China power shortage threatens supply chain disruption and higher prices

Electricity customers across China were forced to spend periods of the last few weeks in the dark as utilities cut out the lights to manage significant power shortages.

The consequences are leading to forecasts of additional obstacles to a global economic recovery, with the disruptions to the world’s second-largest economy expected to raise prices and compound existing supply chain issues.

China’s manufacturing purchasing managers’ index, an indicator of the general health of the sector, contracted to 49.6 for the month of September, the lowest since February 2020, when the coronavirus pandemic was beginning.

Power constraints didn’t help. The country’s largest industrial power users, especially manufacturing operations, were the first victims of rationing as supplying power to residences took priority, according to Helsinki-based Lauri Myllyvirta, lead analyst for the Centre for Research on Energy and Clean Air.

Numerous reports over the last week detail factories having to close or find ways to work around the shortages. A shoe factory in Guangdong province rented a diesel generator at a cost of $10,000 per month to maintain operations. Its manager said this is the “worst year since we opened the factory nearly 20 years ago,” the New York Times reported .

China is a significant global producer of everything from machinery and plastics to earth metals, so any disruption to industry of this scale, especially one affecting its power sector , is of significant import to the world.

“It will put pressure on prices and will affect the supply chains,” Myllyvirta told the Washington Examiner.

As many as 19 of China’s provinces were experiencing power rationing in some form by the end of September, per an analysis by Hong Kong-based research and consulting firm The Lantau Group. Outages have ranged anywhere from four to 10 days, particularly for the larger industrial customers.

Residents have not been completely spared and reportedly face higher energy bills despite being shown preference during the power crunch. Those in Liaoning, Jilin, and Heilongjiang provinces in northeastern China have been especially affected and experienced blackouts in recent days as coal generators in the region were operating at 50% capacity in the last week, Chinese outlet Caixin reported Tuesday.

Elsewhere, the energy authority in Guangdong asked for residents to cut power consumption by limiting elevator use for the first three floors of buildings and keeping thermostats above 26 degrees Celsius, or about 79 degrees Fahrenheit, according to state media.

As to the genesis of the shortage, the simple explanation is that the domestic energy supply has been unable to meet an uptick in demand fueled by the global recovery, but Myllyvirta implicated Chinese power regulators in particular for failing to be dynamic enough with price controls — not a shortage of coal, on which the Chinese grid is heavily reliant.

“Essentially, the regulator put pressure on coal mines to keep prices low with pressure on generators to generate at a low price, and that just made it uneconomic to keep purchasing coal and keep running the power plants,” he said. “And now, when global energy prices have shut up, it just brought things to a head.”

“This is something that happens periodically in China that economic policy and energy policy just fall out of step. A lot of this is textbook economics, but the government doesn’t always want to lay along with the economics textbook,” Myllyvirta said.

Chinese officials are reportedly working to get the power crunch under control, having ordered state-owned energy companies to procure adequate fuel supplies for the winter at all costs. That effort may well contribute even more to already high fuel prices across the world, Myllyvirta said.

“It’s just the scale of China’s market that is important to keep in mind,” he said. “China gets less than 10% of its coal from overseas … so, very small changes in China’s coal demand can have a major impact on the seaborne market.”