China’s energy crisis threatens long disruption in global supply chain
Factory owners in China and their customers around the world have been urged to prepare to make power disruptions a part of life as President Xi Jinping stubbornly wards off the world’s second-largest economy from its dependence on coal.
Months of shortages have cut household electricity in northeast China and caused blackouts at factories across the country. But energy demand continues to rise amid record demand for Chinese exports, and the problems will be compounded by the prospect of freezing temperatures in winter.
Despite a wave of interventions from the central government, led by Premier Li Keqiang, Chinese manufacturers and multinationals have been urged to boost energy efficiency in their factories and accelerate investments in renewable energy.
Trueanalog Strictly OEM, a factory producing loudspeakers near Guangzhou, is emblematic of the crisis already plaguing exporters due to frequent blackouts. Owner Philip Richardson said his business was stuck “catching up”.
“It’s the domino effect when you cut off the electricity: it directly affects the adhesives in the production chain, you have to reset the jigging, it takes 20 to 30% of the day’s productivity. . . It really is a chore, ”he said.
Will Jones, chief operating officer of the British Home Enhancement Trade Association, said that a third of members of the DIY and gardening industry said suppliers have extended their delivery times. The ripple effect, Jones said, was additional inflationary pressure and a wider range of product shortages.
“This is impacting an already very difficult situation for suppliers with constraints on the availability of space on container ships and increasing costs,” Jones said.
The Chinese government has taken a short-term, pragmatic approach to alleviating the energy shortage by switching back to more polluting fuels, despite its long-term promises to cut back on coal.
Over the past week, the government ordered a rapid expansion of coal mines. He also decreed sweeping market reforms, forcing all coal-fired power producers to sell on the wholesale market, allowing electricity prices to rise by up to 20% and lifting price caps for some. heavy users.
The overhaul of the market is a “big step” towards liberalizing the electricity sector, said David Fishman, energy analyst at the Lantau Group.
Government actions, however, should not immediately end the power outages.
“A lot of companies have been really surprised by the intensity” of the shortages, said Thomas Luedi, a Shanghai-based energy expert at consultancy Bain. But they had to “recognize that this could be the case again towards the end of the year”.
Luedi added that increases in energy prices would quickly force some manufacturers to cut production, relieving the strained power grid.
“Inefficient producers could fall off the cliff,” he said, pointing to smaller-scale manufacturers of smelting materials such as ferromanganese and metallurgical-grade silicon as the first likely victims.
In Guangdong, China’s largest manufacturing hub, senior officials said nearly 150,000 businesses were affected by energy shortages last month, people familiar with a government briefing told the Financial Times.
In a concession that the problems could not be resolved immediately, Guangdong officials privately warned that rationing would likely persist. They also encouraged companies to use their own power generation, which likely means even greater use of diesel for power generation.
“A lot of businesses are going to go back to their backyard generators. Some of them are illegal. They will have to modernize them, but it is much faster than starting a power plant, ”said a businessman from southern China, who requested anonymity.
“Shortages eliminate 30-40% of uptime and commercial companies suffer the same disadvantage,” he said, adding that power shortages “will not go away tomorrow”.
Richardson, the owner of the plant, has resorted to diesel production despite a five-fold increase in costs, to supply his speakers to customers in Europe and the United States. It has also recruited temporary staff for night shifts and is turning to higher-cost air cargo as a workaround for blocked ports.
Even companies well positioned to benefit from the government’s response, such as those selling mining services and back-up power generation, are struggling to seize the opportunity.
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Nathan Stoner, who heads the Chinese operations of Cummins, a US mining and energy industry group, said that “while there are opportunities,” the company’s operations have been constrained by power outages affecting its factories and those of its component suppliers.
In Britain, Steve Levy, managing director of UK retailer Heat Outdoors, said all but one of his Chinese suppliers of outdoor heaters and hand dryers, mainly based in Jiangsu and Guangdong, had experienced shutdowns. part of the week. Delivery times for a Chinese supplier have increased to six months, from four months during most of the pandemic and 10 weeks before the coronavirus struck.
“I can’t make a decision for April,” Levy said, as he had “no idea” what the market would be like at the time.
Luedi de Bain warned that people should not be “fooled” by China’s reversion to coal to deal with this crisis.
“The trend line is clear. But you have a lot of volatility around the trendline, ”he said. “You only need a few more percentage points of economic growth and that can temporarily destabilize the system.”