Wednesday, January 19

China’s energy crisis is affecting everything from iPhones to milk


The impact of China’s energy crisis is beginning to spread around the world, hurting everyone from Toyota Motor Corp. to Australian sheep farmers and cardboard box manufacturers.

The extreme shortage of electricity in the world’s largest exporter will not only affect its own growth, but the impact on supply chains could cripple a global economy struggling to emerge from the pandemic.

The timing couldn’t be worse as the shipping industry already faces congested supply lines that are delaying deliveries of clothes and toys for the end of the year holidays. It also comes just as China begins its harvest season, raising concerns about considerably higher grocery bills.

“If electricity shortages and production cuts continue, they could become another factor causing global supply problems, especially if they start to affect the production of export products,” said Louis Kuijs, senior economist for Asia at Oxford Economics.

Slower growth

Economists have already warned of slower growth in China. At Citigroup, a vulnerability index indicates that exporters of manufactured goods and raw materials are at particular risk from the weakening of the Chinese economy. Neighbors like Taiwan and Korea are sensitive, as are metal exporters like Australia and Chile, and key trading partners like Germany are also somewhat exposed.

As for consumers, the question is whether manufacturers will be able to absorb higher costs or whether they will pass them on.

“This appears to be another stagflationary shock to manufacturing, not just for China but for the world,” said Craig Botham, chief China economist at Pantheon Macroeconomics. “The price increases at the moment are fairly broad based, a consequence of China’s deep involvement in global supply chains.”

Beijing has been seeking energy supplies while trying to stabilize the situation. The impact on the world economy will depend on how quickly those efforts pay off. Many Chinese factories cut production for this week’s “Golden Week” holiday, and economists are closely watching whether power outages will return as they rise again.

However, some industries are already under pressure and the damage they are experiencing could quickly spread to other sectors.

Paper

Consider the role. The production of cardboard boxes and packaging materials was already affected by the skyrocketing demand during the pandemic. Now, temporary shutdowns in China have further affected production, leading to a possible reduction in supply from 10% to 15% for September and October, according to Rabobank. That will add further complications to companies already suffering from the global paper shortage.

Meal

The food supply chain is also at risk, as the energy crisis makes the harvest season more challenging for the world’s largest agricultural producer. World food prices have already risen to a decade high, and concerns mount that the situation will worsen as China struggles to manage crops from corn to soybeans, peanuts and cotton.

In recent weeks, several plants have been forced to shut down or reduce production to conserve electricity, such as soybean processors that grind beans to produce flour for animal feed and oil for cooking. Fertilizer prices, one of the most important elements of agriculture, are skyrocketing, hitting farmers who are already reeling under pressure from rising costs.

The processing industry will be hit harder than staples like grains and meat, Rabobank analysts wrote in a report this week. In the dairy sector, power outages could disrupt milking machines, while pork suppliers will face pressure from a more limited supply of cold storage.

Wool

A sheep farmer takes sheep to a capture pen for shearing on a farm near Gunnedah, New South Wales, Australia, on Tuesday 13 October 2020. Farmers in Australia, who supply around 90% of the The world’s garment wool, have struggled through the Covid-19 shutdown as global apparel factories and retailers shut down.

Outside of China, Australian sheep farmers are bracing for weaker demand just as they look to sell their wool at auctions. The industry saw Chinese mills cut production by as much as 40% due to power outages last week, Australian Broadcasting Corp reported.

Technology

The tech world could also see a dramatic shock, given that China is the world’s largest production base for devices, from iPhones to game consoles, and a major hub for the packaging of semiconductors used in cars and home appliances.

Several companies have already experienced downtime at their Chinese facilities to comply with local restrictions. Pegatron Corp., a key Apple partner, said last month that it began adopting energy-saving measures, while ASE Technology Holding Co., the world’s largest chip packer, halted production for several days.

The overall impact on the tech sector so far has been limited due to the usual closures around the week-long holidays. If the energy crisis worsens, it could affect production ahead of the crucial year-end buying season. Industry giants, including Dell Technologies Inc. and Sony Group Corp., cannot afford another supply shock after pandemic-induced turmoil fueled a global chip shortage that runs through 2022 and beyond.

Car manufacturers

Any further deterioration in the semiconductor market would also add headaches to automakers, which have already seen production crushed by chip shortages. Industry, which ranks high on the list of protected sectors at times like these, has so far largely escaped the effects of the energy crisis.

Still, there have been some isolated cases. Toyota, which produces more than 1 million vehicles a year in China at plants located around Tianjin and Guangzhou, has said that some of its operations have been hit by power shortages.

© 2021 Bloomberg


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