Of China’s 23 provinces, 20 are reported to have been affected by power cuts over the past month. China’s industrial foundations have been rocked by chaotic disruptions—the worst for over a decade—surprisingly caused by mainly non-covid-related mayhem.
The situation in China: the canary in the coalmine
Economics 101: when supply decreases, price increases. Despite China having proven reserves of 149,818 million tons of coal, there is not much of it about these days. Floods in Henan and Shanxi, cases of corruption preventing mine licences from being approved, and an athletics event slowing production to lift the perma-smog for long enough for spectators to see the athletes have all caused a decrease in output—which has increased price.
Unable to pass on this increased cost to consumers due to complex regulations, power stations have shut down—not wanting to operate at a loss. In addition, China is also planning on going carbon neutral by 2060, which has been an additional contributing factor to the national slowdown of coal production.
This medley of reasons means China is running out of coal, which provides the country with two-thirds of its electricity supply. And this is a problem for the rest of the world since coal is what powers China’s vast factories and quells the West’s unassailable appetite for their products.
The situation is happening at a time when there is already an increased demand for Chinese products, including smartphones, household appliances, and other electrical equipment. This began when people’s shopping modes changed during lockdowns. And now, a novel post-covid hunger for goods from Chinese factories has been accelerated by the world reopening, the covid-induced backlog, and the world’s evolving spending habits.
The dearth of electricity powering the world’s factory is yet another hit to the global supply chain that is currently in tatters—sick from a plethora of ailments including the lack of shipping containers.
The manufacturing industry: being hauled over the coals
The power shortages have impacted the manufacturing industry; numerous factories, some of which have been reported to be working by candlelight, have stopped production. Consumers across the globe are now beginning to feel the repercussions of the energy crisis—even iPhones and Teslas have been affected as the companies have implemented energy-saving measures.
The tech sector has so far escaped relatively unscathed. Still, as the Christmas period is fast approaching, the production of in-demand gadgets and electronic devices will most likely be affected due to the lack of supply. This is yet another threat to the country’s slowing economy and has the potential to produce another supply shock, adding to the current global semiconductor chip shortage.
The customers: Carrying the coals
Given the situation, it is highly likely that components such as Printed Circuit Boards (PCB) will be facing critical capacity constraints and shutdown. This is because the decrease in output and consequent slower growth will lead to higher costs for manufacturers. Unfortunately, this increase will be felt along the supply chain—from the factory to the electronics manufacturing services (EMS), to the original equipment manufacturers (OEMs), and, ultimately, to the end-user.
This is yet another blow as giant chemical companies such as BASF, DuPont, and Dow increased prices from September 1, 2021. Some products increased by up to 30% in addition to extra fees such as natural gas surcharges.
The one certainty is that prices will continue to increase for everyone along the supply chain.
Pour on the coal: is there a solution to the crisis?
The government has told state-owned energy companies to increase their coal procurement channels and for miners to raise their output. Additionally, China’s banking and insurance regulator told the financial sector to increase their risk tolerance for loans to coal plants. Beijing is also increasing electricity imports from Russia, North Korea, and Myanmar to meet demand.
There are also reports from experts that the government will redirect electricity from energy-intensive industries such as steel, cement, and aluminium to manufacturing plants as well as people’s homes to keep them warm over the winter.
Fully aware that the winter is fast approaching and wanting to avoid any social disturbance, the Chinese government is keen to do ‘whatever it takes’ to resolve the situation. The nature of Chinese politics means the country is in as good a position as any to take quick and affirmative action.
The impact on the global economy, however, will depend on just how quickly they can get the fires burning.
Factories in China are understandably worried, as are manufacturers who rely on their Chinese suppliers. The easiest knee-jerk reaction would be to think re-shoring or near-shoring, but this ignores the importance of China and the global supply chain.
While there are certainly benefits of manufacturing products outside China, the components used to manufacture these products are most likely to come from China. Therefore, manufacturers are dependent on the country, and whatever happens in China—politically, socially, environmentally—will have an effect on the rest of the world.
The reality of our lives today is that we live in a globalised and interconnected world. Europe and the U.S. want more Chinese products—increasing electricity demand by twice its usual speed. But China’s ability to meet these demands has been hampered by a complex set of interwoven reasons. Trying and give us what we want, the country is importing higher quantities of liquified natural gas.
This sounds great, but the wind didn’t blow in the U.K. this year. So it turns out that we need that natural gas on its way to China to keep us warm over the winter.
Two outcomes are certain this year—not only will we be paying more for our Christmas presents, but we will also be paying a lot more to keep the guests warm.