China’s electric shock is the world’s latest supply chain threat, Economy News & Top Stories

DONGGUAN (NYTIMES, BLOOMBERG) – China’s energy crisis is shaping up to be the latest shock to global supply chains as factories of the world’s largest exporter are forced to conserve energy by cutting production.

According to Bloomberg Intelligence, at least 20 Chinese provinces and regions accounting for more than 66% of the country’s gross domestic product have announced power cuts, mainly for heavy industrial users. The reasons are twofold: Record coal prices are forcing power producers to cut back on production despite strong demand, while some regions have proactively stopped electricity flows to meet emissions and intensity targets. energetic.

The disruption comes as producers and shippers race to meet demand for everything from clothes to toys for the year-end shopping season, grappling with supply lines that have already been shattered by the soaring raw material costs, long delays at ports and shortages of shipping containers. .

Chinese manufacturers warn that strict measures to reduce electricity consumption will reduce output in economic powers like Jiangsu, Zhejiang and Guangdong provinces – which together account for nearly a third of the country’s gross domestic product – and could drive up prices.

Power crisis

There are several reasons why electricity is suddenly scarce in much of China. More regions of the world are reopening their doors after the pandemic-induced shutdowns, dramatically increasing demand for power-hungry Chinese export factories.

As the demand for electricity has increased, the price of coal to produce that electricity has increased. But Chinese regulators have not let utilities raise their tariffs enough to cover the rising cost of coal. Utilities have therefore been slow to run their power plants for more hours.

In Dongguan City, a major manufacturing hub near Hong Kong, a shoe factory that employs 300 workers last week leased a generator for US $ 10,000 (S $ 13,540) per month to keep work going. . Between the rental costs and the diesel to feed it, electricity is now twice as expensive as when the plant simply connected the network.

“This year is the worst year since we opened the plant almost 20 years ago,” said Jack Tang, general manager of the plant.
Economists predicted that production disruptions at Chinese factories would make it more difficult for many Western stores to restock empty shelves and could contribute to inflation in the months to come.

Nationwide electricity shortages have prompted economists to lower their estimates of China’s growth this year. Nomura, a Japanese financial institution, cut its forecast for economic expansion in the last three months of this year to 3 percent, from 4.4 percent.

The shortage of electricity is starting to exacerbate the problems in the supply chain. The sudden restart of the global economy has resulted in shortages of key components such as computer chips and has helped to confuse global shipping lines, placing too many containers and the ships that carry them in the wrong places.

The power supplies are little different. Compared to last year, China’s electricity demand is increasing this year to nearly twice its usual annual rate. Higher orders for smartphones, home appliances, exercise equipment and other manufactured goods produced by Chinese factories drove the rise.

China’s electricity problems are partly contributing to rising prices elsewhere, especially in Europe. Experts said a price spike in China prompted energy distributors to send ships loaded with liquefied natural gas to Chinese ports, leaving others to rush to other sources.

A workshop produces parts for a shoe maker in Dongguan, China on September 27, 2021. Power cuts and even blackouts have slowed or closed factories across China in recent days. PHOTO: NYTIME

But most of China’s electricity problems are unique to the country.

Two-thirds of China’s electricity comes from burning coal, which Beijing is trying to curb to tackle climate change. Coal prices have increased with demand. But because the government keeps electricity prices low, especially in residential areas, household and business use has increased regardless.

Faced with additional losses for every additional ton of coal they burn, some power plants have shut down for maintenance in recent weeks, saying it was necessary for safety reasons. Many other power plants are operating below full capacity and are wary of an increase in production when that would mean wasting more money, said Lin Boqiang, dean of the China Institute for Policy Studies Energy from Xiamen University.

China’s main economic planning agency, the National Development and Reform Commission, also ordered 20 major cities and provinces in late August to reduce their energy consumption for the rest of the year. Regulators cited the need to ensure cities and provinces meet annual targets set by Beijing for their carbon dioxide emissions from the combustion of fossil fuels.

Dongguan

Disruption due to power shortages has already been felt in Dongguan, a city in the heart of southern China’s manufacturing belt. Its factories produce products such as electronics, toys and sweaters.

The local power transmission authority in Houjie, a township in northwest Dongguan, issued an order to cut power to many factories from Wednesday to Sunday. Monday morning, the suspension of industrial electricity service was extended at least until Tuesday evening.


Power cuts and even blackouts have slowed down or closed factories across China in recent days, prompting a shoe factory to bring this generator to Dongguan, China on September 27, 2021. PHOTO: NYTIMS

Mr. Tang, the general manager, said his factory already faces particularly strict energy use rules because the government called it a “low-profit, high-energy-consuming factory.” “.

Along the nearby alleys, a maze of small workshops made insoles and other shoe components for assembly in the Tang factory and other similar factories nearby. Component prices are already up 30-50% from last year as labor costs and raw material prices rise, Tang said.

Clark Feng, whose tents and furniture Vita Leisure buys from Chinese manufacturers for sale abroad, said power cuts in the eastern province of Zhejiang, where the company is based, have brought a new blow to businesses. Fabric manufacturers in the province experiencing production shutdowns have started to raise prices and postpone new overseas orders, he said.

“We already had a hard time shipping goods overseas, and now with the restriction of production capacity, it is sure to be a huge mess,” Feng said. “We have had to deal with so many uncertain factors before, and now there is one more. Orders will be more difficult to deliver, especially during the holiday season. “

Certainly, the full impact on production remains to be seen.

IPhone assembly operations in China are starting to reduce their power consumption, Pegatron Corp, a key partner of Apple and one of the assemblers of its iPhone, said on Monday. The company said it was taking energy-saving measures to comply with local government policies.

Yet the companies responsible for the production of the Apple handset have so far avoided drastic production cuts and appear to be granted preferential access to energy in order to continue their operations, according to people familiar with the situation.

Authorities are monitoring the disruption, the People’s Daily, the official newspaper of the Communist Party of China, saying in an editorial on Sunday that the shortages would force companies to raise the prices of products for Chinese consumers.

The government of northeastern Liaoning province has urged local regulators to prevent power outages from impacting production and residential use, state broadcaster CCTV reported.

As the electricity crisis moves from factories to homes, the State Grid Corporation of China power company said on Monday it would do its best to avoid power outages to meet basic residential demand.

Analysts say power shortages will inevitably impact heavy industries such as aluminum and steel right down to downstream sectors. In the industrial center of Guangdong, the provincial energy administration issued a notice on Sunday saying that large-scale cuts to factories have already been implemented.

“Global markets will feel the pinch of a shortage of supplies of textiles, toys and machine parts,” said Lu Ting, chief economist for China at Nomura Holdings in Hong Kong. “The hottest topic on China will change from ‘Evergrande’ to ‘Power Crunch’ very soon.


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