China’s Energy Crisis – Burning Issues

Table of Contents

China energy crisis

Is the Evergrande crisis china’s lehman moment

Chinese real estate major Evergrande, $305 billion in the red, is on the brink of explosion. Markets have been spooked by fears of an effect on economies

China is facing a severe energy crisis that threatens to compound supply chain woes and derail the global recovery.

In recent days, factories in 20 of China’s 31 provinces have suffered a loss of power, forcing many to shut down production, at least for hours at a time.
Millions of households in the north-east of the country have also lost power and found that they cannot use electricity to heat or light their homes

visible impacts of China’s energy crisis?
More than half of China’s mainland provinces have been forced to limit electricity usage due to shortages. The largest industrial provinces are facing cuts just as they try to dig their way out of the supply chain woes.

Globally, widespread concerns over rising coal and natural gas prices are causing a stir.

Policymakers are expressing real angst over the ability of their countries to adequately heat homes as winter months approach.
Nothing happens in a vacuum. This means that an energy crisis in China is not just about China—it has a complex set of causes and effects.
it’s important to understand that the economy is an interconnected web of activity.

Butterfly flaps its wings….

China’s crisis is primarily related to coal. While out of vogue, coal remains a key source of electric power globally.

As simple as it can be : Coal is burned, the heat boils water and produces steam, which drives a turbine, which produces electricity.
Supply & Demand. Supply is everything related to energy production. Demand is everything related to energy consumption.
demand for coal (and the electricity it produces) is very high (and rising). The robust global recovery from COVID—and the resulting impact on goods manufactured in China—is one key driver.

Domestic residential coal-powered electricity demand is also up, with a hot summer and lower than normal hydroelectric production.

supply.

The main supply dislocations are:

Coal Shortages
Import Restrictions
Utility Price Fixing
CCP Emissions Targets

Coal Shortages
Global coal supply has been constrained. Coal mines have faced COVID-related shutdowns.
Further, concerns over the PR risk of opening new coal production have held back new entrants. Rising global coal prices haven’t led to new supply entering the market.

While coal supply has been constrained, China has taken actions that have exacerbated the problem.
They cut Australian imports—previously 10% of Chinese coal consumption—over a political spat. Similar story with Mongolia over anti-corruption crackdowns.
In China, utility companies face standard pricing set by the government.
\This means they cannot raise prices when their input costs spike (as they have).
Utilities are often better off shutting production—which they have done—vs. producing at a loss.

And Emission targets

On one end, a structural surge in demand. On the other end, a number of significant supply challenges and disclocations.
Yet again, we have demand up and supply down.
the net impact:
widespread energy shortages in China, sharp price increases, and continued production delays.
For supply chains, this means continued woes.
For consumers, this means rising prices.
In our interconnected economy, nobody is insulated from this disruption.