China’s ongoing energy crisis reached its peak in Q3 of 2021. At the peak, the energy problems were largely due to a coal shortage. The country’s ‘double carbon’ drive – a series of policies that aim at carbon neutrality – was part of the reason for this. While clearly laudable in many respects, ‘double carbon’ has led to some of the world’s strictest regulations surrounding coal production and use. And, in 2021, this clashed with surprisingly strong industrial demand for energy.
An unexpected COVID dividend
In the first three quarters of 2021, China’s total energy demand grew by 14% compared with the equivalent period in 2020. For comparison, total energy demand for Qs 1-3 of 2020 was up only 3% compared to 2019. Industrial demand for coal was driven in part by the very strong post-COVID economic recovery that China has enjoyed. But the situation in 2021 was exacerbated by events in Europe, the USA and ASEAN (the Association of Southeast Asian Nations).
In Europe and the USA, a radical improvement in vaccination rates in 2021 aided a general economic recovery that resulted in soaring demand for manufactured goods from China. Meanwhile, the outbreak of Delta in ASEAN caused unprecedented factory shutdowns throughout the region. The customers of these ASEAN factories then shifted most of their demand onto Chinese suppliers. As a result, Chinese exports reached record highs.
All this helped contribute to a situation where demand for energy from Chinese industry by late 2021 was the highest it had ever been. With four industries alone accounting for 25% of total energy demand: non-ferrous metals, chemicals, steel, and non-metallic minerals.
A supply crunch
The energy crisis was (and continues to be) exacerbated by several factors on the supply side.
China’s 14th five-year plan – running from 2021-25 – is designed to help the country hit new targets that have been set by central government. These include hitting peak emissions before 2030, and achieving total carbon neutrality by 2060. To that end, in 2021, China was striving to reduce energy consumption per unit of GDP by 3%.
On top of this, China’s national development and reform commission introduced a measure known as “dual control”, which is designed to reduce both total energy consumption and energy consumption intensity. Areas that fail to reduce energy consumption intensity are given official warnings, leading to some local governments in 2021 deliberately restricting or rationing power, causing power outages. The practical, real-world impact of dual control is that reductions in energy consumption intensity get much higher priority than reductions in total consumption. Additionally, regions that export power to other regions (i.e. where the self-sufficiency rate exceeds 100%) are in a strong position, while regions that import electricity are at higher risk of being impacted by power problems.
Finally, strict safety regulations surrounding coal mining in China make it still more difficult to rapidly scale up output as a response to price rises. And a major drought last summer also hit hydropower generation, meaning that the energy network in Q3 2021 was more dependent on coal than ever before.
A crisis that will be felt outside of China too
In response to these problems, Chinese authorities raised coal production targets for the fourth quarter of 2021 to 12 million tons (compared to 10 million tons in a normal year). This will not be enough to solve the problem on its own, but it should ease matters. Additionally, the government has also put in place a pricing policy to ensure that the allowed fluctuation range in coal prices cannot exceed 20%, although the largest energy users are not covered by this and some have seen their energy prices go up by over 30%. Ultimately these pricing policies are likely to see revenues in the power industry increase by between 6 and 15%, but it will not be enough to offset rising costs at power generation companies, meaning that profits will still be squeezed badly.
At the height of the crisis, the largest energy consumers – such as chemical and steel companies – found energy prices so prohibitive that they had to restrict their own production. This caused the prices of their own products to rise, which helped many to maintain at least some degree of profitability. For less intensive power users, the energy shortage led to problems such as rising raw material prices and delayed deliveries.
The Chinese energy crisis eased in Q4 but continues to have important impacts on manufacturing industries. Ultimately, the impacts will ripple out of China and will be felt across the entire global industrial value chain. The general rise of electricity prices that the market is still experiencing is causing further rises in the overall costs of manufactured goods. And, as inflation increases, the marginal increase in raw material prices slows down, meaning that the profits of energy intensive industries will be eroded.
To discuss the current outlook for industry, both in China and globally, get in touch with Jan Zhang today: firstname.lastname@example.org