China’s Energy Crisis Is Hitting Everything From Milk To iPhones

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The hit from China’s energy crunch is starting to ripple throughout the globe, hurting everyone from Toyota Motor Corp. to Australian sheep farmers and makers of cardboard boxes, as reported by Bloomberg.

Soaring Prices of Coal

The unprecedented electricity scarcity in the world’s greatest exporter, exacerbated by surging coal costs, is poised to hamper China’s economic growth, and the knock-on effect on supply chains might squeeze a global economy still recovering from the pandemic.

The timing could not be more inconvenient, given that the shipping industry is already dealing with clogged supply lines, which are causing delays in clothing and toy deliveries for the year-end holidays. It also comes as China’s harvest season begins, prompting concerns about skyrocketing food prices.

“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 Louis Kuijs, senior Asia economist at Oxford Economics. 

Prolonged Growth

Economists have already warned of slower growth in China.

As for global consumers, the question is whether manufacturers and retailers will 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 Craig Botham, chief China economist at Pantheon Macroeconomics. 

Beijing has ordered coal mines to increase production and is scouring the world for energy supplies as it tries to stabilize the situation.

Still, power use curbs on the most energy-intensive industries such as steel, aluminum, and the cement will persist for months and China will continue to aggressively target imports of natural gas, adding to global price pressures, they said.

Some industries are already under pressure, and the damage they’re seeing could fan out to other sectors.

Paper Shortage

Take, for example, paper. During the epidemic, demand for cardboard boxes and packing materials was already at an all-time high, putting a burden on production.

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According to Rabobank, temporary shutdowns in China have cut output even harder, resulting in a projected 10% to 15% decline in supplies for September and October. Businesses currently dealing with a global paper shortage would face additional challenges as a result of this.

Food and Energy Crisis

Food inflation heats up and the energy crisis may make it worse.

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 soybean processors that crush beans to produce a meal for animal feed and oil for cooking.

Prices for fertilizer, one of the most important elements of agriculture, are skyrocketing, slamming farmers already buckling under the strain of rising costs.

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.

Wool Demand

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% due to power cuts last week, Australian Broadcasting Corp. reports.

Tech Companies Experience Downtime

The tech world could also see a dramatic hit, given that China is the world’s biggest production base for gadgets from iPhones to gaming consoles, and a major center for the packaging of semiconductors used in autos and appliances.

Several companies have already experienced downtime at their Chinese facilities to comply with local restrictions.

Pegatron Corp., a key partner for Apple, said last month it began to adopt energy-saving measures, while ASE Technology Holding Co., the world’s biggest chip packager, halted production for several days.

The overall impact on the tech sector has so far been limited because of customary shutdowns around the week-long holiday.

Should the energy crunch worsen, it could hit production ahead of the crucial year-end shopping season.

Automakers Crux

Any further deterioration in the semiconductor sector would cause more problems for automakers, who are already experiencing production constraints as a result of chip scarcity. In times like these, the industry, which is high on the list of protected industries, has generally escaped the effects of the power crisis.

Nonetheless, there have been a few isolated incidents. Toyota, which builds more than 1 million vehicles a year in China at plants in Tianjin and Guangzhou, has warned that the power outages have hampered parts of its operations.

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Source: Bloomberg Quint

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