China's electricity shock is latest supply chain threat to world

The disruption comes as producers and shippers race to meet demand for the year-end holiday shopping season.
The disruption comes as producers and shippers race to meet demand for the year-end holiday shopping season.PHOTO: NYTIMES

DONGGUAN (NYTIMES, BLOOMBERG) - China’s energy crisis is shaping up as the latest shock to global supply chains as factories in the world’s biggest exporter are forced to conserve energy by curbing production.

At least 20 Chinese provinces and regions making up more than 66 per cent of the country’s gross domestic product have announced some form of power cuts, mostly targeted at heavy industrial users, according to Bloomberg Intelligence. The reasons are two-fold - record high coal prices are causing power generators to trim output despite soaring demand, while some areas have pro-actively halted electricity flows to meet emissions and energy intensity goals.

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

Chinese manufacturers warn that strict measures to cut electricity use will slash output in economic powerhouses like Jiangsu, Zhejiang and Guangdong provinces - which together account for almost a third of the nation’s gross domestic product - and possibly drive up prices. 

Power crunch

There are several reasons electricity is suddenly in short supply in much of China. More regions of the world are reopening after pandemic-induced lockdowns, greatly increasing demand for China’s electricity-hungry export factories.

As electricity demand has risen, it has pushed up the price of coal to generate that electricity. But Chinese regulators have not let utilities raise rates enough to cover the rising cost of coal. So the utilities have been slow to operate their power plants for more hours.

In the city of Dongguan, a major manufacturing hub near Hong Kong, a shoe factory that employs 300 workers rented a generator last week for US$10,000 (S$13,540) a month to ensure that work could continue. Between the rental costs and the diesel fuel for powering it, electricity is now twice as expensive as when the factory was simply tapping the grid.

“This year is the worst year since we opened the factory nearly 20 years ago,” said Jack Tang, the factory’s general manager.
Economists predicted that production interruptions at Chinese factories would make it harder for many stores in the West to restock empty shelves and could contribute to inflation in the coming months.

Nationwide power shortages have prompted economists to reduce their estimates for 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 per cent, from 4.4 per cent.

The electricity shortage is starting to make supply chain problems worse. The sudden restart of the world economy has led to shortages of key components like computer chips and has helped provoke a mix-up in global shipping lines, putting in the wrong places too many containers and the ships that carry them.

Power supplies are little different. Compared with last year, electricity demand in China is growing this year at nearly twice its usual annual pace. Swelling orders for the smartphones, appliances, exercise equipment and other manufactured goods that China’s factories churn out has driven the rise.

China’s power problems are contributing in some part to higher prices in other places, including Europe. Experts said a surge in prices in China had drawn energy distributors to send ships laden with liquefied natural gas to Chinese ports, leaving others to scurry for further sources.


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

But the bulk of China’s power problems are unique to the country.

Two-thirds of China’s electricity comes from burning coal, which Beijing is trying to curb to address climate change. Coal prices have surged along with demand. But because the government keeps electricity prices low, particularly in residential areas, use by homes and businesses has climbed regardless.

Faced with losing more money with each additional ton of coal they burn, some power plants have closed for maintenance in recent weeks, saying that this was needed for safety reasons. Many other power plants have been operating below full capacity and have been leery of increasing generation when that would mean losing more money, said Lin Boqiang, dean of the China Institute for Energy Policy Studies at Xiamen University.

China’s main economic planning agency, the National Development and Reform Commission, also ordered 20 large cities and provinces in late August to reduce energy consumption for the rest of the year. The regulators cited a need to make sure that the cities and provinces met full-year targets set by Beijing for their carbon dioxide emissions from the burning of fossil fuels.

Dongguan

Disruptions from power shortages have already been felt in Dongguan, a city at the heart of China’s southern manufacturing belt. Its factories produce goods that include electronics, toys and sweaters.

The local power transmission authority in Houjie, a township in northwestern Dongguan, issued an order shutting off electricity to many factories from Wednesday through Sunday. On Monday morning, the suspension in industrial electricity service was extended at least through Tuesday night.


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

Mr Tang, the general manager, said his factory already faced especially strict power usage rules because the government labeled it a “low-profit, high-energy-consuming factory.”

Along nearby alleys, a warren of small workshops was making insoles and other shoe components for assembly at Tang’s factory and other similar plants nearby. Prices for the components have already increased by 30 per cent to 50 per cent from last year as labour costs and raw material prices rise, Mr Tang said.

Clark Feng, whose Vita Leisure buys tents and furniture from Chinese manufacturers to sell overseas, said electricity curbs in the eastern province of Zhejiang, where the company is based, have dealt another blow to businesses. Fabric makers in the province that are suffering production halts have started to hike prices and postpone taking new overseas orders, he said.

“We were already struggling to ship goods overseas, and now with the production capacity restriction, it’s definitely going to be a huge mess,” said Mr Feng. “We already had to deal with so many uncertain factors, and now there’s one more. It will be harder to deliver orders, especially for the holiday season.”

To be sure, the full impact on production remains to be seen. 

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

Yet the firms responsible for producing the Apple handset have avoided drastic cutbacks in production so far and appear to be getting preferential access to energy in order to keep operations going, according to people familiar with the situation.

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

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

With the power crisis moving from the factory floor to people’s homes, electricity utility State Grid Corporation of China said Monday it will try its best to avoid power cuts to meet basic residential demand.

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

“Global markets will feel the pinch of a shortage of supply from textiles, toys to machine parts,” said Lu Ting, chief China economist at Nomura Holdings in Hong Kong. “The hottest topic about China will very soon shift from “Evergrande” to “Power Crunch.”