Power Cut!

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What happens when the largest manufacturing hub of the world goes through an energy crisis?

 

China’s energy crisis and disruption in global supply chain
In the shining conference room, environment friendly energy solutions may look promising but the world is yet to embrace the next era energy solutions, as showcased by the ongoing energy crisis in China, emitting a shock around the global supply chain with long term consequences.

China and energy policy
China is the world’s largest producer of coal with 3.8 billion tonnes production per year. The number is larger than the next nine producers combined, and the industry employs 26 million people and amounts for nearly half of the world production. The country has thousands of coal based plants and has been using the mineral as its main energy source for several decades. China consumes more coal than the world combined.
However, coal fired plants bring several problems. It pollutes the air, increases carbon emission and causes pulmonary diseases. The problem is severe in China as large metropolises like Beijing often suffer from dense smog. In recent times, Chinese leader Xi Jinping has pledged to curb coal and other fossil fuel based energy sources. The country is aiming to become carbon neutral by 2060. China has already developed a significant amount of hydro, sun and wind powered energy sources, making up about 26% of current demand, amounting to 790 GigaWatt – the largest in the world. Rest of the demand is met by old school coal fired plants.
As it pledged, China has rapidly tried to reform its energy sector by pressuring manufacturers to convert to renewable sources. Cutting down coal production, excluding subsidies, are being used as a coercive mechanism as it has sent energy prices way higher. Coal price per ton has increased from 100 to 170 USD. The government expects that factories will be pressured to avoid coal based electricity by this way. Around 20 of the 36 provinces in China have introduced frequent power cuts and rationing to fit in the energy policy, but this sudden change has severely curbed production capacity and triggered a worldwide instability in supply chain.

 

The country produces almost everything except a few high grade technological components. Numerous companies worldwide rely on Chinese manufacturing hubs.

 

Global supply chain
China exports 2.59 trillion USD worth of goods per year. The country was the only large economy that continued to grow despite COVID-19 pandemic. About one-third of Chinese exports are destined to the USA and European Union (EU). The country produces almost everything except a few high grade technological components. Numerous companies worldwide rely on Chinese manufacturing hubs. However, shortages in energy production since August have caused mass outages. The country’s main manufacturing hub in the northeast region is bearing the brunt. While the leaders are urging Chinese companies to boost investment in renewable energy and achieve energy efficient approaches, most are finding it tough to keep up full scale operations. 20% to 30% productivity has been reported to drop in many factories.
Several other problems have exacerbated the crisis. China banned the import of Australian coal at the end of 2020. The country now relies on Russia and Indonesia mainly. Indonesia produces about 55 million metric tonnes of coal, recent heavy rain in its main coal producing island Kalimantan has disrupted production. Another issue is the upcoming winter, Chinese households and producers all are rushing to secure energy supplies for the cold season. This could be another cause behind the price of coal rising, deepening the energy crisis as a result.
Metal and automotive production
Experts assume the higher energy price will quickly dismantle inefficient producers with high energy consumption. Makers of ferromanganese or metallurgical silicon can be early victims.
China produces more cars than the USA, Japan and Europe combined. Magnesium, a key component in automobile production, is facing soaring prices due to the energy crisis in China. The metal requires extreme level use of energy to process and China’s cuts have hampered production. As the biggest exporter of magnesium (87%) is falling behind, prices have reached 11,000 USD per tonne, an increase from 2,500 per tonne several months ago. While the EU expects the German and European reserves to be exhausted by 2021, the automotive industry is facing serious challenges. Yulin’s Fugu County is responsible for 60% of Chinese production. The production there has been halved. As a result, Chinese production decreased to 17%, European car registration fell almost one quarter and Toyota motors has cut back its production by 40%. Approximately 15kg of Magnesium is required per car. Aluminum and steel industry is also experiencing a similar contraction. China’s largest manufacturing hub, Guangdong alone faced shortages in 1,50,000 of its companies. Makers of consumer goods are also expecting a bit of instability in price as China, as stated earlier, produces everything. Electrical equipment like electric heaters may see price hikes worldwide. However, consumer brands won’t be hit much hard as most of the energy demand comes from metal based industries.

Government steps
China has taken a short term reality based approach to address the shortages. First, it has rapidly expanded its coal mining operations to tackle the hike and shortages temporarily, and secondly it has decreed all the coal powered plants to sell their electricity to the wholesale market. The step could push the price of electricity by 20% for now. The government expects that manufacturers will be forced to choose renewable energy, many however are relying on old school generators rather than investing a large sum in other sources. This could spike the price of diesel in near future as the government has no immediate plans of cutting down shortages. On the other hand, Diesel costs five times higher than coal so probably the shock in the supply chain will remain somehow.

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