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Explained: How China's power crunch can impact commodities

market | IST

Explained: How China's power crunch can impact commodities


Over the weekend in China, it was reported that several provincial governments announced implementing more restrictions on industrial power usage, resulting in an acute power crunch that left industries struggling.

A severe power crunch has vexed China's northeastern industrial heartland, as alarmed citizens struggle to keep their homes lightened, factories open, and water flowing. 

The crunch comes as a shortage of coal supplies, toughening emissions standards, and strong demand from manufacturers pushed coal prices to record highs. This has also triggered a massive curb on coal usage.
Over the weekend, several provincial governments in China announced they would implement more restrictions on industrial power usage. This meant electricity outages across key provinces in China.
China's power outages were reported earlier as well but now they have become more severe. Provinces and cities have stepped up power rationing to meet decarbonization goals, controlling emissions.

The top planning body in China, the National Development and Reform Commission (NDRC) came up with ratings in a report in mid-August showing nine provinces are performing poorly based on energy usage. Then in mid-September, the NDRC published a plan for dual controls and was reported to pressure provinces that had lagged behind to curb energy use.
Also, decarbonization is not the only overarching top-down aim. But there is also the issue of rising coal prices coal shortages, there are other supply shortages that have also contributed to the electricity outages that we are seeing.
Maximum hit
The August report classified nine provinces as category red - the most severe, there were 10 other provinces which were classified as yellow slightly below.
Red is the colour for most affected regions, so factories across manufacturing powerhouses like Guangdong, Jiangsu, Zhejiang, among others, all are powerhouses for China's manufacturing activity have been severely impacted.
Of the overall China production, these provinces produce 42 percent of aluminium production, 32 percent of cement, 16 percent of steel 32 percent of paper packaging, and 34 percent of PVC production comes out of these nine provinces that are classified as red.

Estimated production cuts due to power outages
A forecast by Goldman Sachs said ferrous metals like steel, non-ferrous, non-steel, and other mineral products could see the sharpest production cuts. The production could be down between 20-40 percent in these three industries.
For petroleum coking and nuclear fuel chemical materials, it is assuming production cuts of between 10-20 percent.
For sectors like mining, textile, paper, making chemicals, fibre, rubber and plastic products, they are assuming between 5 and 10 percent production cuts.
The unknowns
While we are unaware how long electricity outages will really last, companies can move forward due to complex supply chains and general interdependence between industries. Thus, it's unlikely that the impact will be limited only in the affected 9-10 provinces but it may spill over.
So in regions where energy caps are not as strict, industries can increase manufacturing from their facilities there.
But the fact remains: China, apart from being a large commodities exporter, is also a large commodities consumer. So if end demand is hit in a big way then there may be some sort of balance that happens, as far as prices are concerned.
For more details on the impact on commodities, watch the video

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