The unprecedented power crisis in China has begun to threaten the global supply chain in addition to triggering blackouts in its northern parts and the shutdown of factories in the country's most industrialised provinces Jiangsu, Zhejiang, and Guangdong. These three provinces account for almost a third of the nation’s gross domestic product.
The slowdown in the production of export products due to soaring coal prices in China comes at a time when international suppliers are already confronted with a global chip crisis. Last month, financial services company Nomura trimmed their forecast for Chinese growth in 2021 by half a percentage point to 7.7 percent in view of the electricity crunch.
Similarly, Rabobank, also a financial services company, has said that the energy crunch has begun to hit every sector in the world's second-biggest economy. Some of the most stressed sectors are:
Technology: This is probably the worst-hit sector as China is the world's biggest manufacturer of gadgets. In recent weeks, Pegatron Corporation, a key partner for Apple, adopted energy-saving measures and ASE Technology Holding, the world’s biggest chip packager, has halted production for several days.
Auto sector: Many global automakers have their plants in China and several auto components are produced in the country. A reduced power supply is likely to impact production. In fact, Toyota, which has plants in Tianjin and Guangzhou, has said some of its operations have been impacted by power shortages.
Food: The food processing units in the country are also struggling due to the ongoing crisis. Processing of soybean for cooking oil, operation of machines essential for dairy products, and functioning of cold storage units are also taking a hit due to the energy crunch.
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Paper: The power crisis could lead to a 10 percent to 15 percent reduction in the production of cardboard boxes and packing materials, according to Rabobank.
Textile: According to the Australian Broadcasting Corporation, Chinese mills reduced production by up to 40 percent due to power cuts last week.
What's behind power disruptions in China?
While blackouts are not unusual in the country, the issue is particularly serious this year. Increased global demand coupled with President Xi Jinping's ambitious plans to reduce the usage of coal has left several units gasping for breath.
The new rules rolled out by Beijing to make the country carbon neutral by 2060 have led to a drop in coal production. This is despite the country's dependency on coal for more than half of its power.
Meanwhile, the demand for Chinese goods has increased as nations have started recovering from the impact of the COVID-19 pandemic and resuming operations. To cater to this increased demand, factories in China require a lot more power to ramp up production.
As a result, the country has reached a stage where it needs to burn more coal to provide a constant power supply to factories, but the new rules don't allow higher usage of the conventional energy source. Further, China has banned imports from Australia, the world’s second-biggest exporter of coal, after a diplomatic tussle.
To add to its woes, higher costs of thermal coal have exhausted the profit margin of the power plant operators, forcing them to shut coal plants.
How is China tackling the crisis?
In recent years, China has consciously reduced spending on its coal plants, therefore, ramping up production now would be a behemoth task.
China is already sourcing coal from Kazakhstan, South Africa, and Mozambique and is also likely to purchase coal from Indonesia, Russia, and Mongolia to ensure power supply. Some experts believe that China may ease the import ban on Australia.
Besides, the Chinese government is rationing electricity to power-dependent businesses. In Jiangsu province, street lights have been turned off to conserve power and in some northern provinces, even traffic lights have been switched off.
Similarly, elevators have been stopped in several apartments and citizens have been asked to reduce air-conditioner usage. On the other hand, industrial units have been asked to stop production during peak consumption hours.
The Chinese Communist Party (CCP) has asked railway companies to strengthen coal transportation within the country and asked local governments to closely monitor coal supply, demand and inventories at power plants.