China sneezes and the world catches a cold. This is how it looked after factories across China entered a new two-pronged crisis, both related to energy.
The first is the shortage of energy in China, led by coal-fired power plants caught between tightly regulated prices and high coal costs, which has reduced production due to operating losses, as well as a drought that hit the world, and reduced the amount of hydropower generated.
The second prong is linked to Beijing’s strict targets for energy intensity – the amount of energy used per unit of production – as part of its environmental plans.
The boom in demand for goods has forced Chinese factories to work overtime, especially in heavy industries such as aluminum, which has increased energy use and resulted in a failure to meet environmental targets.
A mid-year review by the central government of provinces that failed to meet Beijing’s environmental targets reduced energy use for the rest of the year, according to their respective ratings, with each province ranked according to its consumption, ranging from red to green.
As a result, Goldman Sachs economists cut their economic forecasts for the world’s second-largest economy, forecasting zero growth for the third quarter, as well as a contraction in the economy in the final months of the year.
Mineral producers will face a 40% drop in production in the “red” provinces, the investment bank estimates, dropping to 20% in the “yellow” regions that have not missed their targets hard.
Chemical producers will see a decrease of 10% to 20%, while others, including textile, paper and plastic makers, expect a decrease of 5-10%.
The effects are not limited to heavy industries. Even power for electric vehicle charging points and solar panel manufacturers is at risk, according to Goldman’s co-chair of Greater China Research, Trina Chen.
In turn, Morgan Stanley economist Robin Sheng predicted total steel production would fall 9% in the fourth quarter compared to the same period in 2020, while aluminum would fall 7% and cement 29%.
“Anything that uses metals globally will be affected,” said Craig Bothham, chief China economist at Pantheon Macroeconomics. “Even if China doesn’t export directly to you, the price is determined by supply and demand, so you can’t escape from it.”
China is by far the world’s largest steel producer, producing nearly 1 billion tons in 2019, compared to 111 million tons in second place India.
The credit rating agency, Standard & Poor’s, cut its growth forecast for Asia, citing China’s energy shortage as one of the main risks.
Meanwhile, shipping is still reeling from the Covid chaos that was only exacerbated by the Delta Wave, which has intermittently closed Chinese ports and dumped production in other manufacturing hubs such as Vietnam.
More than 75% of German manufacturers reported bottlenecks and problems with essential supplies, according to Ifo.
Even if new suppliers can be found in different countries, or if China increases production, the shipping industry is faltering, making it difficult to get goods cheaply or quickly.
