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China’s energy crunch might disrupt global supply chains

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Amid the soaring raw material costs, long delays at ports, and shortages of shipping containers, China’s energy crisis emerges as a new global supply chain shock stopping the shippers and producers from meeting the increased demand ahead of the festive season. 

The energy cuts ordered by the local government as an attempt to try to avoid missing targets for reducing energy and emissions intensity are forcing the factories of the world’s biggest exporter to conserve energy by curbing production.

Concerned about the same, the Chinese manufacturers have warned that strict measures to cut electricity use will slash output in economic powerhouses like Jiangsu, Zhejiang, and Guangdong provinces — which together account for almost a third of the nation’s gross domestic product — and possibly drive up prices. 

Local exporters are exhibiting fears of severe operational damages. The manufacturers which have come face to face with production halts have started to hike prices and postpone taking new overseas orders.

Already grappling to ship goods overseas’ the producers are unhappy with yet another uncertain factor hitting them ahead of the holiday season.

The power crisis surfaces right after the recent port disruptions in China rippled across global supply chains. Part of Ningbo port was idled for weeks last month following a Covid outbreak, while Yantian port in Shenzhen was shut in May.

The energy crunch is likely to further weigh down China’s economy which is already slowing because of factors such as stringent virus control measures and tighter restrictions to rein in the property market.

Nomura Holdings Ltd., China International Capital Corp., and Morgan Stanley have either downgraded GDP growth forecasts or have warned of lower growth because of the power disruptions.

“Global markets will feel the pinch of a shortage of supply from textiles, toys to machine parts. The hottest topic about China will very soon shift from “Evergrande” to “Power Crunch.”

Lu Ting, chief China economist at Nomura Holdings Inc in Hong Kong.

iPhone assembly operations in China are beginning to reduce their energy consumption, Pegatron Corp., a key partner for Apple Inc. and one of the assemblers of its iPhone, said on Monday.

While the company claims to have taken energy-saving measures to comply with local government policies, people familiar with the situation present a different view.

They feel that the firms responsible for producing the Apple handset have avoided drastic cutbacks in production so far and appear to be getting preferential access to energy to keep operations going.

Although the full impact on production remains to be seen the authorities are watching for disruption, with the People’s Daily, the official newspaper of the Chinese Communist Party, saying in a Sunday editorial that the shortages would force companies to raise the prices of goods for Chinese consumers.

As per analysts, the power shortages will inevitably impact both heavy industries such as aluminum and steel right through to downstream sectors. In the industrial hub of Guangdong, the provincial energy administration issued a notice Sunday that said large-scale cuts to factories have already been implemented.

“No one knows when the supply chain bottleneck will be overcome, But it is looking ominous for this winter.”

Hao Hong, head of research and chief strategist at Bocom International.

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