China's energy crisis and supply chain problems 2023: what to expect

11/10/2021

China is struggling with a severe energy crisis that has left millions of homes and businesses without electricity for several hours of the day. Blackouts are not that unusual in the country, but this year a number of factors have contributed to an unprecedented situation of difficulty.

The problem is particularly acute in China's northeastern industrial centers, which require more and more energy as winter approaches, and is something that could have implications for the rest of the world.

In the past, the country has struggled to balance electricity supplies with demand, which has often left many of China's provinces at risk of power outages. Usually the peak of energy demand occurs during the summer and winter periods, but this year the situation is worse than expected.

As the world begins to reopen after the pandemic, the demand for Chinese goods is rising and the factories that require them need much more energy. In this article we will analyze the causes, consequences and solutions to this energy crisis.

The rules imposed by Beijing to make the country carbon neutral by 2060 (source The Guardian) have seen coal production slow down, even though the country still relies on coal for more than half of its power. And as the demand for electricity increased, the price of coal went up.

But with the government rigorously controlling electricity prices, coal-fired power plants are unwilling to run at a loss, with many drastically reducing their production, aggravating this energy crisis.

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Who has been affected by the Chinese energy crisis?

Private homes, factories and offices have been hit by power outages as electricity has been rationed in several provinces and regions. There have been blackouts in four provinces: Guangdong in the south and Heilongjiang, Jilin and Liaoning in the northeast.

Companies in the main production areas of the country have been asked to reduce energy consumption during peak periods and to limit the number of days they operate. Energy-intensive industries such as steel, aluminum, cement and fertilizer manufacturing are among the activities most affected by the disruptions.

Official data showed that in September 2021 the activity of Chinese factories had been reduced to a minimum since February 2020, when the coronavirus lockdowns paralyzed the economy. Concerns over the energy crisis have contributed to investment banks slashing their forecasts for the country's economic growth.

Goldman Sachs estimated that 44% of the country's industrial activity was affected by the Chinese energy crisis. Now he expects the second largest economy in the world to expand by 7.8% this year, down from the previous forecast of 8.2% (source BBC).

Globally, these power interruptions could affect supply chains, particularly towards the year-end shopping season. Since economies have taken off, retailers around the world have already faced widespread disruption due to a surge in import demand.

Chinese energy crisis blackout aluminum sector power outages

What is China doing to solve the problem?

Blackouts in many of China's northern provinces turned off street lights last weekend, causing traffic jams that are miles long in several cities (source The Standard). Residents of skyscrapers have been forced to take the stairs in some cities where elevators have been blocked to save electricity (source BBC).

The provincial energy administration in China's southern Guangdong province has asked residents to stop using air conditioning and rely on natural light instead of electric bulbs. In the meantime, energy prices for industrial users have increased by 25% during peak hours (11-12 and 15-17).

Most of the companies involved, with the aim of limiting production costs, have decided to postpone working hours to the evening, as the price of energy is lower. For now, this strategy seems to counter this energy crisis and no significant disservices have been found.

Chinese authorities usually spare domestic consumers from blackouts, preferring to force industrial users to reduce their energy consumption first. To this end, suppliers of companies such as Apple and Tesla have announced the closure of factories for days with the aim of rationing electricity (source Reuters).

The National Commission for Development and Reforms (NDRC) has outlined a series of measures to solve this energy crisis, giving priority to meeting the demand in the north-east of the country, in view of the winter season.

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The measures include working closely with energy producers to increase production, ensure the availability of coal and promote electricity rationing with the aim of addressing the energy crisis and resolving it quickly.

The China Electricity Council, which represents power companies, said coal-fired power companies are now broadening their supply channels to ensure both winter heat and electricity supplies to solve the energy crisis before winter. .

China has drastically reduced coal consumption since 2017, reducing the percentage used to generate electricity from more than 80% to 51.8% in 2019. Renewable energy, including wind and solar, has offset most of the difference, however, the country still depends on fossil fuels.

How did this energy crisis come about?

The main reasons for the power shortage in southern China are different from those in the north. The south is running out of hydroelectricity; the north is in trouble due to the increase in coal prices.

China's southern provinces, such as the Guangdong manufacturing hub, have experienced energy shortages since June, when local officials ordered producers to ration energy, forcing factories to cut production (source Reuters). This solution was only a prelude to the current energy crisis.

Chinese energy crisis blackout factories Guangdong Shenzhen

Guangdong gets 30% of its electricity from hydroelectric power, but a hotter-than-average summer has drained water reservoirs and evaporated the power supply in Yunnan. At the same time, the increase in export volumes caused a spike in energy demand, leading to an energy shortage.

China's northern provinces are more dependent on fuel than the southern ones. The arid and freezing north relies heavily on coal-fired power plants to generate electricity. The authorities have rationed energy to the most "hungry" industries, such as Bitcoin mining and aluminum smelting (source Global Times).

In China, the government's tight regulation of its energy markets has forced electricity producers to accept the rising costs of raw materials, such as coal, without passing them on to consumers. Now for many of these energy producers, the cost has become too high and this has made the energy crisis more serious.

Up until two years ago, the government allowed power producers to raise electricity rates by just 10% to account for a sudden rise in operating costs. But, in October 2019, the National Development and Reform Commission (NDRC) ordered rate hikes to be frozen indefinitely.

Last month, 11 energy producers in northern China petitioned the government to allow operators to raise prices for consumers to solve the energy crisis and increase production. If the price increases cannot be passed on to users, energy producers have warned, they risk bankruptcy.

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Last month temperatures in Guangdong reached 33 degrees Celsius and families were asked to turn off the air conditioning, the provincial government announced that it would allow energy producers to pass the costs on to consumers. This limited the use of electricity and buffered the energy crisis.

As China continues to decarbonise, charging consumers more for pollution will help spur this transition. The challenge for Beijing will be to minimize disruption by forcing its people to finance change and avoid a new energy crisis.

Is China struggling to produce electricity?

No, there is the ability to generate electricity. Since the beginning of the year, electricity production has increased by about 10% thanks to the recovery of the economy from the pandemic. However, China is the world's largest coal importer. Fossil fuel prices have risen in recent months in response to increased demand.

Unfortunately, however, coal stocks are exhausted sooner than expected, and producers hope that Beijing will lift all environmental restrictions that increase the cost of electricity generation with fossil fuels or that world prices will fall to leave this energy crisis behind. definitive.

The situation worsened for China when Australia last year called for an international investigation into the origins of the coronavirus pandemic. Beijing has imposed an unofficial ban on imports from Australia, making it dependent on more expensive coal from domestic suppliers and other countries.

Energy crisis China electricity generation coal

However, finding new sources of coal import may not be easy. Russia is already busy supplying its customers in Europe, Indonesian production has been hit by heavy rains, and neighboring Mongolia is facing a shortage of road transport capacity.

A delicate geopolitical framework

Beijing seems to have no intention of easing environmental standards after declaring it feels responsible for climate change and in view of the COP26 in Glasgow scheduled for November it wants to give an image of leadership on this issue.

In addition to this, Shijiazhuang and Heilongjiang province, both in northern China, will host the Winter Olympics from the beginning of February 2022, for which clear skies will be required in front of audiences around the world (Beijing 2022). This situation could delay the exit from the energy crisis.

It should be remembered that China hosted the Summer Olympics in 2008 and, to ensure a blue sky in favor of cameras and world public opinion, it closed the polluting factories within a radius of 250 km from the city four months earlier.

The US government is largely responsible for producer prices and the cost of world energy. If he wants to put pressure on China, he has the opportunity right now. However, it must be considered that Russia may want to support Beijing and break with the high energy prices imposed globally.

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Russia can afford it and such a move could give Moscow some political and economic influence over Beijing. The United States must be careful not to intervene too late on this issue, as the later it does, the greater the strain on a recovering but energy-starved global economy.

In the past, China has dealt with energy shortages with a rolling system. Twenty years ago, the country suffered another energy crisis when production exploded at a time when the national energy grid was not sufficiently developed to meet the huge demand.

The essential services were maintained, then a community energy sharing system was introduced. The factories were categorized and communicated to them in advance (a crucial issue when planning production) when the energy would go down.

Some industries have been encouraged to invest in permanent backup generators. This energy crisis lasted for nine months, until the national grid increased production and therefore fully satisfied the national demand for electricity.

What to expect in the coming months?

The hottest time of the year from the production point of view is approaching, in fact, Black Friday, Cyber ​​Monday and especially Christmas are just a few weeks away. There will therefore be a peak in demand for goods from China and the energy crisis could get worse.

Chinese energy crisis China import supply

As for Christmas and toy supplies, things have changed since the early 2000s, when Guangdong produced 95% of the global demand for Christmas decorations. Indeed, China has climbed the "value chain" and none of the largest toy manufacturers in the world are Chinese, even if the products are made there.

However, in recent years (especially in the US market) due to the tariff war wanted by Donald Trump a few years ago, production has been moved to other countries, such as Vietnam.

This has become an effective extension of the China Plus One business model, which has seen foreign investors split their manufacturing into two parts: the first is based in China for the Chinese domestic market and the second is based in locations like Vietnam. , India, Thailand, Philippines or Bangladesh to serve the western market.

However, this is a solution that has not always proved effective, as many countries have lower professional training, skills, flexibility and technological development than China. It should also be considered that this energy crisis is not only affecting Beijing and therefore the same problems could arise.

Relying on on-site facilities is essential to be able to better deal with this energy crisis and follow production step by step and avoid unpleasant unforeseen events such as delays, compliance errors and incomplete documentation.

Tools like Noziroh Hub are the key to importing products from China and managing production processes successfully. With a single reference you can manage the entire supply chain, from supplier research to production, from certification to storage of goods and shipping from China.

Our team of experts also follows customers in the delicate stages of importing and customs clearance of goods, communicating in Italian. The company is located in Italy and has a branch in China from which it is possible to store goods from suppliers, check them and then ship them to the customer in one go.

Author: Alessandro Ave

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