Wall Street Analysts: Citrini's On-the-Ground Report on the Strait of Hormuz (Full Version)

From most of our conversations, it is clear that damage to oil refining and natural gas processing infrastructure has been extremely severe—and significantly underestimated. Moreover, the current tightness in refined product markets far exceeds that in crude oil markets—this is precisely why this portfolio is overweight refiners and refined-product-related assets. However, with transportation gradually reopening, we expect near-term crude oil prices to decline—at least in the short run. We believe the U.S. petrochemical industry still offers the greatest asymmetric opportunity within these sectors. We lack sufficient confidence to forecast short-term movements in U.S. equities, as these depend not only on the outcome of this conflict. Historically, outcomes have exhibited highly dispersed distributions. If our assumption of sustained recovery in Strait traffic proves incorrect—and if traffic fails to continue rising in mid-to-late April, instead effectively shutting down—the global equity market could plunge sharply (by approximately 15–20%). Our base case remains that, as the conflict escalates and persists, equity markets will continue experiencing high volatility; however, broad concerns over a global energy crisis will gradually give way to a more nuanced view: Strait traffic will increase, accompanied by elevated—but non-catastrophic—prices. Damage to petrochemical infrastructure across the Gulf region has already imposed structural impacts on this market, and we believe it is now approaching a potential cyclical inflection point—possibly making it the most asymmetric positioning opportunity. U.S. petrochemical companies with reliable access to low-cost domestic feedstocks stand to benefit enormously from global supply dislocations and soaring prices. "Even before the outbreak of the Middle East conflict, we had begun observing early signs of market improvement in Q1. Now, price action and supply dynamics are evolving rapidly—and constructively. Already in March, we announced price-increase initiatives across all regions and all business units globally." Global logistics have become highly uncertain. Affected by the Middle East situation, up to 50% of polyethylene supply is currently offline, constrained, or otherwise disrupted. Furthermore, inventory levels across the entire value chain sit at historic lows. Dow Chemical raised polyethylene prices by $0.10/lb in March, then again by $0.30/lb in April—double the previously anticipated $0.15/lb increase. Last week, Dow CEO James Fitterling projected that—even after the Strait of Hormuz fully reopens—supply normalization may take 250–275 days, due to prioritization of oil, natural gas, and fertilizer shipments. Capacity destruction is real, and reconstruction timelines are measured in years—not quarters. We favor U.S. producers positioned advantageously: Dow Chemical (DOWUS) and Westlake Chemical (WLKUS) are our top holdings. Even if the Strait of Hormuz were to reopen completely tomorrow, we do not expect prices to revert to pre-conflict levels. This is especially meaningful for stocks still trading ~50% below their historical highs. Macroeconomic backdrop Short-term interest rates Approximately two weeks ago, we executed a trade: shorting ES (S&P 500 futures) while going long SFRH7.

Fundamentals and Influencing Factors in the Chemical Industry

1. The Two Sessions set a clear, quantified target for carbon emissions: peaking by 2030. As this is the final five-year period—and aligns with the last Five-Year Plan—the urgency around carbon reduction has intensified significantly, and government resolve has risen markedly. Supply-side restructuring is being advanced through optimization targeting high-energy-consuming industries and enterprises. 2. Cancellation of export tax rebate subsidies. Previously, national fiscal support enabled enterprises to break even despite losses. With subsidies eliminated this year, unprofitable firms in these sectors will likely exit the market. Taken together, supply-side optimization makes the 'anti-internal competition' drive far more explicit this year. Chemical industry product focus: 1. MDI and polyurethane: e.g., MDI/TDA, widely used in thermal insulation for home appliances and automobiles—representing a classic case of high environmental standards and concentrated industry structure. 2. Phosphorus-based chemicals 3. Coal-based chemicals Why invest in industry leaders? 1. They can absorb larger capital inflows. 2. Our sector investment thesis stems from shifts in supply-demand dynamics. Such shifts occur when demand growth coincides with thorough supply rationalization—leading to supply shortages, higher product prices, and ultimately improved fundamentals for listed companies. Supply optimization eliminates laggard firms unable to ramp up capacity or generate profits. What about chemical new materials? As an industry in its growth phase, its current scale remains modest—but its long-term prospects are broad. Investors should monitor both scale and growth rate. Track the China Chemical Price Index (CCPI) and price trends. Also remain vigilant against sudden oil price spikes, which negatively impact the sector (rising raw material costs without commensurate downstream demand). Conversely, once oil prices peak and begin declining, that may represent a key entry point—raw material costs fall while product prices remain elevated. Macro perspective Supply: Globally, China’s chemical industry accounted for 47% of output in 2024. Prior to the Russia-Ukraine conflict, the U.S. and EU benefited from cheap Russian natural gas. Since then, their energy costs have surged. Compounded by the U.S.-Iran conflict, natural gas prices have doubled. Meanwhile, domestic coal prices in China have remained relatively stable—further widening the cost gap with Europe. Consequently, EU capacity has accelerated its exit in recent years, creating market-share opportunities for Chinese firms. In the Middle East, geopolitical conflict has destroyed significant production capacity—resulting in permanent supply withdrawal. For chemical products heavily reliant on Middle Eastern output, this triggers genuine global supply shortages. Crude oil is just one facet; downstream derivatives—including sulfur, light hydrocarbons, and others—are also affected. This represents a real structural improvement in supply—driving the current chemical sector rally. Demand: Domestic demand remains weak—essentially reflecting sluggish property markets. Nationally, until the real estate sector bottoms out, chemical demand remains questionable. Therefore, investments should exclude industries tightly coupled to the property cycle—i.e., those whose downstream demand depends almost exclusively on real estate. Examples include building materials, glass, and cement. However, one exception exists in chemicals: sectors where external demand provides certainty *and* domestic demand offers marginal upward elasticity.

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