China’s energy crunch and its impact on global economy

China has been facing a severe power crisis which is making one of the top headlines of this week. This crisis led to power outages and blackouts. As a result, both the industrial and household users are facing trouble. Moreover, as the winter is approaching, the situation is becoming more chaotic.

Power shortages are not a new issue in China. But this time several factors made this problem more serious.

First of all, the production of coal has been disrupted because of the pandemic. Its trade dispute with Australia resulted into reduction in coal imports.

On the other hand, China showed an urge to overcome the pandemic-driven industrial slump. In last few months, China has seen tremendous activity in both the real estate and the manufacturing sectors. This made the country to recover economically. However, these sectors need plenty of units of electricity. That means tons of coal usage. This also causes high carbon emissions.

China’s ambitious climate goals is being the another one. China’s leadership has vowed to make their country “Carbon Neutral” by 2060. The Chinese government has started putting curbs on coal production. This made coal production low. It has also restricted the price of the electricity output. However, coal-based thermal power plants are still China’s major power sources. Both the industrial boom and the ambitious climate goals have made the coal prices to go up significantly. Power plants are hesitating to supply their output at restricted prices as their input costs are increased. As a result, thermal plants started decreasing their production.

All of these made several provinces and regions to face power cuts in order to rationalize the power supply. Both homes and industries have been affected drastically. Especially the energy-intensive industries have been cutting their production hours in order to tackle the power shortage.

In September 2021, China has witnessed major decline in its industrial activities since February 2020. As a result, global investment banks and agencies like Nomura and Goldman Sachs have expressed their concern over future growth. Goldman Sachs has corrected China’s economy growth rate prediction to 7.8% from 8.2%.

To cope with this situation, Chinese government has ordered its top state-owned energy companies to ensure that there will be adequate fuel supplies for the coming winter.

The situation in India:

Indians have also been facing the brunt of rising coal and petroleum prices. Because we are also mostly dependent on coal-based plants.  It also has to manage ever-increasing demand for power as its economy is re-opening.

Apart from rising fossil fuel prices, facing the supply-chain disruption is another problem for India. On one side, the temporary shutdowns of Chinese plants have paved way for increasing demand for Indian industrial products. But at the same moment, many industries are seeing shortage of inputs as imports from China are reduced. The cause being either full or partial shut downs of factories in China.

The global scenario:

This power outages could affect global supply-chain also. The world has already been facing widespread supply-chain disruption. From toy making enterprises to mobile phone manufacturers, every industry has been noticing the impact.

Along with China, Europe has also been facing energy crunch. In many European countries, the low production and rising prices of coal and natural gas is becoming a burning issue. Like China, the approaching winter is posing a major concern for these countries.

Amidst, energy equity stocks and futures have seen significant spike in market prices across the globe. For instance, in India, Coal India, Reliance Industries, etc. have rallied remarkably. But as the time passes by, these rallies may fade out due to production and supply chain disruption.

In a nut-shell, this energy crisis could make the post-pandemic global economic recovery more sluggish, if it remained unsolved.