Power outages in China show no signs of easing as coal prices soar.
This assessment was issued to clients of Dragonfly’s Security Intelligence & Analysis Service (SIAS) on 12 October 2021.
Despite efforts by the authorities to expand production at coal mines in Shanxi and Inner Mongolia, high coal prices and ongoing floods will probably sustain electricity shortages. Those are likely to mainly affect provinces in the northeast, such as Liaoning and Jilin. It is also almost certain that several knock-on effects of power outages will aggravate international supply chain disruptions that are ongoing in several sectors including tech, construction and manufacturing.
The shortages are likely to remain most acute in the northeast where coal is used for 70% of electricity production. On Monday, the government in Liaoning province issued the second-highest level power shortage alert. This was after several weeks of prolonged power outages in the province, as well as in Heilongjiang and Jilin, following power rationing during peak hours in other cities. Based on local press reports, a power outage there two weeks ago that lasted for three days brought down mobile phone networks and disruption to the traffic system.
The power shortages seem to be affecting other parts of China as well. Power cuts have also occurred in the eastern province of Jiangsu and Guangdong in the south, both of which are important manufacturing hubs. And the authorities have mandated that at least 20 provinces (out of 34 provincial-level divisions) must ration power, according to a China policy researcher cited in an international outlet that focuses on China. Those provinces include Fujian and Yunnan.
The situation is unlikely to substantially improve any time soon. Although the authorities last week requested banks to provide funding to coal mines and plants to offset shortages, high coal prices are probably discouraging companies from ramping up production. This is because they are banned from increasing electricity prices and due to cost pressure many would not be able to repay their loans if they increased production. Ongoing floods in Shanxi province, one of the main coal-producing regions, have also disrupted operations at local mines and railways in recent days.
China would probably also struggle to increase its coal imports. Coal prices in Europe are soaring and supply from Inner Mongolia has been lagging in recent months, most likely due to the anti-corruption crackdown around the coal sector there. And Beijing banned coal imports from Australia in October 2020 as a part of a wider diplomatic spat. But even if China decided to lift the ban this would be unlikely to increase imports; the majority of Australian coal supply has been now redirected to India.
We forecast that the ongoing power shortage will exacerbate existing and wide-ranging disruptions to supply chains. For example, to address power shortages, the government has reportedly mandated several factories in Jiangsu and Guangdong to either shorten their working hours or said they will have to suspend production, in some cases for longer than a month. And several suppliers for international tech companies have suspended production. In a sign that they are anticipating lengthy outages, they are reportedly buying generators.
Image: Wujing Coal-Electricity Power Station in Shanghai on 28 September 2021. Photo by Hector Retamal/AFP via Getty Images.
