China’s Energy Crisis Threatens Global Supply Chain
Widespread power shortages have caused China’s economy to hit its lowest point of growth in the third quarter of this year. Shortages of coal, skyrocketing electricity prices, and increased demand for industrial goods have caused the Chinese government to ration electricity use in at least 17 of 30 of mainland China’s regions. There are a few main reasons why China is experiencing an energy shortage:
- Electricity prices paid to power generators are regulated by the central Chinese government in an attempt to curb inflation. However, when coal prices rise, industrial plants operate at a loss, so the factories temporarily shut down, citing reasons of technical malfunction or failure to purchase coal.
- China is under heavy diplomatic pressure to meet CO2 emissions reduction goals under the Paris climate agreement and regulates power usage nationwide.
- Natural disasters have halted coal production, such as torrential rainstorms that suspended coal mine factories in Shanxi for a week.
- China’s dependence on coal, which provides 70% of the nation’s power, is leading to an over-reliance on coal and Chinese coal producers are struggling to match the demand.
Supply Chains at Risk and Impacted Industries
These power shortages are disrupting global supply chains and are leading to a worldwide shortage of goods produced in China. China’s GDP is projected to be down by 2% in December, and energy-dependent sectors such as steel, aluminum, and cement producers are some of the most at-risk, according to Standards & Poor’s estimates.
According to Natixis’ market risk reports, the power restrictions will have severe implications on the manufacturing sector, and producer prices will be expected to go up, squeezing the profit margin of downstream users and leading to inflation risk.
Steps to Alleviate the Impact of China’s Energy Crisis
Shanxi, China’s biggest coal-producing region, ordered its mines to raise annual output capacity by 55.3 million tons over the remainder of 2021. Furthermore, they are allowing mines that already hit annual production levels to go over their limits. Inner Mongolia, China’s #2 producer of coal, also received urgent notice from the region’s energy department to operate at higher capacities. While these ease coal shortages in the time being, they don’t completely alleviate current energy needs.
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