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Date: 15 October 2021 Author: Patryk Szczotka

Chinese Industry and Global Supply Chains Hit by Energy Shortages

In recent weeks, China has been facing a severe electricity shortage, which affected millions of households and manufacturing companies. The problem is particularly grave in the northeastern provinces of the People’s Republic of China (PRC).

SOURCE: FLICKR

The power outages are occurring in at least 19 provinces across the country, including Guangdong, Zhejiang, Shandong, Anhui, and Jiangsu, although the frigid Northeast is the most affected area.[1] The problems are related primarily to PRC’s energy mix. Coal still accounts for the majority of it, but, as a result of depleted supplies of this raw material, its price hit a 10-year high.[2] Some Chinese provinces are experiencing electricity shortages due to the reluctance of mining companies to operate in the face of high thermal coal prices.[3]

Reportedly, 90% of China’s coal comes from Shanxi, Shaanxi, and the Inner Mongolia Autonomous Region.[4] Working conditions at production facilities and hazards related to this occupation led to a number of fatal accidents. Consequently, in June 2021, regulators decided to close some mines in Shanxi, a Chinese province that accounts for around 14% of the world’s coal output.[5] As a result, the supplies of this raw material were disrupted. Imports account for the remaining 10% of coal supply, but currently they are also problematic. Before Australia called for an independent investigation into origins of COVID-19 in April 2020, it accounted for 68% of Chinese coal imports. That number fell to zero after China imposed an unofficial embargo on Australian coal (a retaliatory response to Australia’s coronavirus probe), which has not been cleared by customs continuously.[6]

Some provinces are failing to meet their annual energy control objectives for energy consumption and intensity (also known as the “dual-control” targets) and have adopted power rationing as a short-term measure before these goals are reached again.[7] This is also affecting the supply of electricity. In some provinces, local demand exceeds available local generation capacity. As a result, a number of them are affected by the power generation issues in other parts of China due to their reliance on energy imports.[8]

Goldman Sachs estimated that as much as 44% of industrial activity in the PRC has been affected by energy shortages. The company believes that due to the energy scarcity, the world’s second-largest economy will grow by 7.8% this year, which is less than initially estimated (8.2%).[9] The power failures could also affect global logistics. The demand for goods produced in the PRC is strong, while the world’s economy has been affected by port congestion and bottlenecks in global supply chains for several months now.[10] Limited production in China and higher energy prices will make not only electronics or cars, but also Christmas gifts more expensive, while some of them might be difficult to obtain.[11]

[1] https://www.lantaugroup.com/file/brief_china_volatile_sep21.pdf

[2] https://www.argusmedia.com/en/news/2251466-mine-accident-sends-china-met-coal-prices-above-600t

[3] https://www.bbc.com/news/business-58733193

[4] https://lloydslist.maritimeintelligence.informa.com/LL1138362/Can-China-do-without-coal-imports-from-Australia

[5] https://www.scmp.com/economy/china-economy/article/3138758/china-coal-mine-closures-after-deadly-incidents-likely-add

[6] https://lloydslist.maritimeintelligence.informa.com/LL1138362/Can-China-do-without-coal-imports-from-Australia

[7] https://www.lantaugroup.com/file/brief_china_volatile_sep21.pdf

[8] https://www.lantaugroup.com/file/brief_china_volatile_sep21.pdf

[9] https://www.reuters.com/world/china/goldman-cuts-china-gdp-growth-forecast-cut-energy-supply-crunch-2021-09-27/

[10] https://www.bloomberg.com/news/articles/2021-08-25/the-world-economy-s-supply-chain-problem-keeps-getting-worse

[11] https://www.cnet.com/news/holiday-shopping-has-started-early-amid-fears-over-shipping-delays/

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