China's Energy Crisis Affecting Multiple Industries, Authorities Ask Top Coal Regions To Increase Production

A series of power outages in China have caused firms to reduce production or shut down completely since last month. The northeastern Chinese manufacturing hubs have been particularly heavily struck.

As reported, this ongoing issue is now affecting everyone from Toyota Motor Corp. to Australian sheep farmers and cardboard box manufacturers. It also comes as China's harvest season begins, causing concerns about skyrocketing food prices.

Bloomberg reported that according to Louis Kuijs, senior Asia economist at Oxford Economics: “If the electricity shortages and production cuts continue, they could become yet another factor causing global supply-side problems, especially if they start to affect the production of export products.”

Craig Botham, chief China economist at Pantheon Macroeconomics said that it appears to be another “stagflationary shock” for manufacturing, not just in China, but globally. Additionally, Bothan noted: “The price increases by now are pretty broad-based—a consequence of China’s deep involvement in global supply chains.”

As reported by Financial Times, Bank of America's Miao Ouyang and Helen Qiao said that China's industrial output was squeezed in September 2021 due to steep production cuts in energy-intensive industries. Additionally, predictions indicate that the gross domestic product growth would be harmed.

Meanwhile, when many Chinese industries cut back on output for this week’s holiday, economists are keeping an eye on whether power shortages may resurface once production resumes.

Economists at Societe Generale SA in France said on 8 October that as a result of Beijing’s reaction “the worst of this energy crisis – but not the entire crisis – may be over soon”. But according to them, power consumption restrictions in the most energy-intensive industries, such as steel, aluminium, and cement, will last for months, and China will continue to aggressively target natural gas imports, putting upward pressure on world prices.

Meanwhile, Reuters reported that in China officials have urged the country's major coal mines to move quickly to increase yearly output capacity by more than 160 million tonnes to solve the power issue.

Industries Under Pressure

During the Covid-19 pandemic, demand for cardboard boxes and packaging materials was already at an all-time high, putting a burden on production. At this moment, the temporary power shutdowns in China have wreaked havoc on output, resulting in a 10 to 15 per cent drop in supply for September and October.

The food supply chain is also under threat, as the world's largest agricultural producer faces a more difficult harvest season as a result of the energy crisis. Several businesses, such as soybean processors that smash beans to generate meals for animal feed and oil for cooking, have been forced to shut down or limit operations in recent weeks to preserve power. Even, fertilizer prices are soaring, hitting farmers who are already struggling to keep up with escalating expenditures.

Outside China, sheep producers in Australia are bracing for lower demand as they try to sell their wool at auctions. According to a report by the Australian Broadcasting Corporation, Chinese mills reduced production by up to 40 per cent owing to power outages last week.

The energy crisis also affected the tech industry, as China is the world's largest manufacturer of consumer electronics and a key hub for semiconductor packaging for automobiles and appliances. In September, Pegatron Corp., an important Apple partner, announced that it had begun to implement energy-saving measures, while ASE Technology Holding Co., which is the world's largest chip packager, suspended production for a week.

However, due to the usual closures surrounding the week-long vacation, the overall impact on the tech sector has been minimal thus far.

Even though the semiconductor market has mostly escaped the consequences of the power outage so far, there have been a few cases where side effects are noticed. Toyota, which makes more than 1 million vehicles a year in China at factories in Tianjin and Guangzhou, has claimed that the power issues have hampered parts of its operations.

But now, as per the Reuters report to solve the issues related to the power shortage, China has ordered an immediate increase in coal production.

According to a Chinese official, Shanxi, which is China's largest coal-producing area, has instructed its 98 coal mines to increase annual output capacity by 55.3 million tonnes for the rest of the year. As per the report, it will also allow 51 coal mines that had reached their maximum yearly production levels to continue operating in the fourth quarter and increase their capacity by 8 million tonnes, adding 20.65 million tonnes of additional supplies.

In Inner Mongolia, which is China’s second top coal region, the region's energy department requested local officials to notify 72 mines that they may operate at stipulated greater capacities immediately, providing they ensure safe output.

However, a department spokesman declined to comment on how long the output surge would be permitted to continue, the report added.