy storage systems [14]. We believe, referencing the experience of 2022, if the conflict in the Middle East continues, Europe’s procurement demand for China’s solar PV equipment may increase.

Figure 17: Improvement in gross margins along the solar PV industrial chain after “anti-inevitable-involution”

Source: Solarzoom, CICC Research Department

Figure 18: Rising European gas prices push up residential electricity prices

Source: Bloomberg, Energy Price data, CICC Research Department

Based on our earlier calculations [15], the conflict in the Middle East may drive an increase in China’s exports of new-energy-related products by 10.5%, of which solar PV equipment exports may increase by 17.5%. If estimated based on the share of solar PV product export volume in total production [16], China’s solar PV industry has about 4.8% upside potential in demand. Judging from the operating rate of the solar PV industrial chain (Figure 20), compared with February this year, in March the operating rates of polysilicon feedstock, mono-crystalline silicon wafers, mono-crystalline cells, and modules all rose slightly, showing positive changes. However, China’s solar PV industry is still facing phased capacity adjustments, and the operating rates along the industrial chain remain at a clearly low level (34%, 47%, 48%, and 32%, respectively). The external incremental demand generated by geopolitical conflict is expected to partially ease the pressure of oversupply.

Figure 19: China’s solar PV export volume and year-on-year change

Source: Solarzoom, CICC Research Department

Figure 20: Operating rates along the solar PV industrial chain

Source: InfoLink, CICC Research Department

From a medium- to long-term perspective, according to The Economist’s analysis, the energy security strategies of the world’s major economies may evolve from a “1.0 paradigm” (energy source diversification) to a “2.0 paradigm” (energy self-reliance) and then to a “3.0 paradigm” (energy self-reliance + price self-reliance). The “1.0 paradigm,” represented by Europe and Japan, mainly responds to risks by dispersing energy import channels. The “2.0 paradigm,” represented by the United States, relies on domestic oil and gas resources to achieve energy supply self-reliance, but because oil prices are globally linked, it cannot achieve price self-reliance. The “3.0 paradigm,” with China at its core, reduces the impact of fluctuations in international commodity markets on energy prices by building a system centered on renewable energy (wind, solar, and nuclear are not globally linked in the same way oil prices are), achieving price self-reliance alongside energy self-reliance.

In the past, the main driver of new energy transition was climate change; but under a series of geopolitical frictions such as the conflict in the Middle East, the logic of the transition may tilt toward strategic security. The rise in costs of traditional energy and the risk of premiums improves the investment returns and economic viability of new energy. We expect that economies with high reliance on external oil and gas may accelerate the construction of solar PV, wind power, and energy storage. As the center of the global new-energy supply chain, China—benefiting from mature capacity advantages and technological accumulation—may capture external incremental demand. This will not only help boost export expectations for related industries, but also strengthen the certainty that the domestic new-energy industry’s supply-demand relationship will return to a healthy range and escape the “involution” trap.

Source: CICC Insight

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