China has a power problem.
Global supply chains have been rocked by China’s rolling power outages. And some factories in China have had to suspend operations—from a few hours to a few days, and even as long as a week—as the government began rationing electricity usage. But it isn’t just industrial and manufacturing sectors that have had to deal with the power crunch. Shopping malls in some areas have been closing early as well.
“Widening power shortages in China have led authorities to order production halts in certain sectors in order to minimize the risk of residential power cuts in multiple provinces,” UBS analyst Jennifer Han said.
The policy to cut back on some industrial usage is aimed at preventing consumers from absorbing higher energy production costs. It’s an effort to control inflation and allow consumers to maintain their current living standards and spending to avoid social unrest. But the policy is having a big impact on manufacturing sectors, and in turn causing other problems with global supply chains. It means global consumers might face shortages of sought-after goods ahead of the holiday shopping season.
Among some of the manufacturing sectors hit by the temporary suspensions are located in the Zhejiang area where many textile, dyeing and synthetic fiber firms are based, one source said.
The precursor to China’s current problem began in 2018 when the country toughened its carbon emissions standards. China has reduced its coal consumption since 2017. Back then, the move to decarbonize was also a signal that China was serious about it pollution problem. According to The Guardian, China has cut back the proportion of coal used to generate electricity from more than 80 percent to 51.8 percent in 2019. But more than half of its electricity production is derived from coal. China previously said it expects carbon emissions to peak by 2030 and plans to reach net zero by 2060. In the meantime, demand for coal has risen, pushing prices up for imports amid a shortage of supply.
The closures are expected to cause additional production delays on top of the existing supply chain disruptions. Much of the existing disruptions have been due to a spike in Covid cases from the Delta variant. That has caused stoppages connected to factory production and even a suspension on air freight and select closures at some of its ports. China’s power problem still could escalate further and begin to impact other production facilities connected to fashion. It would come at a bad time now that some vendors have increased apparel production in China to offset the Covid troubles hitting Vietnam.
The cutback on usage first hit chip manufacturers and industrial sectors such as aluminum producers across the north and west before affecting the textiles and dyeing facilities, whose main manufacturing base is in eastern China.
In addition to the energy troubles, the government asked state-backed firms to purchase some assets belonging to Evergrande, the second-largest Chinese property developer with a $300 billion debt crisis. While some believed China might bail out the company, that seems less likely now. Both the energy and Evergrande crises portend trouble ahead for China’s economic growth.
Source: Sourcing Journal