China’s Power Crisis Piles More Pressure on Inflation

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Massive power cuts in China are already driving up costs for downstream industries and prices for end users

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Many Chinese provinces, including manufacturing centers such as Guangdong and Zhejiang, have limited access to electricity for factories as Beijing tries to rein in energy consumption. Skyrocketing coal and natural gas prices have also affected electricity supply. This puts another crack in already chaotic global supply chains. Not only are manufacturing activities being disrupted further ahead of the holiday season, but higher costs in energy-intensive upstream sectors are also flowing downstream to drive up prices for some end users as well. Prices of many commodities have already gone up this year, as there has been a sudden spurt in demand due to supply disruptions and a booming economy.

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Take solar panels. According to industry analyst Johannes Bernreuter, about 80% of solar-grade polysilicon, a component of solar panels, came from China in 2020. China’s cheap electricity, which is mostly coal-powered, has helped reduce production costs in regions such as Xinjiang and Yunnan. But power shortages have now disrupted production: Prices of the silicon metal used to produce polysilicon have more than doubled this month, according to Wind. Solar panel grade polysilicon prices have risen by more than 10% this week alone, according to the China Silicon Association. According to Jefferies, leading polysilicon producers have less than three days of inventory, a 90% decline year-over-year.

Even before the current surge, polysilicon prices were already trending upward after years of decline. Recent price gains have probably been overstated and the long-term structural shift to renewables will persist. But such volatility in prices could affect the demand for solar power in the short term. For example, Citi two weeks ago lowered its forecast for this year’s solar capacity growth in China. Similar disruptions are going on for other items such as aluminum, which requires a lot of energy to produce.

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China may finally ease power restrictions to give struggling manufacturers a break. This could allow electricity prices to better reflect rising fuel costs for end users. The latter would mean a structural change in the cost of goods dependent on lower energy costs in China – a boon for the planet, but another thorn in the side of global firms already dealing with spiraling material and labor costs.

Jackie Wong at [email protected]

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