Factory owners in China and their customers around the world have been instructed to prepare for power interruptions to become a part of life as President Xi Jinping persistently weans the world’s second largest economy from its reliance on coal.
Months of power shortages cut power to households in northeast China and caused factory outages across the country. But energy demand is still rising amid record demand for Chinese exports, and the problems are exacerbated by the prospect of sub-zero temperatures in winter.
Despite a spate of central government intervention, led by Prime Minister Li Keqiang, Chinese manufacturers and multinational corporations alike have been urged to increase energy efficiency in their factories and accelerate investments in renewable energy.
Trueanalog Strictly OEM, a speaker manufacturing factory near Guangzhou, symbolizes the crisis that frequent failures are already affecting exporters. Owner Philip Richardson said his company was stuck “catching up”.
“It is the domino effect when saving electricity: It has a direct effect on the glue in the production line, we have to readjust the clamping, it takes 20 to 30 percent of productivity off the day. . . It’s really tedious, ”he said.
Will Jones, chief operating officer of the British Home Enhancement Trade Association, said a third of members in the home improvement and gardening sectors said suppliers had extended their lead times. The knock-on effect, Jones said, is further inflationary pressures and a wider range of product shortages.
“This is affecting what is already a very difficult situation for suppliers with limited space on container ships and rising costs,” said Jones.
The Chinese government has taken a short-term, pragmatic approach to addressing the energy shortage by turning to dirtier fuels, despite its longer-term promises to cut coal.
Last week the government ordered a rapid expansion of the coal mines. It also enacted major market reforms that forced all coal-fired power plants to sell on the wholesale market, increased electricity prices by up to 20 percent, and raised price caps for some large-scale consumers.
The market overhaul is a “big step” towards liberalizing the electricity sector, said David Fishman, an energy analyst at Lantau Group.
However, government action is not expected to end power cuts immediately.
“Many companies were really surprised by the intensity of the shortage,” says Thomas Luedi, energy expert from Shanghai at the consulting firm Bain. But you have to “understand that it could be like that again towards the end of the year”.
Luedi added that energy price hikes would quickly force some manufacturers to cut production, relieving the strained power grid.
“Inefficient producers could fall off the cliff,” he said, pointing to smaller producers of smelting materials like ferromanganese and metallurgical silicon as the likely early victims.
In Guangdong, China’s largest manufacturing center, senior officials said nearly 150,000 companies were hit by energy shortages in the past month, people familiar with a government briefing told the Financial Times.
In an admission that the problems could not be resolved immediately, Guangdong officials privately warned that rationing is likely to continue. They also encouraged companies to use their own power generation, which likely means even greater use of diesel for power generation.
“A lot of companies will go back to their backyard generators. Some of them are illegal. You will have to retrofit them, but that is much faster than putting a power plant into operation, ”said a businessman from southern China, who did not want to be named.
“The bottlenecks eliminate 30 to 40 percent of uptime and retailers experience the same disadvantage,” he said, adding that power shortages “won’t go away tomorrow.”
Richardson, the factory owner, has turned to the diesel generation to bring its speakers to customers in Europe and the US, despite the cost quintupling. He has also hired temporary workers for night shifts and is turning to more expensive air freight as a workaround for congested ports.
Even companies well positioned to benefit from the government’s response – such as those selling mining services and emergency power generation – face problems seizing the opportunity.
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Nathan Stoner, who heads the China operations of Cummins, a US mining and energy company, said, “While there are some options, the company’s operations have been limited by blackouts in its factories and those of its component suppliers.
In the UK, Steve Levy, managing director of UK retailer Heat Outdoors, said all but one of its Chinese outdoor heater and hand dryer suppliers, mainly based in Jiangsu and Guangdong, had seen downtimes in some cases for weeks. A Chinese supplier’s lead times had increased to six months, from four months during most of the pandemic and 10 weeks before the coronavirus outbreak.
“I can’t decide on April,” said Levy, because he “had no idea” what the market would look like then.
Luedi von Bain warned not to be “fooled” by China’s return to coal to deal with this crisis.
“The trend line is clear. But there is a lot of volatility around the trendline, ”he said. “You only need a few percentage points more economic growth and that can throw the system out of balance temporarily.”