China has burned through much of a petrochemicals glut built up by years of overproduction as the US-Iran war chokes oil flows, setting the stage for higher prices for an array of industrial materials.
The squeeze is most acute in the so-called aromatics chain and the downstream products made from these chemicals, according to JPMorgan Chase & Co. and commodities data provider ICIS. That includes rubber for car tires and electrical insulation, resins, and plastic bottles, as well as various paints and coatings
Energy exports from the Persian Gulf may have recovered in recent months, but Iranian crude, favored by some Chinese private producers, has completely dried up due to the US blockade. Exports of naphtha, a chemicals feedstock, from the region remain constrained, while Beijing has prioritized gasoline and diesel output, forcing refiners to draw on petrochemical stockpiles accumulated before the war.
“Right now, inventory levels are basically near the bottom,” said Parsley Ong, head of Asia energy and chemicals research at JPMorgan. The tightness in Chinese markets has already affected consumers with “inflation happening across most products,” she said.
The price rises have fed through into China’s producer price index, which tracks inflation at the wholesale level, and has gone from below zero in February to a faster-than-expected 5% in September. These price gains are also being exported, given the country’s role as a major supplier of petrochemicals and downstream products to global markets.
Unlike China’s vast crude reserves that were amassed for strategic reasons, the scale of the country’s petrochemicals inventories was an unintended consequence of years of overcapacity and overproduction as refiners expanded deeper into chemicals. Rongsheng Petrochemical Co. and Hengli Petrochemical Co. are some of China’s biggest producers.
The glut became an inadvertent cushion when the US-Iran war disrupted energy supply. Around 95% of the end-use chemical inventories built up in 2025 have now been depleted, Goldman Sachs Group Inc. said in a note this month. Overall, stockpiles remain high by historical standards, but the bank said the de-stocking is unsustainable over the longer term as China seeks to maintain buffers against future supply shocks.
Petrochemicals are split into two main types of hydrocarbons: Aromatics — used to produce benzene, toluene and paraxylene — and olefins such as ethylene and propylene, materials that are commonly used in packaging, coatings and plastic piping.
Across China, port inventories of the aromatics grades are all at multiyear lows, said ICIS senior analyst Jenny Yi. Robust Asian demand for toluene in gasoline blending is also diverting supply away from petrochemicals, she said.
As the stockpiles shrink, fresh production becomes more important. Overcapacity had already pushed margins for some petrochemicals below zero before the war. The surge in oil and feedstock costs is now putting more pressure on producers.
For producers to increase output in the fourth quarter, downstream prices need to rise enough to restore margins, said JPMorgan’s Ong. Petrochemical buyers are “just going to have to accept a higher price,” she said, adding that she doesn’t expect a sharp rally.
The higher prices may not last though, given that China is still saddled with overcapacity in the sector. ICIS sees China’s cracker operating rate recovering to 81% by the end of the year from 79% in October as plants return from maintenance. That’s well below 88% before the war, however.
The overcapacity is still increasing. BloombergNEF is forecasting that almost 21 million tons of new global manufacturing capacity for polyethylene — one of the world’s most common plastics — will be producing or ramping up, a record increase. That leaves an unusual combination — depleted inventories and abundant underlying capacity.
“Higher feedstock prices, when passed through the supply chain, are leading to short-term inflationary pressures on Chinese consumers,” said Salmon Aidan Lee, principal at ICIS. “This goes against fundamentals though, and those products facing overcapacity will eventually return to that oversupplied state.”