Debrief - Impact of energy shortage

China's power crunch could add to rising inflation in Singapore

A shortage of affordable electricity in China since last month has resulted in blackouts and disrupted production in the world's second largest economy.

Its impact is already hurting supply chains and could add to rising global inflation, including in Singapore. The power crunch is attributed to China's coal shortage, with coal accounting for 60 to 70 per cent of the country's electricity generation.

To achieve its target of going carbon neutral by 2060, President Xi Jinping had earlier this year discouraged coal miners from increasing output. Meanwhile, the price of natural gas, an alternative to coal, has also risen strongly thanks to global demand recovery.

Covid-19 lockdowns and suppression measures are being gradually lifted in many countries, boosting demand for products and commodities, from electronics to building materials, much of which China produces and exports.

China's coal production grew by 6 per cent in the first eight months of the year, but power output from coal-fired generators surged 14 per cent in the same period, leading to a decline in inventories, according to Bloomberg.

Since last year, China has also stopped buying coal from Australia amid a political dispute.

As a result, coal prices have risen to record levels. Power prices will now be allowed to rise by as much as 20 per cent against a benchmark, double the level of the current cap. Prices for most energy-intensive industries, such as mining and smeltering, will not be subject to a cap. Consequently, local governments in major Chinese manufacturing hubs such as Zhejiang, Jiangsu, and Guangdong provinces have asked factories to limit power usage or curb output.

Why it matters Higher electricity prices in China will add to global inflation pressures and exacerbate delays in delivering materials essential to supply chains. That, in turn, will have an impact on output, corporate earnings and even jobs.

Metal smelters and steel factories have been among the first casualties. The shortage has already hampered production and lifted the prices of some metals, including copper, aluminium and steel, last month, according to research firm Mysteel.

China is the largest producer of metals in the world as well as the main exporter of steel and other building materials to Singapore, where the construction industry is struggling with runaway costs and extended delays. Consumers are ultimately affected, with flats taking longer to be completed.

E-commerce will also be affected. With factories closed and output down, inventories will take longer to ship out or become harder to find, especially during online shopping festivals such as Black Friday and 11/11. Order cancellations will become more common.

Many sellers will have less capacity to discount products, and sales prices might get less attractive.

What lies ahead

In Singapore, the electronics and manufacturing sectors will also be affected by these disruptions, if they continue.

Maybank Kim Eng economist Chua Hak Bin said rising costs and persistent chip shortages will eventually eat into company earnings here, and manufacturers may pass on higher production costs to consumers if disruptions persist and margins continue to be squeezed.

China's production prices are already growing at the fastest pace in almost 26 years. Last month, the producer price index hit its highest level since 1995.

The Monetary Authority of Singapore tightened its monetary policy yesterday to account for higher expected inflation.

While firms here have yet to report a slowdown, DBS economist Irvin Seah said the manufacturing sector will likely take a hit if delays and inflation continue, and this would ultimately impact the labour market if growth is affected.

 • Additional reporting by Bloomberg, Reuters

A version of this article appeared in the print edition of The Straits Times on October 15, 2021, with the headline 'China's power crunch could add to rising inflation in Singapore'. Subscribe