Energy: China crisis threatens long-term global supply chain disruption

People work on a wind turbine at the Haili factory in Rudong, China's Jiangsu province. Photo: EPA-EFE / ALEX PLAVEVSKI

Factory owners in China and their customers around the world have been told to prepare for power outages that will become part of everyday life as President Xi Jinping embarked on a project to vigorously reform the world's second-largest economy. from its dependence on coal.

A month-long power outage has cut off household power supplies in northeast China and disrupted production at factories across the country. But energy demand is still growing amid record Chinese export demand, and problems will escalate with the onset of low winter temperatures.

Despite the influx of central government interventions led by Prime Minister Li Keqiang, Chinese manufacturers and multinationals are being urged to increase energy efficiency in their factories and accelerate investment in renewable energy.

Truanalog Strictly OEM, a speaker factory near Guangzhou, is symbolic of the crisis that is already affecting exporters from frequent outages. Owner Philip Richardson says his company is stuck "playing leveling".

- It is a domino effect when you cut off the electricity: it directly affects the production line, we have to reset the wiring. It removes 20 to 30 percent of the day's productivity. - It is really a trouble - he says.

Will Jones, chief operating officer for the British Trade Association for Home Improvement, said a third of members in the "self-employed" sector and in gardening reported that suppliers had extended their time. The effect, Jones said, is additional inflationary pressures and a wider range of product shortages.

"This has an impact on an already very challenging situation for suppliers with restrictions on the availability of space for container vessels and spiral costs," Jones said.

The Chinese government has taken a short-term pragmatic approach to tackling energy shortages by returning "dirty fuels", despite long-term promises to reduce coal use.

Last week, the government ordered the rapid expansion of coal mines. It also ordered sweeping market reforms, forcing all coal-fired power producers to sell on the wholesale market, allowing electricity prices to rise by as much as 20 percent, and lifting price restrictions for some large consumers.

Market reforms are a "huge step" towards liberalizing the energy sector, said David Fishman, an energy analyst at Lantau Group.

However, government actions are not expected to immediately end power outages.

- Many companies were really surprised by the intensity of the shortage. But they had to admit that it might happen again by the end of the year, said Thomas Luedi, a Shanghai-based energy expert at Bain Consulting.

Luedi added that rising energy prices would quickly force some manufacturers to cut production, providing some relief to the strained power grid.

"Inefficient manufacturers can fall off the cliff," he said, citing smaller smelters such as ferromanganese and metallurgical silicon as the most likely early casualties.

In Guangdong, China's largest manufacturing hub, senior officials said nearly 150.000 companies were hit by energy shortages last month, people familiar with the government briefing told the Financial Times.

Acknowledging that problems could not be resolved immediately, officials in Guangdong privately warned that rationalization was likely to continue. They have also encouraged companies to use their own electricity generation, which probably means even greater use of diesel for power generation.

- Many companies will return to their own generators. Some of them are illegal. "They will have to upgrade them, but it is much faster than opening a power plant," said a businessman in southern China, who asked not to be named.

"The shortage eliminates 30 to 40 percent of working time, and trading companies suffer the same shortage," he said, adding that the electricity crisis "will not disappear tomorrow."

Richardson, the factory owner, has joined in restarting the diesel generators, despite a fivefold increase in cost, to be able to send his speakers to customers in Europe and the United States. It has also brought in temporary night shift staff and is targeting higher-cost air transport as a solution for neglected ports.

Even companies well-placed to benefit from government measures - such as those selling mining services and additional electricity generation - face difficulties in seizing the opportunity.

Nathan Stoner, who leads the Chinese operations of Cummins, a US mining and energy group, said that "although there are some opportunities", the company's operations were limited by power outages that affected factories and component suppliers.

In Britain, Steve Levy, managing director of Heath Outdoors Retail, says all of its Chinese suppliers of heaters and hand dryers, mainly based in Jiangsu and Guangdong, have suffered partial weekly shutdowns. Delivery time from one Chinese supplier jumped to six months, from four months during most of the pandemic and 10 weeks before the coronavirus appeared.

"I can not make a decision for April, because I have no idea what the market would be like then," Levy said.

Bain's Luidy warns that people should not be "fooled" by China's return of coal as an attempt to overcome the crisis.

- The trend line is clear. "But you have a lot of volatility around the trend," he said.

"You just need to have a few more percentage points of economic growth and that can protect the system temporarily from shock," Laudi said.

 

Source: Financial Times

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