Policy Pain and Rebirth – Export Rebate Removal Forces HCSO Producers to Go High-End


      The removal of the 13% export rebate for primary polysiloxanes, effective April 1, 2026, has sent shockwaves through China’s export-oriented HCSO industry. Yet this stress test is accelerating the phase-out of obsolete capacity and forcing players to move up the value chain.
      Spring 2026 marks a turning point for China’s HCSO industry. With the official elimination of the export rebate for primary-shaped polysiloxanes (covering HCSO and many other categories), the era of subsidized exports has ended.
      In the first month after implementation, market reactions were clear. A major trader in South China noted, “April 1 was a watershed. Pre-deadline rush exports inflated first-quarter numbers; after the policy took effect, overseas orders entered a wait-and-see mode, and cost sharing became the key negotiation point.” The policy effectively increases export costs by about RMB 1,600 per tonne. For small and medium producers reliant on low-price competition and undifferentiated products, profit margins have collapsed, leading some to suspend or curtail production.
      However, beneath the surface chill, a warm current of industrial upgrading is flowing. Leading enterprises are not engaging in price wars but accelerating product mix adjustments. A chemical group with a full industrial chain in Shandong stated at its annual strategy meeting that it will use the policy window to phase out low-end HCSO and expand high-purity silicone oil for AI cooling and medical applications.
      Technology development is the key to escaping the trap. HCSO contains reactive Si-H bonds, making it an excellent waterproofing agent but also a crucial intermediate for modified silicones. Previously, China’s HCSO exports were largely destined for low-end textile treatment (which accounts for about 42% of market share). Under rebate pressure, producers are now exploring higher-value crosslinker and silicone intermediate applications. For example, hydrosilylation of HCSO with allyl polyether yields hydrophilic polyether-modified silicone oil, a core ingredient in cosmetics and personal care products—far more valuable than construction-grade water repellents.
      Local governments are facilitating the shift. In the Dalad Banner Economic Development Zone of Inner Mongolia, authorities explicitly support expansion into specialty silicone oils. A newly built HCSO unit there targets high-hydrogen-content (above 1.6%) niche markets, which are in demand for electronic potting agents and high-efficiency flame retardants.
      The adjustment aligns with global market realities. Although China has removed the rebate, European energy crises and capacity withdrawals from developed countries (an estimated 145,000 tonnes of overseas capacity exiting in 2026) mean global reliance on Chinese HCSO remains strong in the short term. This gives leading domestic producers some pricing power to pass on costs.
      The export rebate removal acts as a precise supply-side reform. It ends the era of relying on subsidy-fueled price wars and opens a new phase defined by innovation, brand premium, and functional specialization.