Efforts by the Chinese government to curb energy consumption amid electricity shortages and surging coal prices have forced factories in 10 provinces to reduce output or temporarily close and threaten to further disrupt the already strained global supply chain.
The disruption comes amongst the country’s busiest season, as producers and shippers race to meet demand for everything from clothing and toys to electronics for the year-end holiday shopping season, while already grappling with supply lines that have been upended by soaring raw material costs, equipment shortages, chronic port congestion, and severe weather disruptions.
China’s power supply has been tight for several months as power consumption surged on the back of strong economic recovery from the pandemic, but the power supply failed to catch up with the increased demand. The power rationing was ordered to ease pressure on power utilities and allow them to increase coal stocks before winter.
The efforts to rein in energy use have mostly targeted the heavy industrial hubs in Guangdong, Jiangsu, and Zhejiang, which account for nearly 60% of the economy’s coal consumption. Chinese manufactories warn that the strict measures to cut power will slash output in the industrial hubs, which account for almost a third of the nation’s gross domestic product, and likely drive prices up.
While we expect the power shortages to be temporary, exports – particularly textiles, electronics, furniture, home appliances, furniture, manufactured parts, semiconductors, chemicals, dyes, and steel products – will be affected in the coming weeks, and the market will likely see a brief slowdown in export volumes. Space availability under lower rate classifications, especially FAK, is likely to increase as carriers will no longer be able to command premiums due to the decreased output.