A power crunch on a scale unseen in more than a decade is laying bare the impact of Beijing’s changing policy priorities.
By Stella Yifan Xie, Sha Hua, Chuin-Wei Yap
Article from The Australian Business Review - Monday - March - 07.03.22 - (originally from the Dow Jones - October 2, 2021)
China is struggling with widespread power shortfalls, dealing a blow to the recovery of the second-largest economy and risking disruption to global supply chains and heightened inflationary pressure around the world.
The power crunch, on a scale unseen in more than a decade, highlights how some of Beijing’s changing policy priorities, including its effort to limit carbon emissions, can ripple through a global economy that has been reshaped by the pandemic.
“There’ll be a cascading effect,” said Mike Beckham, Oklahoma-based co-founder and CEO of Simple Modern, which makes products such as insulated water bottles and backpacks, “As we started to comprehend the ramifications of what’s happening, we realised that this is potentially bigger than anything we’ve seen in our business careers.”
Last week, one of Mr. Beckham’s main suppliers, based in Quzhou city in eastern China, was told by the local government that it could only operate four days a week, instead of the usual six. In addition, it must adhere to a power-usage cap, which cuts the capacity of the factory by about one-third as a result.
Mr. Beckham anticipates U.S. retail prices for many products could increase by as much as 15% next spring, as appetite from retailers stays strong.
The shortages reflect a combination of factors. Coal prices have surged because of a shortage of domestic coal supplies, made worse by import cuts from Australia and Mongolia. That has prompted power stations to reduce output to avoid losses because of official caps on their selling prices.
Meanwhile, from the top, Beijing is seeking to enforce energy-efficiency targets, leading to officially sanctioned reductions in energy usage by some industries.
At the same time, demand for electricity has soared since the end in April 2020 of China’s pandemic-induced shutdown, as factories increased production to meet rising consumer demand in the West.
The power crunch in China adds to a global energy squeeze that risks upsetting the post-pandemic recovery.
Surging demand, swings in the weather and lacklustre production have driven up natural-gas prices. The surge has hit output at European factories and household energy bills. It is also fuelling anxiety in Europe and the U.S. over whether dwindling supply will be sufficient to power economies through the winter.
The U.K. government recently stepped in with subsidies to reopen a fertiliser plant closed by rising energy costs, which supplies a significant share of the country’s carbon dioxide, a by-product needed in food processing. The French government said this week it would block any increase in household gas and electricity bills until the spring.
The China power crunch also risks heaping further pressure on global supply chains by pushing up prices for raw materials and essential components.
“Global markets will feel the pinch of a shortage of supply from textiles, toys to machine parts,” wrote Ting Lu, chief China economist at Nomura Holdings, in a note to clients on Monday. He added that the resulting supply shock will likely further push up global inflation, especially in developed markets such as the U.S. The power curbs have hit parts of China’s manufacturing bases, including those that produce semiconductor-related goods. A global shortage of semiconductors this year has already hit car makers and other industries.
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The view from an electricity pylon in China’s Anhui province. Picture: Reuters