Huachuang Securities: Under the current high oil prices, midstream gross profit margins may be more resilient

The Zhitong Finance APP has learned that Huachuang Securities has released a research report stating that demand in the midstream sector has remained strong since 2025. There are concerns in the market about the stability of its gross profit margin. During this period, it has faced tariff shocks, direct cost shocks from significant increases in non-ferrous metals, and the impact of rising oil prices. As of February, the first two rounds of shocks have had a limited impact on the midstream gross profit margin, which has even seen a slight uptick recently due to price increases in the midstream sector. After the third round of shocks, the resilience of midstream profits may become even more prominent.

The main viewpoints from Huachuang Securities are as follows:

1. The Triple Test of Midstream Manufacturing Gross Profit Margin

(1) Test One: Tariff Shock

Starting in April 2025, the United States significantly increased tariffs globally. From the perspective of tariff revenue, it was $8.16 billion in March last year, increasing to $29.67 billion by September last year, and then decreasing to $26.59 billion by February 2026. Therefore, it can be considered that the peak of tariff pressure occurred in Q2-Q3 of 2025.

Focusing on the midstream manufacturing gross profit margin during this period, the gross profit margin for midstream manufacturing was 14.5%, a decrease of 0.1 percentage points compared to Q2-Q3 of 2024.

(2) Test Two: Direct Cost Shock

Since October 2025, non-ferrous metals have seen significant price increases. In terms of PPI for non-ferrous minerals and PPI for non-ferrous processing, the overall price increase was 18.6% (from October 2025 to February 2026), while during the same period, the PPI for midstream manufacturing rose by 0.9% cumulatively. From the cost side of midstream manufacturing, the combined costs of non-ferrous mining and processing account for 9% of total costs, so the significant rise in non-ferrous metals has had a substantial impact on their costs.

We observe the changes in the gross profit margin of midstream manufacturing from Q4 of last year to February of this year. During this period, the gross profit margin was 15.2%, better than the 14.8% from the same period last year. That is, during the five months of significant increases in non-ferrous metals, the overall gross profit margin in the midstream sector not only did not decline but actually increased. The reason may be related to rapid revenue growth and price increases in the midstream sector itself.

(3) Test Three: Oil Price Shock

The third test may come from oil prices. The impact of oil prices may be transmitted to the cost side of the midstream sector through chemicals or electricity prices, and on the demand side, it may affect the price transmission in the midstream sector. Historically, oil price increases have coincided with periods of further improvement in midstream gross profit margins (Q2-Q3 of 2018) as well as periods of margin decline (Q2-Q3 of 2021). The impact of the current round of oil price increases on midstream gross profit margins remains to be seen.

However, considering that the weight of non-ferrous metals in midstream costs is greater, and that China’s electricity prices are less affected by oil prices compared to overseas, this may lead to an increase in export share. Additionally, the current high oil prices stemming from supply shocks may bring about more energy investments, driving an increase in midstream demand, thus midstream gross profit margins may be more resilient.

For example, the impact of oil prices on electricity prices in 2022 saw a significant increase in oil price levels due to the Russia-Ukraine conflict. European electricity prices (PPI basis, representing industrial electricity, the same below) increased by 61% for the year, while U.S. electricity prices rose by 90.5%. In contrast, China’s electricity prices only increased by 5.1% for the whole year.

2. Commentary on Industrial Enterprise Profit Data for January-February

For January-February, according to data from the National Bureau of Statistics, profits of industrial enterprises above designated size increased by 15.2% year-on-year. In terms of inventory, as of February 2026, inventory was up 6.6% year-on-year, compared to a previous value of 3.9%. By ownership, in January-February, the profit growth rate for state-controlled industrial enterprises was 5.3%, while for private enterprises it was 37.2%, and for foreign and Hong Kong, Macau, and Taiwan enterprises it was -3.8%.

Breaking down by volume, price, and profit margin, both volume and price increased. The year-on-year PPI for January-February was -1.2%, compared to -1.9% in December last year. The industrial added value growth rate for January-February was 6.3%, compared to 5.2% in December last year; the revenue growth rate for January-February was 5.3%, compared to -3.2% in December last year. In terms of profit margins, January-February saw a profit margin of 4.92%, compared to 4.49% in the same period last year (on a comparable basis). Breaking down the profit margins, the gross profit margin for January-February was 15.2%, compared to 14.9% in the same period last year; the expense ratio was 8.66%, compared to 8.56% in the same period last year; and the other income ratio was 1.58%, compared to 1.80% in the same period last year.

Looking at it by industry, for January-February, the mining industry saw a year-on-year increase of 9.9%, while the manufacturing industry saw an increase of 18.9%, and the electricity, heat, gas, and water supply industries saw an increase of 3.7%. Within the manufacturing sector, the midstream equipment manufacturing industry saw a year-on-year growth rate of 23.4%, with the computer, communication, and other electronic equipment manufacturing profits increasing by 2.0 times; electrical machinery and equipment manufacturing grew by 6.2%; specialized equipment manufacturing grew by 4.3%, general equipment manufacturing grew by 3.6%; and transportation equipment grew by 11.4%. The automotive manufacturing industry declined by 30.2%. Some upstream manufacturing sectors also performed well, including non-ferrous metal smelting and rolling industries, which grew by 1.5 times, chemical raw materials and chemical products manufacturing, which grew by 35.9%, and non-metallic mineral products industries, which grew by 16.2%. In contrast, downstream manufacturing sector performance was relatively weak, with a growth rate of -5.6%. Among those, the alcoholic beverage sector saw a decline of 17.2%.

From the revenue perspective, for January-February, the midstream manufacturing sector saw a revenue growth rate of 8.8%. The upstream manufacturing revenue growth rate was 4.26%, the downstream manufacturing growth rate was 2.8%, the mining industry growth rate was -0.3%, and the electricity, heat, gas, and water supply growth rate was 0.54%.