What China’s energy crisis means for the global supply chain
As China contemplates its strategies to combat the soaring coal prices and energy shortages, millions of households in the country have experienced sporadic power cuts with virtually no prior warnings as a result of the government’s power rationing to ensure balanced electricity consumption. Similarly, the energy crisis has also disrupted the manufacturing activities in China. With lights and power suddenly going out, factories across China have been experiencing a reduced productivity level, leaving many importers worldwide concerned about the stability of supply for Chinese-manufactured goods. As these government regulations and volatile market conditions can often translate into further complications of the already strained supply chains, in this publication, we explain what China’s energy crisis means for your business.
Why is there a fuel shortage in China?
A combination of factors which have already impacted the supply chain were further amplified by the surging prices in diesel fuel that have resulted in rationing, shortages, and surcharges per tankful of diesel fuel which have been showing up throughout China recently. The recent energy crisis is believed to the caused by the following reasons:
Reduction of oil output – Some analysts have indicated the root cause of the energy crisis can be traced to OPEC’s reduction of daily output by 5.8 million barrels of oil per day because of weakened demand traced back to the early 2020 COVID days. Although China recovered very quickly, the rest of the world is now in various stages of recovery, which has added pressure on the limited oil supply that failed to satisfy overwhelming demands and triggered huge price increases, as witnessed from the U.S. Benchmark price of West Texas Intermediate (WTI) crude increasing from last year’s price of $39.73 to $84.08 a barrel as of November 1. As China imports 70% of its crude oil, the downstream effect will continue as prices continue to rise. To combat the current shortage, China made a rare public announcement on October 31 that it was releasing strategic gasoline and diesel reserves to boost market supply and stabilize prices. The State Reserves Bureau did not announce the volume to be released.
West Texas Intermediate (WTI), as of November 1, 2021
Coal Shortage – As the primary resource used to generate 70% of electricity, China’s heavy reliance on coal has resulted in the worst energy crisis facing the country in a decade amidst the skyrocketing coal prices. Thermal coal futures contracts have increased more than 200% year-to-date, reaching $259.42 per ton the week of October 11. Mostly using coal-based electrical power generation, electricity utility companies in China are operating with costs set on the current market, while the electricity prices are strictly regulated by the central government. This means that unless the government allows the fixed maximum selling price for electricity to be sold at a higher margin, some utilities may be operating at a loss. As a result, many plants reduced capacity and some even shut down entirely rather than suffer a loss, resulting in insufficient power supply leading to the recent halted factory productions. To help the utilities pass on the high cost of coal, China’s State Council announced on October 8 that it would allow coal fired power prices to fluctuate by up to 20% from base levels, which was an increase from previous limits. For comparison, in 2019, China allowed coal fired prices to rise by 10% and decrease by 15% from base price levels. Fixed prices will still be charged to residential, agricultural, and public welfare initiatives.
Additionally, besides the restrictions around the price ceiling, the recent heavy rains hitting Shanxi Province, China’s biggest coal producing province, also exacerbated the coal shortage. Due to severe flooding, 60 of the 682 coal mines in Shanxi were forced to halt operations, further reducing China’s domestic coal output. Since the initial power shortages which were causing factory closures received significant media coverage in mid-September, Chinese authorities have increased production and coal imports and restricted speculation in rising prices. The China State Railway Group moved 122 million metric tons of coal for power generation in October, which was a 21% increase over September. In addition, imports of coal increased 76% in September, mostly from Russia and Indonesia.
Power rationing policy – As China tightens electricity use across the country, factories have been turning to alternative power source to continue manufacturing activities. Many factories have been operating with diesel fueled generators for temporary power because of the electricity crunch. The sudden uptick in diesel has led to a diesel price hike and insufficient supply for commercial users and consumers. Gas stations in some parts in China have reportedly started rationing diesel due to fuel shortages.
The rationing was triggered by an announcement from the National Development and Reform Commission (NDRC) in August, which called for all major Chinese regions to monitor their energy consumption through the end of the year after failing to make progress in achieving targets earlier in the year. Power rationing began in some provinces in late August and “dual-control” power warning is imposed in provinces that are off-track to meet their annual control for energy consumption and energy intensity. Please refer to the following illustration of the Chinese provinces with power rationing in place.
What are the impacts to global supply chains?
As the ramifications of China’s energy crisis continue to unfold, the fuel price hike and shortage are now making headlines as the latest threat to the global supply chain. Coupled with the ongoing supply chain disruptions including port congestion, longer lead times of imports from China are just one of the many impacts shippers worldwide have had to endure. Despite China’s efforts to boost its domestic coal output, we believe there could be the following impacts to your supply chain until the energy crisis is resolved:
Trucking limitations & increased costs – As diesel is used for heating, generating electricity and as fuel in cars and trucks, the impact to the transportation industry has been significant. For some truck lanes, particularly in Shenzhen, Xiamen, Ningbo, and Tianjin, the local diesel price has gone up from ¥5.1 per liter in May to ¥7.20 per liter in October, representing a 41% increase. This has put a lot of pressure on truckers as they are still transporting goods based on the trucking rates negotiated earlier this year. Some of the truckers are refusing to take new orders or demanding surcharges, as the increase in diesel prices does not allow for adequate profit margins. With the use of diesel-powered generators on the rise in manufacturing to help offset electric power rationing and outages, truck drivers are now competing for a piece of the pie which is now distributed to a larger market. The impact has been more significant to smaller operators who lack the bargaining power their larger competitors enjoy and are more susceptible to paying the higher prices, with many electing to turn down long haul routes that are no longer profitable.
Lowered manufacturing output – Due to the electricity rationing measures the government has imposed in multiple provinces, some Chinese manufacturers have been ordered to halt or reduce production. According to the latest numbers released by the National Bureau of Statistics of China, the Purchasing Manager Index (PMI) of China’s manufacturing industry has shrunk for the second consecutive month to 49.2%, 0.4% lower than the previous month and below the 50-point mark that separates growth from contraction, signaling weakened manufacturing activities. This is significant as these decreases follow 18 consecutive months of growth in the PMI. As winter approaches, China may further restrict energy consumption and reserve enough resources for heating purposes, and the government has already signaled that adequate resources for residential heat will be available throughout China.
Higher commodity prices create profit imbalance – Major industrial enterprises including coal, oil, and metal producers have seen their profits more than double over last year. However, certain downstream sectors including textiles and autos have only registered single digit growth in profits, according to China’s National Bureau of Statistics. High commodity prices have affected sustained earnings recovery and the government will enact policy measures to stabilize commodity prices and expand domestic demand. With energy and commodities in tight supply and prices constantly increasing, China’s Producer Price Index (PPI) rose 10.7% year-on-year in September, which is the highest reading since numbers were first released in 1996. This does not bode well for purchasing agents, as the PPI may stay elevated through the fourth quarter.
How can Century help?
While national policies are often beyond the control of businesses and importers, we share your concerns about the energy crisis that may impact your supply chain. Century endeavors to provide you with the latest information and we have taken the following steps to help you mitigate the potential risks following China’s power rationing plans:
Vendor Communication – We are in close communication with your vendors throughout China and we gather feedback on their operating status on a regular basis. We are paying extra attention to vendors with noticeably lower unit counts and more frequent ship window changes.
PO Prioritization & Cargo Readiness – Based on a priority PO list, we can obtain information around the relevant manufacturers’ production priority for your orders, so that we have the best visibility to cargo ready dates. To ensure your hottest merchandise can arrive at destinations as expected, we can work with you to establish a prioritization process for your cargo and can also connect with your vendors to check on cargo readiness.
Century Origin Trucking – As carrier and equipment shortages continue, we can move your merchandise to alternate ports of departure where your contracted or NVOCC space is more readily available. This is an option being utilized by many customers, as the increased diesel fuel price and trucking costs can still justify these moves for certain seasonal and time-sensitive cargo.
Century Origin Warehouse Storage – Cargo can be delivered to the nearest Century’s warehouse for consolidation with other available freight, thus reducing the number of CY containers and minimizing the impact of trucking and fuel shortage. If factories produce goods sooner or have inventory readily available earlier than ship dates, the same can be delivered in our facilities for storage until the shipping window or carrier SO’s are released.
We will continue to monitor the situation and send out further updates should there be changes to the situation. As always, please contact your Century Account Manager or your Century representative if you have any question or require further information.
Disclaimer: The information contained in this newsletter was provided by our partners across Asia and referenced from online sources that were not specifically authorized for third-party usage. The aim of this publication is for informational purposes only. While Century endeavors to validate the authenticity of the stipulated information, Century is not responsible for its accuracy and completeness and does not accept liability or responsibility for any actions taken upon reliance.
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