Crunch time

Energy rationing forces factories to close


Busy times for local coal miners

Early 1974 was quite literally the darkest period in the UK’s post-war history, when Edward Heath, then prime minister, ordered a national cut in energy consumption as part of his fight with the coal mining unions. Blackouts forced Britons to eat by candlelight and the BBC stopped broadcasting at 10:30 each night. Most businesses had to limit their electricity usage to three days a week.

The crisis has been in the news again this week following a nasty supply crunch in which the UK’s petrol stations have been rationing fuel. Energy prices have been soaring in general, however, after a depletion in inventories over the Covid-19 crisis. Gas prices have increased nearly five times in Europe in the past year, for instance, and prices in the US hit a seven-year high this week, worsened by Hurricane Ida’s disruptive impact on production in the Gulf of Mexico a month ago.

China too is in the midst of an energy crisis, with widespread shortages of electricity. With natural gas prices reaching record levels, there has been a sudden scramble for coal, where stockpiles are reported to be heavily diminished. The shortfalls have prompted signs of panic from policymakers. Coal-buying efforts would be stepped up “at any price” to support heating and power generation in the coming winter months, the China Electricity Council promised in a statement on Monday.

Some commentators have noted the irony of the supply crunch at a time when the policy agenda has been pushing for a reduced role for coal-fired power in national energy strategy. Chinese newspapers have also reported that the power producers have complained about higher spot prices for months, but hoped to meet winter demand from stockpiles of cheaper reserves. That strategy now looks unsustainable, triggering a sudden stampede into the market for new supply.

Even for regions where new deliveries can be sourced quickly, sky-high prices for thermal coal are deterring power plants from cranking up energy output (fixed electricity prices mean they will run up heavy losses). Thermal coal futures on the Zhengzhou Commodity Exchange have broken records – more than doubling on last year’s levels – with shortages in supply exacerbated by a boycott of Australian imports of the fossil fuel (see WiC521).

At least 20 provinces – making up about two-thirds of Chinese GDP – have instituted electricity curbs in recent weeks. Under the mandate, many factories have been asked to reduce their working days or suspend operations outright.

One of the worst affected provinces is Jiangsu, where the major cities of Kunshan and Suzhou are home to key clusters in the electronics, chipmaking and textile industries. “The power reductions definitely had an impact on us. Production has been halted, orders are suspended, and all our 500 workers are off on a month-long holiday,” the manager of one Jiangsu-based textile factory told the Global Times on Sunday.

Meanwhile at least 10 Taiwanese producers of printed circuit boards announced in September the temporary closure of their mainland Chinese facilities – doing so via filings to the Taiwan bourse. These included Chin-Poon Industrial and Unimicron Technology Corporation.

Not all manufacturers have suffered as badly. Pegatron, a major supplier to Apple, said on Monday that its production teams had been granted preferential access to power in order to keep operations going.

Beyond manufacturing, power blackouts are inconveniencing residents across China, especially those living in the north, reports 21CN Business Herald. Traffic lights have even been turned off on the outskirts of Shenyang (see WiC556) causing chaos on the roads. In parts of Jilin, water supply is intermittent because pumping stations are out of power. In Guangdong, people were asked to keep air-conditioning at lower power levels and to stop using elevators to get to the first three floors of buildings.

In light of the power crunch, a slew of investment banks have cut their forecasts for GDP growth this year. Nomura’s chief China economist Ting Lu, for instance, cut his to 7.7% from 8.2%, noting that he might further lower his GDP growth estimate if the energy situation doesn’t improve soon.

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