Not only is the extreme electricity shortage in the world’s largest exporter set to hurt its own growth, the knock-on impact to supply chains could crimp a global economy struggling to emerge from the pandemic.
The hit from China’s energy crunch is starting to ripple throughout the globe, hurting everyone from Toyota to Australian sheep farmers and makers of cardboard boxes.
“If the electricity shortages and production cuts continue, they could become yet another factor causing global supply-side problems, especially if they start to affect the production of export products,” said Oxford Economics senior Asia economist Louis Kuijs.
The timing could not be worse, with the shipping industry already facing congested supply lines that are delaying deliveries of clothes and toys for the year-end holidays. It also comes just as China starts its harvest season, raising concerns over sharply higher grocery bills.]
Economists have already warned of slower growth in China. At Citigroup, a vulnerability index indicates that exporters of manufacturers and commodities are particularly at risk to a weakening Chinese economy. Neighbours such as Taiwan and South Korea are sensitive, as are metal exporters such as Australia and Chile, and key trading partners such as Germany are also somewhat exposed.
As for consumers, the question is whether manufacturers will be able to absorb higher costs or will pass them along.
“This is looking like another stagflationary shock for manufacturing, not just for China but for the world,” said Pantheon Macroeconomics chief China economist Craig Botham. “The price increases by now are pretty broad-based – a consequence of China’s deep involvement in global supply chains.”
Beijing has been scouring for power supplies as it tries to stabilise the situation. The impact on the global economy will depend on how quickly those efforts bear fruit. Many Chinese factories reduced production for this week’s “Golden Week” holiday, and economists are closely watching whether power shortages will return as they ramp up again. Already, though, some industries are under pressure, and the damage they are seeing could quickly fan out to other sectors. Paper
Consider paper. Production of cardboard boxes and packing materials was already strained by skyrocketing demand during the pandemic. Now, temporary shutdowns in China have hit output even harder, leading to a possible 10 per cent to 15 per cent reduction in supply for last month and this month according to Rabobank. That will add further complications to businesses already suffering from the global paper shortage. Food
The food supply chain is also at risk as the energy crisis makes harvest season more challenging for the world’s biggest agricultural producer. Global food prices have already jumped to a decade high, and worries are mounting that the situation will worsen as China struggles to handle crops from corn to soy to peanuts and cotton. In recent weeks, several plants were forced to shut or reduce output to conserve electricity, such as soya bean processors that crush beans to produce meal for animal feed and oil for cooking. Prices for fertiliser, one of the most important elements of agriculture, are skyrocketing, slamming farmers already buckling under the strain of rising costs.
Outside of China, Australian sheep farmers are bracing for weaker demand just as they seek to sell their wool at auctions. The industry saw Chinese mills reduce production by up to 40 per cent due to power cuts last week, Australian Broadcasting Corp reported. Tech
Wool The processing industry is set to be more severely affected than staples such as grains and meat, Rabobank analysts wrote in a report this week. In the dairy sector, power cuts could disrupt the operation of milking machines, while pork suppliers will face pressure from tighter supply of cold storage.