Global energy crunch: what the China crisis means

Power cuts across China have left millions of homes without electricity, traffic lights and air conditioning units have been turned off and factories ordered to shut down for up to 20 days a month because of energy shortages. 

Workers had to be sent home from one factory with suspected air poisoning because the ventilators were  switched off because of the outages.

There are two reasons for China’s power crunch. In the north, the cuts are due to soaring coal prices amid a shortage of fuel prompted by the post-pandemic recovery while in the south, it is because of lower hydropower production. 

China’s most industrialised provinces of Jiangsu, Zhejiang and Guangdong are the worst hit by the energy shortages. Reuters reports that electricity cuts have already hit production at Apple, Tesla and Toyota factories while even soybean plants and clothing factories have been ordered to close. 

Ironically, China’s coal supply situation has been aggravated because it was the first country to recover from the pandemic. Such was the flood of new export orders that power consumption rose more than 10 per cent, prompting a 120% rise in the coal price to $212 a tonne. Although China produces about 90 per cent of its own coal requirement, the rest usually comes from Australia but these imports have been blocked due to the diplomatic dispute between the two countries. This meant factories have had to switch equipment to use coal coming from Russia and elsewhere, thus halting production schedules.  

Goldman Sachs forecasts that up to nearly half of China’s industrial activity may be affected by these combined problems and has slashed its growth estimate this year to 7.8 % from 8.2%. 

So has Nomura.Ting Lu, Nomura’s economist, says the power issues may have been “underestimated” because the spotlight has been on Evergrande, the heavily indebted property developer which missed payments on its offshore debts last week.

Figures out today confirm the bleak outlook: China’s manufacturing purchasing managers’ index – the official gauge of factory output –  has fallen for the first time since the beginning of the pandemic. China’s shivers are already being felt throughout the commodity markets as the price  of nickel, copper, zinc, iron ore and other essential metals used by industry are falling as demand has dropped.

So what’s behind the global energy crunch? China is the latest country to admit to an energy crisis but it is by no means the only one. Here in the UK and across Europe, gas prices are at record levels while the oil price has also shot up to reach $80 a barrel because of shortages due to higher consumption. In the US, gas and coal producers are also struggling to keep up with demand as winter approaches and factories step up production after the lockdowns.

The immediate reason for the latest crisis is that demand for energy from both consumers and industry world-wide has roared back over the last few months after 18 months of lockdowns and partial shut-downs. This in turn has played havoc with production, creating bottlenecks in global supply chains as well as staff shortages as workers have either been put on furlough or have returned home or stayed at home.

Yet the pandemic is by no means the only factor. As investors and governments have moved towards more renewable sources of energy, there has been a chronic lack of investment in fossil fuels. At the same time, the big oil majors have been selling off their assets in their dash to go green. 

This shift towards renewables – which are not reliable and still in their infancy- is coming back to haunt governments as most of the world still relies on traditional energy sources.  

Jeff Currie, global head of commodities research at Goldman Sachs, said in a Bloomberg TV interview earlier this week: “Gas, coal, oil, metals, mining — you pick — the old economy is significantly underinvested. We call it the revenge of the old economy… Poor returns saw capital redirected away from the old economy to the new economy.”

We are seeing the consequences of that shift, from China to the rest of the world. If more Chinese companies are forced to shut down or slow-down production of goods for its massive export market for much longer, then we too will see the impact on our shelves. Time to stock up for your Christmas stocking?