What's behind the power cuts in China?

The whole world is facing a shortage of products, delayed delivery of products to consumers and rising prices. Fewer products are expected to be available around Christmas time and bottlenecks in supply chains may extend for several more months.

The shortage is affecting almost all products, food, textiles and toys, etc. For America, the biggest problems are in electronic products, household appliances and cars. They are stored in containers of ships that do not arrive at the ports on time or importers are still waiting to get a shipping space for maritime transport, which is becoming more expensive to a worrying level, with increases of up to 500% in the price average freight of a container from China to America. 

The upheavals that international trade is experiencing are consequences of the pandemic, but apart from that, there are many other elements at play. As an example, the world's factory, China, has announced cuts in the electricity supply to factories.

What are these blackouts due to? In this article we will explain a little about this phenomenon.

In the second half of last year, in the chemical industry, under strict environmental protection policies, a large number of chemical companies with high energy consumption and high pollution were ordered to suspend production and move, which made the price of chemical raw materials will skyrocket. Furthermore, as demand for the materials continued to grow as the world economy reactivated, manufacturers and distributors hoarded stocks. A crazy cycle of price increases was then triggered in the chemical sector.

The general context for this is that the "Carbon Neutral" strategy in China was formally implemented. The high-energy, highly polluting chemical and light industrial industries, and coal power, among others, are key industries that must be vigorously adjusted through policies, regarding relocation or even plant closures and industry upgrades.

However, there are some differences between this year's electricity cut and production restriction and last year's chemical industry rectification. To the chemical industry, the Chinese government hit hard, shutting down thousands of chemical companies violating regulations. Instead, in terms of light industry manufacturing, the main measures were to limit electricity and production rather than shutdown.

We will talk about some of the main reasons for this:

1.Coal prices are rising and coal-fired power plants are suffering losses in China.

In China, electric power is a public industry, a monopoly wholly owned by the state, and it is the government who decides whether there will be an increase in electricity prices or not, which is related to the national economy and the welfare of the people. citizens.

In fact, earlier this year, the National Development and Reform Commission of China announced that it was necessary to increase electricity prices, but the public did not agree, so in the end the prices did not increase.

However, coal prices did skyrocket. Due to the Chinese government's restrictions on Australian coal imports, only 780,000 tonnes of coal were exported from Australia to China in the first half of this year, equivalent to a year-on-year decrease of 98.6%. Therefore, China increased coal imports from the United States, Canada, Russia, Colombia and the Philippines, but the problem is that the cost of importing these coals or operating domestic mines is higher than that of Australian coal. Sadly, 70% of China's electricity comes from coal power. When the cost of coal is high, the cost of electricity goes up very quickly. However, as electricity prices are not allowed to rise, coal-fired power plants have no choice but to generate energy at a loss.

A vicious circle is then created, the more energy is generated, the more losses will be for the power plants. So some coal-fired power plants simply suspend production or reduce power generation.

2.Commodity prices have skyrocketed internationally and China's capacity expansion has not generated high earnings growth, especially in light manufacturing.

China's light industry has been in a meager profit state for a long time, with most of the profit always going to big international brands. For example, Shein, a B2C-type platform, the store that surpasses Amazon as the most downloaded shopping application in the US, was born in the town of Nancun, in Guangzhou, China. Their success lies in selling cheap clothing or low-cost fashion, reflecting that China's garment factories rely heavily on cheap labor and cheap raw materials, make little profit, and competition is fierce.

An important objective of restraining production and structural reform on the supply side in China is to improve the status and bargaining power of China's manufacturing industry in the global industrial chain. What China needs to expand now is the manufacture of mid-to-high-end products rather than low-end. With the gradual deepening of China's industrial modernization, it is an inevitable trend that some low-end manufacturing industries will be redistributed or replaced.

3.Power outage and production restriction help prevent inflationary risks. Americans have been overprinting dollars, these dollars do not disappear out of nowhere, they arrive in China. Chinese manufactured goods are sold to the United States and transactions are carried out using US dollars which then have to be exchanged into Chinese RMB currency in order to be spent domestically. As a result, the amount of RMB has grown a lot as well.

Also, in international capital markets, there is a lot of frenetic speculation with raw materials, prices of copper, iron, grains and oil soar easily, which triggers possible inflation risks. Overheating of money on the supply side can stimulate production, but overheating on the consumer side can easily trigger price increases and inflation.

In short, all of these adjustments stem from a main line called Carbon Neutrality that ushers in an era of once-in-a-century major changes in China's traditional chemical, electrical and energy industries. This strategy leads the reforms on the supply side and drives the transformation of people's new consumption habits.