Hello investors. Welcome to the "Everyday Industries" column by CITIC-Prudential Fund. In this series, we aim to avoid complex capacity data and obscure refining equipment discussions, starting instead from your daily life. Look around you: the cup on your desk might be plastic; the clothes you wear could be made from synthetic fibers; the tires on your car for your commute are synthetic rubber, and the road is paved with petroleum asphalt. These commonplace items all trace back to a single source: petrochemicals. Many perceive the chemical industry as distant, dull, and difficult to grasp. In reality, it serves as the "material library" of modern civilization. Investing in chemicals essentially means investing in the evolution of our lifestyle. In this series, we will start with a garment, a plastic bottle, a tire, or a stretch of road, following the trail to explore the deep industrial chains behind them. You will discover that investment insights often lie hidden within these daily observations. Are you ready? Let's begin with a piece of clothing.

Part 1: Introduction: What Links the Clothes on Your Back to Oil Prices? Check the label on your clothing; terms like "polyester" and "polyester fiber" are likely familiar. But have you considered where these fabrics originate? The answer might surprise you: they come from crude oil. A saying circulates within China's petrochemical system: "Aromatics are a crucial source for the polyester industry. Without aromatics, there would be no paraxylene (PX), hence no polyester, no polyester fiber, and modern textile and garment manufacturing would be impossible." More直观的数据是: Approximately 65% of textile raw materials and 80% of beverage packaging bottles derive from paraxylene (PX), a key variety of aromatics (Data source: China Petrochemical News, 2024/02/02). What does the industrial chain look from oilfield to wardrobe? How does your clothing cost get affected when international oil prices rise significantly? This article starts from a garment to delve into the depths of the aromatics industrial chain.

Part 2: Industrial Chain Map: The Journey from a "Drop of Oil" to a "Piece of Clothing" The transformation from crude oil to clothing大致需要经过四步: Step 1: Crude Oil -> Naphtha Crude oil enters a refinery and is first "distilled" into different fractions. One light fraction is naphtha, the core raw material for producing aromatics. Step 2: Naphtha -> Aromatics (PX) Naphtha undergoes catalytic reforming to become a mixture of aromatics. The aromatics family has three core members: benzene, toluene, and xylene. Among them, PX (paraxylene) has the largest volume and receives the most attention. Step 3: PX -> PTA -> Polyester (PET) PX is oxidized to become PTA (purified terephthalic acid). PTA polymerizes with ethylene glycol to produce polyester, commonly known as PET. Over 98% of global PX is used to produce PTA, and over 98% of PTA is used to produce PET (Data source: China Petrochemical News, 2025/04/02). Step 4: Polyester -> Polyester Fiber -> Clothing PET can be spun into filaments, becoming polyester filament and staple fiber, which are then woven into fabrics and made into clothes. This completes the journey from a "drop of oil" to a "piece of clothing." Simplified Chain: Crude Oil -> Naphtha -> PX -> PTA -> Polyester -> Polyester Fiber -> Clothing

Part 3: Core Raw Material Overview: Why is PX Important? PX (paraxylene) is the "star player" in the aromatics family. Its importance is reflected on two levels: First, it is crucial for "clothing" needs. China's annual production of chemical fibers equivalently replaces cotton output requiring hundreds of millions of acres of land. Without PX, more land would be needed for cotton cultivation, competing with food production for land resources. It can be said that PX technology has significantly contributed to resolving the "grain vs. cotton competition for land"矛盾. Second, it was once a "bottleneck" in the petrochemical chain. Around 2015, China's import dependency for PX exceeded 50%, with technology long monopolized by foreign companies. In 2015, Sinopec's "Efficient and Environmental Friendly Aromatics Complex Technology" won the National Special Prize for Scientific and Technological Progress, making China the third country globally to master complete aromatics technology. Subsequently, with the commissioning of large-scale private refining and chemical projects, domestic PX capacity increased substantially. By the end of 2025, China's total PX capacity reached approximately 45.5 million tons/year, accounting for over 50% of global capacity, making it the world's top producer (Data source: Wind, data as of 2025.12.31).

Part 4: Current Market Dynamics: What is Happening in the Aromatics Chain? 1. High Oil Prices, Naphtha Becomes the "Profit King" The US-Iran conflict that erupted in late February 2026 directly impacted the Strait of Hormuz, a global energy transport choke point. By late March, Brent crude spot prices fluctuated at high levels above $100/barrel. Unlike previous price hikes, naphtha prices rose more than crude oil in this round. Why? Because Asian naphtha heavily relies on Middle Eastern supply, and disruptions in the Strait of Hormuz caused naphtha shortages. Refineries in Japan and South Korea were forced to reduce operating rates or shut down due to raw material shortages, directly affecting PX exports to China. 2. PX Segment "Squeezed from Both Ends" PX is a direct downstream product of naphtha. Currently, with naphtha prices rising sharply, PX margins are significantly compressed, and valuations are low. Looking further downstream, PTA processing spreads are also at low levels. Profits are concentrating upstream, putting cost pressure on midstream and downstream enterprises. 3. Low Inventory Supports Prices The good news is that social inventories of PX have decreased substantially. The pattern of "low inventory + high PTA operating rates" supports PX prices. 4. Weak Downstream Demand, Inventory Accumulation However, the situation further downstream is not optimistic. Production and sales of polyester products (polyester filament, staple fiber) remain weak, with significant inventory buildup for both filament and staple fiber. Downstream garment factories hold a strong wait-and-see attitude towards raw material procurement. Simple summary: Expensive and scarce upstream raw materials (naphtha), thin margins for midstream products (PX, PTA), and lagging downstream demand (clothing) – this is the current portrait of the aromatics industrial chain.

Part 5: Investment Opportunities and Risks Where are the opportunities?

Integrated Refining and Chemical Leaders Companies with a full industrial chain from "crude oil - PX - PTA - polyester" can adjust profits between rising upstream costs and weak downstream demand. The PX industry features typical characteristics of "high barriers, integration," where the integrated refining and chemical model highlights scale and cost advantages.

Structural Opportunities from Improving Supply-Demand Dynamics After significant destocking in 2025, overall social inventory levels for PX are not high. PX supply and demand are expected to be relatively tight in the first half of 2026. Meanwhile, new capacity for downstream PTA and polyester continues to come online. This mismatch in the pace of upstream and downstream capacity additions provides support for aromatics product prices. In 2026, aromatics products are entering a window of improving supply-demand dynamics. On the supply side, the pace of new capacity additions for key products like PX and PTA has noticeably slowed, with most new units concentrated towards the year-end, limiting actual incremental supply within the year. Concurrently, several overseas units have exited the market due to poor margins, leading to global supply contraction. On the demand side, downstream polyester still has new capacity coming online. The mismatch in the pace of upstream and downstream capacity additions provides solid support for aromatics product prices. Additionally, the second quarter is a集中 period for chemical plant maintenance, and supply-side contraction may further improve short-term supply-demand balances.

Supply-Demand Improvements from Overseas Supply Contraction Affected by Middle Eastern geopolitical conflicts and transport disruptions in the Strait of Hormuz causing naphtha shortages, several companies in Japan and South Korea have reduced operating rates or idled PX units. Overseas supply contraction may further optimize global supply-demand dynamics, supporting PX prices, from which domestic integrated leaders are poised to benefit.

Risks to Monitor: 1) Continued US-Israel-Iran conflict leading to further intensified oil price volatility, causing significant cost fluctuations for petrochemical PX and PTA. 2) Continued compression of the PX-naphtha spread, with the possibility of inversion. 3) The persistence of raw material shortages in Japan and South Korea needs tracking based on conflict developments and Strait of Hormuz transit conditions. 4) Regional price differences for polyester products may affect profit distribution within the polyester segment and transmit to raw material prices.

Part 6: Summary A single garment connects your wardrobe to the global petrochemical chain. Changes in every link, from oil prices to naphtha, from PX to polyester, can ultimately affect the cost of the clothes you wear and the profits of related companies. Understanding this chain means understanding the industrial logic behind the "essential need for clothing." Currently, the aromatics chain is experiencing a pattern where "upstream feasts, midstream and downstream get scraps." The industry is transitioning from "involution-style" capacity expansion towards high-quality development. Companies with integrated advantages and cost moats are likely to navigate cyclical fluctuations more successfully. Starting from a garment, we've understood the operational logic of the aromatics industrial chain. Indeed, behind every familiar everyday object lies industrial opportunities worthy of in-depth research. If you also believe that "research creates value" and are interested in cyclical industries like chemicals, we welcome you to follow fund manager Sun Huicheng, who has deep experience in cyclical sectors like chemicals, and join us in seeking investment opportunities amidst industrial transformation.

Performance data of some funds managed by Sun Huicheng are listed below. Fund performance data intervals and disclosures are provided as per the original text, noting that past performance is not indicative of future results, fund net values are volatile, and investment involves risks.