How Involution is Impacting Industrial Chemical Markets

The chemical industry has always been cyclical. Plants are built, supply surges, prices fall, and eventually the market corrects. But a different word has entered discussions of global manufacturing and chemical markets— “involution.”

The term is borrowed from Chinese word ‘neijuan’ which describes a system where competition becomes so fierce that profits for all companies are destroyed. Some have likened it to the Western concept of the ‘Rat-race’ where everyone is left running as fast as they can just to survive. While a Reuters report on the issue described it as shorthand for “the exhausting but also often futile and sometimes self-destructive grind of hyper-competition.”

It’s a nice image and a neat concept, except that for the chemical industry, the concept of ‘involution’ is no longer theoretical, as across multiple value chains – particularly in petrochemicals – it is becoming one of the defining forces shaping chemical production, pricing, and global trade.

Why is the Chemical Industry Particularly Vulnerable?

The structure of the chemical industry makes it especially susceptible to involution.

Most basic chemicals are commodity molecules. For example, one tonne of polypropylene or methanol is essentially interchangeable with another. This means that when multiple producers bring new plants online simultaneously, differentiation disappears and price becomes the only competitive lever.

At the same time, chemical plants are extremely capital-intensive. Once a plant is built, the economic logic pushes operators to keep it running even when margins are weak. High fixed costs make shutdowns painful.

Put these forces together and the result is a now familiar dynamic of too many plants chasing too little demand. And with China now producing more than 40% of global industrial chemical production, the sector is now trapped in a cycle of competition so fierce that it is destroying profits and creating a race to the bottom for prices.

“The whole game is meaningless, crushing, exhausting,” explains Xiang Biao, a director at Germany’s Max Planck Institute for Social Anthropology. “They want to step out of it, but yet they cannot find a way, because everyone is doing it.”

According to a recent report by industry consultants at Roland Berger, some sectors are hitting critical oversupply, resulting in extreme involution. These include:

·    Epichlorohydrin: 93% excess capacity vs. rest-of-world demand.

·    Siloxanes: 69%.

·    Epoxy: 35%.

·    Phenolics: 23%.

The report continues to explain how, “Over the past five years, China has aggressively expanded capacity across multiple chemical value chains. Enabled by state incentives, inexpensive financing, and long-term planning, this expansion was predicated on sustained domestic growth and global export potential.” But this rapid expansion could not foresee the global markets of 2026. “[As] Demand in China has cooled, and global downstream sectors—from construction to electronics—are facing stagnation. The result? Massive structural overcapacity.”

Polyester Markets: A Clear Example

Few markets illustrate involution more clearly than the polyester value chain, where polymer producers have expanded aggressively into purified terephthalic acid (PTA) and downstream polyethylene terephthalate (PET) used in fibres and plastic bottles.

However, demand has not kept pace, with Reuters reporting how China’s PTA production capacity has doubled to roughly 92 million tonnes since 2019, while PET chip capacity has doubled to about 22 million tonnes in just three years.

The resulting oversupply has created some of the worst production margins in the petrochemicals sector, with even the newest, most efficient facilities struggling to remain profitable.

Many analysts believe that the issue has arisen due to China’s unique stance on capitalism. “In the Chinese system,” an FT report notes, “central authorities keep an iron grip on political, personnel and strategic decisions but grant local cadres wide latitude in economic policy. Regional officials are rewarded or punished not only for absolute achievements but also relative performance against peers. The result is a fierce competition in which local leaders chase investment, growth and industrialisation.” 

It is a system which rewards scale — even when scale destroys margins.

The Involution Issue has Global Ripples

The problem for the wider chemical market and for chemical producers everywhere is that what happens inside China’s chemical industry rarely stays there.

So as domestic markets have become saturated, excess chemical production has spilt into global trade, depressing chemical prices and putting pressure on chemical producers in Europe, the United States, and other Asian countries.

The scale of the imbalance is striking in some products. One industry report found that Chinese capacity for certain chemicals could exceed global demand by enormous margins. As mentioned earlier, China’s epichlorohydrin capacity alone equals roughly 93% more than rest-of-world demand.

In other words, China could theoretically supply most of the world — and still have plants left idle.

For Western producers, that creates a difficult strategic question: how do you compete when a rival industrial chemical system can out-scale almost everyone?

Anti-Involution: Beijing’s Policy Response

The problem for Beijing is that chemical product margins have dropped so low, that it has removed most of the incentive for industrial investment. It is also forcing firms to cut costs to the bone by reducing worker hours and lowering wages—all of which is driving stagnation.

In response, China’s leadership has begun pushing what officials describe as an “anti-involution” campaign, aimed at curbing excessive competition and limiting irrational expansion.

“China so far is taking a gradual, supply-side approach,” writes Hannah Miao, a reporter at the WSJ, “Piecemeal guidelines from various governmental bodies have centered on stopping below-cost pricing and curbing capacity in oversaturated sectors with measures such as tightening regulations and discouraging new investment in production.”

Some producers are even experimenting with coordinated output reductions. For example, caprolactam producers temporarily agreed to cut output by around 20%, which briefly pushed prices higher. However, with Chinese local governments always keen on maximising economic output, most initiatives to reduce investment or scale-back production have failed.

As Miao notes, “Tackling involution at its root, many economists argue, would require a fundamental restructuring of the economic system that puts consumer spending in the driver’s seat, rather than leaning on investments and manufacturing. Until then, involution is the price to pay for Chinese leader Xi Jinping’s goal of industrial self-reliance and global leadership in advanced technologies.” 

As Larry Hu, chief China economist at the Macquarie Group investment bank observes, “Involution is both a feature and a bug of the China model.”

The Chemical Trader’s Paradox

For chemical producers, involution is painful and sometimes deadly, as persistent oversupply erodes profitability and forces consolidation, closures, and bare survival. But for traders, the picture can look quite different, as oversupply tends to create:

·    Regional price spreads.

·    Sudden export surges.

·    Inventory cycles.

·    Arbitrage opportunities.

In other words, the same forces that crush manufacturing margins can increase trading opportunities—a situation which is unlikely to change any time soon.

Even if capacity growth slows, the chemical industry is already dealing with the legacy of a massive investment cycle. Many new plants are still ramping up, and the global market will need years to absorb the additional supply.

One likely outcome is that involution will continue until China has absolute chemical industry supremacy. As the FT report explains involution will not destroy China’s industrial machine. “On the contrary, the same mechanism that generates wasteful investment and a race to the bottom also forges national champions primed to crush foreign rivals.” Adding that, “Chinese companies that survive gruelling involution emerge hardened. They learn to scale rapidly, slash costs relentlessly and survive on razor-thin margins. Cut-throat price wars at home only sharpen their hunger to capture overseas markets.”

What that will mean for global chemical markets 20 years from now is hard to imagine.

The Long Game for Chemical Markets

For now, involution remains a powerful force shaping global chemical markets. Oversupply continues to suppress margins, exporters continue to chase global demand, and producers everywhere are being forced to rethink their competitive strategies.

But history suggests that chemical markets rarely remain in imbalance forever. Excess capacity eventually forces consolidation, weaker producers disappear, and supply gradually tightens. The only difference this time is scale. Because China accounts for such a large share of global chemical production, the correction process may take far longer — and the consequences will be felt far beyond its borders.

For Western chemical producers, the challenge will be survival in an environment where prices are increasingly set by the economics of Chinese megaplants. For traders, the same volatility will likely continue to create regional price distortions, sudden export waves, and shifting arbitrage opportunities.

In that sense, involution may not simply be a temporary phase in the chemical cycle. It may represent a structural shift in how global chemical markets function.

The question is no longer whether the chemical industry can absorb China’s capacity expansion.

The real question is whether the rest of the world can adapt to a chemical market where relentless scale, razor-thin margins, and permanent oversupply are the new normal.

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