Solution consultant Durai Selvaraj, Valona Intelligence, explains the three common misconceptions shaping the industry’s response to China’s capacity build-out.
China’s chemical overcapacity dominates industry conversations, and most analysts agree on the contours: capacity is excessive, Beijing has acknowledged the problem through anti-involution policies, and pressure is concentrated in Southeast Asian markets.
The surface logic seems sound. But systematic analysis of what’s actually being built, where exports are actually flowing, and how Western producers are actually responding reveals a different picture: extended timelines, expanding geography, and structural exits that conventional forecasts are underestimating.
Timeline Dynamics: The Capacity Wave Extends Through 2027
Ask when China’s overcapacity will ease, and most observers will say “soon” or “by mid-decade.”
The reasoning seems sound: Wood Mackenzie frames rebalancing as imminent, Beijing has explicitly acknowledged the problem using “anti-involution” language, and the government has convened producers in overcapacity-prone chains like PTA and PET to demand capacity reporting. PetroChina announced plans to phase out 19 refining and chemical units. The surface signals suggest intervention is underway.
But the information asymmetry is significant: anti-involution policy generates analyst coverage and media attention, while the 37-million-ton capacity pipeline unfolds across provincial approvals and construction schedules that don’t aggregate into headlines until plants start up. Intelligence teams tracking policy signals see intervention, but teams tracking capacity are seeing acceleration.
Global ethylene capacity is accelerating after a brief 2024 pause. This year, 8.8 million tons of new capacity enters the market – the start of a 37-million-ton build-out through 2027. That’s 16% expansion of the global ethylene market while demand growth struggles to keep pace. Even optimistic forecasts don’t expect rebalancing until the late 2020s.
The economics are striking: integrated ethylene-HDPE returns in China are expected to stay negative until the early 2030s. Producers are building capacity they know won’t be profitable for a decade. Refiners are pivoting from fuels to chemicals as electrification erodes gasoline demand. Foreign investors want proximity to Chinese markets. Projects approved years ago are too far along to stop.
Is anti-involution working? Policy action is real—government meetings have resulted in capacity reporting requirements and some shutdowns. But exports tell a different story. China became a net polypropylene exporter for the first time in March 2024. PVC exports continue climbing even as 2025 shapes up as a peak capacity year. The export relief valve stays open.
Beijing issues directives, but provincial governments—judged on local GDP and employment—face different incentives. Projects get reclassified as “high-end” capacity. Mega-complexes already under construction proceed on schedule. This isn’t policy failure as much as the natural friction between central planning and provincial execution.
Geographic Pressure: Expanding Beyond Southeast Asia
China’s initial export push targeted the obvious markets: nearby, price-sensitive destinations in Southeast Asia. With most trade coverage focused on ASEAN import surges and Shanghai-Europe freight costs running high, the assumption that pressure stays regional seems reasonable. It’s not.
China became a net polypropylene exporter for the first time in March 2024, according to S&P Global Commodity Insights—a fundamental shift from major importer to export competitor. PVC tells a similar story: 2025 is shaping up as a peak year for capacity additions (2.2 million tons), with export volumes to India and Vietnam rising sharply year-over-year. Analysis of Chinese-language trade reporting revealed these dynamics—including details of India’s policy shifts on BIS quality certification and shelved anti-dumping restrictions—months before they gained traction in Western coverage.
Southeast Asian governments are responding defensively. Indonesia has implemented quality controls, the Philippines strengthened anti-dumping provisions, and tariff adjustments are spreading across the region.
As those barriers rise, Chinese exporters are developing new routes. The Port of Chancay in Peru, which opened recently, cuts shipping time to South America significantly. What started as a Southeast Asian dynamic is becoming a global rebalancing.
Europe has been partially shielded, but by logistics constraints rather than structural advantage. Container shipping costs from Shanghai to Europe more than tripled in 2024, from $875 to $3,104 per 20-foot container, according to the Shanghai Containerized Freight Index. This freight cost spike temporarily priced out Chinese imports. But the protection is contingent on continued disruptions. If Suez Canal routing normalizes and costs drop, European producers operating at 60-70% utilization will face renewed import pressure from Gulf Coast competitors running at 87%. The structural gap explains why recent European closures (Dow, TotalEnergies) are permanent shutdowns rather than temporary idlings.
Export destination monitoring matters as much as export volume. The question isn’t whether pressure spreads; it’s where it lands next, and whether intelligence teams are tracking the logistics and policy variables that determine flow patterns.
Three dynamics warrant closer examination.
Structural Response: Permanent Exits, Not Cyclical Adjustment
When margins compress and prices fall, companies typically idle capacity and wait for recovery. That’s how chemical cycles have always worked: plants shut temporarily, restart when demand rebounds, and permanent closures are rare. Corporate communications reinforce this framing, describing challenges as “current market conditions” rather than structural transformation.
That’s not what’s happening in Europe.
Dow announced it will permanently shut three upstream European assets—an ethylene cracker in Germany, chlor-alkali and vinyl production in Germany, and a siloxanes plant in the UK—with closures spanning mid-2026 through 2027. TotalEnergies is closing its oldest Antwerp steam cracker by end-2027, explicitly citing expected persistent oversupply in European ethylene markets. These aren’t temporary idlings with vague “under review” language. These are permanent shutdowns with public timelines and explicit structural rationale.
The math explains why. Industry data shows European crackers operated at 60-70% utilization through 2024, compared to roughly 87% on the US Gulf Coast. When your costs are structurally higher and your utilization is structurally lower, waiting for better market conditions won’t restore profitability.
The reshaping extends beyond commodity producers. Clariant—a specialty chemicals player with differentiated products and better margins—explicitly cited Europe’s energy and labor costs while expanding production in China and increasing sales from the Chinese market. If specialty producers are relocating operations, commodity producers face even starker choices.
The UK government’s £150 million support package addressing chemical industry closure risks signals that governments increasingly view the sector as strategically vulnerable rather than cyclically pressured. When governments intervene with direct financial support, it acknowledges that market forces alone won’t resolve the competitiveness challenge.
The investment thesis for European commodity chemicals is fundamentally changing. Companies are exiting commodity production in Europe, not repositioning for recovery. The pressure is most acute in commodity chains and older, non-integrated assets, though even specialty chemical producers are relocating operations to manage cost structures. Intelligence teams treating this as a cyclical downturn may be underestimating the permanence of the shift.
What to Monitor in 2026
Current project momentum suggests the capacity wave will likely run through 2027, export pressure is spreading beyond traditional markets, and European closures represent permanent exits. Teams tracking these operational realities—utilization over capacity announcements, actual export flows over policy rhetoric, closure economics over corporate communications—will see the next phase of rebalancing before market consensus catches up.
Sources
Analysis draws on research from Wood Mackenzie, ICIS, S&P Global Commodity Insights, Bloomberg, Reuters, Roland Berger, Financial Times, and company investor relations disclosures.
5 Key Themes Shaping the Polyolefins Value Chain in 2025 (PDF) — Wood Mackenzie
Cracker closures: facing the inevitable — ICIS Shorthand story
Chemical market overcapacity — ICIS resource page
China and the global PP crisis: so much for “anti-involution” to the rescue — ICIS
China’s PP capacity exceeding local demand forecast to jump 68% in 2025 — ICIS
China turns PP net exporter for first time in March amid capacity expansion — S&P Global Commodity Insights
Chemical Trends H1 2025 (PDF) — S&P Commodity Insights
China set to tackle petrochemicals overcapacity with overhaul — Bloomberg
PetroChina to phase out 19 old refining, chemical units to curb sector glut — Reuters
China’s MIIT convenes major producers to tackle PTA and PET overcapacity (“involution” reference) — Reuters
Global chemicals in the crosshairs: Why China’s overcapacity demands a strategic response — Roland Berger
Recent plant closures in the global chemicals industry — Valona Intelligence
PVC overcapacity + export acceleration (Chinese-language trade reporting via Eastmoney/期货日报
Dow will shut down three upstream European assets in response to structural challenges in the region — Dow Investor Relations
TotalEnergies to shut oldest Antwerp cracker due to oversupply in Europe — ICIS
APIC ’25: INSIGHT: Thai petrochemical sector contends with low-cost overseas rivals — ICIS
UK support package linked to chemical closure risks (Grangemouth / INEOS context) — Financial Times
Clariant cites Europe cost disadvantage while expanding manufacturing in China — Financial Times
