Commodities

Explained: Why China is facing power crunch and its fallout

Our Bureau Chennai | Updated on September 30, 2021

The power crunch could affect its industrial production, economy

Nothing could have been as eye-catching as a fall in the commodities market. This week, the commodities market has witnessed a decline with metals such as nickel, copper, zinc, lead, aluminium, lithium, iron ore, tin, rhodium, besides other commodities such as iron ore witnessng a fall in prices.

The London Metal Exchange (LME) index has dropped 1.06 per cent so far this week. The major reason for the commodities slipping is the power crunch that China is going through now.

One of China’s worst power shortages is not confined to only the commodities market, though. Termed unprecedented, the power crunch has left millions of Chinese, particularly in northern parts, without power.

Two different reasons

There are two different reasons for the power crunch — one for the north and another for the south. In the north, it is due to soaring coal prices. In the south, it is due to lower hydropower production.

Many industrial units are facing electricity supply crunch, affecting production. China’s most industrialised provinces Jiangsu, Zhejiang and Guangdong are the worst hit by the situation.

The Chinese power situation has resulted in many financial and rating agencies lowering the growth estimated for the country’s GDP to below eight per cent. The unfolding scenario, which is feared to get worse as winter nears, has many wondering what has gone wrong with the Communist nation.

What are the effects of Chinese power woes?

According to Iikka Korhonen, head of Bank of Finland Institute for Economies in Transition, China’s manufacturing PMIs this month point to a subdued growth and the trend had begun even before the power crunch.

Bloomberg News Chief Energy Correspondent Javier Blas tweeted that the power situation was worsening and widening. Chinese authorities have asked food processors such as soyabean crushing plants to shut down.

Smelters, mainly aluminium, steel plants, cement manufacturers, fertiliser companies and textile units have all been asked to curb their production or even stop for now. Even suppliers of electronic components have been affected that could impact firms such as Apple and Tesla. In some provinces, the suppliers have suspended production.

In one case, a textile mill in Jiangsu province has been told that it is unlikely to receive power supply until October 7.

What are the other impacts?

In provinces such as Jiangsu, even street lights have been turned-off. In some northern provinces, even traffic lights have been switched-off. In some apartments, even operations of lifts have been stopped, forcing people to use the staircases.

In Guangdong, the citizens have been asked to reduce air-conditioner usage. In at least nine provinces, power is being rationed, while industrial users have been asked to stop production during peak consumption hours.

Even chemicals, dyes and furniture firms have been affected. Production at a popular steel and wood firm, Dongguan Yuhong Wood Industry, in Guangdong’s province in Dongguan has been affected. .

This could force multinational firms to look at alternatives, an effort that had begun when the Covid pandemic set in. The power shortage is now expected to affect the electric vehicles sector, one of the rapidly progressing sectors.

This will ultimately drag industrial production and affect economic growth. This could also affect India and other countries that depend on China for imports of industrial equipment and machinery.

Why did such a situation occur?

The major reason for China’s power crunch is short supplies of coal. China is the major consumer of coal in the world and the commodity makes up at least 60 per cent of the total energy consumption.

A diplomatic dispute with Australia has led to a shortage in coal supplies. In view on the controversy, which started over a doctored image posted by the Chinese Foreign Ministry on Twitter, Beijing banned import of Australian coal. This, in particular, has affected its Chinese provinces.

China produces 90 per cent of its coal requirement locally but the producers are unable to ramp-up output at a short notice. Beijing is now having to depend on other suppliers such as Indonesia, Russia and South Africa.

Coal plants’ problem

But the issue is that the Chinese plants are used to working with Australian coal and the change in the fuel has affected their efficiency. This is because they have to change equipment to work on non-Australian coal.

Also, China, being the first nation to recover from the Covid pandemic, was flooded with demand for exports. This resulted in power consumption increasing by over 10 per cent, resulting in the plants being unable to meet the rising demand.

All this has resulted in coal prices surging to a record $212 a tonne on Zhengzhou Commodity Exchange. They have gained 120 per cent year-on-year due to this.

Why can’t power charges be raised?

Power producers are also faced with the problem of being unable to raise the prices of electricity as they are regulated by the Communist regime. Since these producers are prone to losing money in view of the coal price surge, they are reluctant to increase production to meet the demand.

The Chinese National Reform and Development Commission froze the rate hike in 2019 and has not set a deadline for it. This has led to lobbying by the producers for a hike, which Beijing is reported to be considering.

In addition to coal shortage, China is also faced with reducing carbon dioxide emission to meet its norms of reducing it by 65 per cent compared with emissions in 2005.

In the south, Guangdong gets a fourth of its electricity from hydropower from nearby Yunnan province. However, a warm summer has drained water reservoirs affecting power production. Rising demand for energy has compounded the situation.

How is decarbonisation affecting power supply?

Last month, Chinese president Xi Jinping said carbon emission will peak by 2030 and Beijing will achieve carbon neutrality by 2060. This is one of the reasons why a number of coal-fired plants required in the Communist nation have not come up.

Production curbs to meet the emission norms were expected to reduce energy needs. But industrial units, particularly in Mongolia and Guangdong, have not been able to meet the target, thus resulting in the power shortage. Eight other provinces have also not met the emission norms due to post-Covid lockdown recovery. This, in turn, resulted in energy-intensive industries running overtime.

Economic experts say decarbonisation targets are unlikely to be met until consumers begin to pay the exact cost for consumer power. Consumers should also pay for the pollution they cause, they say.

What are the ways out?

On Thursday, Bloomberg News reported that China could review import of coal from Australia. This will help China to get coal at a lower price since India gets coal from Down Under at a much more competitive price.

Another report said that power charges could be increased at least for industrial units.

Two, the Chinese authorities are planning to allow the power producers to hike the rates. But how far will the Chinese citizens bear the higher cost is a million dollar question.

Another issue is also on the cards — shortage of natural gas. Consumption of natural gas is on the rise with Covid restrictions being eased across the globe.

There are even fears that the Chinese power crunch could even lead to socio-economic unrest and probably expose the Jinping administration’s shortcomings.

Published on September 30, 2021

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