China’s power shortage and the continuing surge in oil and gas prices (not to mention coal prices as well) across Asia, Europe and the US rattled markets yesterday, with the ASX shedding tens of billions of dollars of value in a 1.47% slide.
World oil prices rose – the price of Brent topped $US80 a barrel for the first time in three years and overnight Monday, US natural gas futures surged 8% to settle at their highest level for more than 7 years.
The shortages of oil and gas in the US are a result of the lingering impact from Hurricane Ida a month ago which caused more damage and disruption to the energy sector in the Gulf and northeast than previously admitted.
The price of Australian thermal coal futures from Newcastle surged past $US200 to end just over $US204 a tonne on Tuesday, the highest they have been. December futures also rose – to $US198 a tonne – both are key delivery months for the northern Asian winter.
The higher oil prices and looming debt and default crisis in the US saw yields on 10-year US Treasuries jump to over 1.57% on Monday before easing to around 1.53% in early European dealings on Tuesday.
The yield on the Australian Government 10-year bond rose 7 points on Tuesday to 1.48%.
There are renewed fears in the US, Europe and Australia that thanks to the worsening energy supply crisis, inflation is not going to be easing any time soon, as most central banks have been forecasting.
Britain is battling a shortage of petrol and other products; retail store shelves are bare because of panic buying; and a shortage of drivers is making everything worse because Brexit and fears over Covid sent tens of thousands of foreign workers fleeing the UK in late 2020.
China, though, is where the energy crisis seems to be having the most widespread impact.
The fallout of the power shortage has seen a growing number of analysts to downgrade their 2021 growth outlook for China.
Nomura this week chopped its third and fourth-quarter GDP growth forecasts to 4.7% and 3.0%, respectively, from 5.1% and 4.4% previously, and its full-year forecast to 7.7% from 8.2%.
“The power-supply shock in the world’s second-biggest economy and biggest manufacturer will ripple through and impact global markets,” analysts at Nomura said in note, warning that global supplies of textiles, toys and machine parts could be affected.
Morgan Stanley analysts said production cuts, if prolonged, could knock 1 percentage point off GDP growth in the fourth quarter.
Goldman Sachs estimated that as much as 44% of China’s industrial activity has been affected by power shortages, potentially causing a 1-percentage point decline in annualised GDP growth in the third quarter, and a 2-percentage point drop from October to December.
It said in a note published on Tuesday that it was cutting its 2021 GDP growth forecast for China to 7.8%, from the previous 8.2%.
The Asian development Bank last week left its 2021 forecast for China unchanged at 8.1%, but that was well before the impact of the power shortages and silly cuts to carbon emissions became known.
But it did take into account the scattered outbreaks of Covid Delta in August and early September.
Ahead of the start of the seven-day National Day break on Friday, China’s two start of month activity surveys on manufacturing and services on Thursday are likely to show a further slowing in the pace of business, thanks to the power cuts and rationing, as well as the weaker demand.
But the holiday will delay the release of monthly and quarterly economic data for China by a week to 10 days, so any impact, especially on production and retail sales (which weakened in august) won’t be known until late October.
And then there’s the continuing tensions flowing from the agonies of keeping alive the stricken property giant, Evergrande. it has crashed right into the widespread power outages and loss of activity at a time when confidence is most needed.
For yet another day China’s central bank injected billions of dollars in cash into the monetary markets to keep them liquid in the face of the problems at Evergrande, credit crunch nerves and the fallout from the energy shortage.
Another $US15.8 billion was injected via reverse repos (which sees the bank buy securities from commercial banks). That was the same as on Monday and last week when the total value of repos topped the $US70 billion mark.
Reuters reported yesterday that with electricity shortages sparked by scant coal supply crippling large sections of industry, the governor of Jilin province, one of the hardest hit regions by the power crisis, called for a surge in coal imports, while a power company association said supply was being expanded “at any cost”.
News organisations and social media carried reports and posts saying the lack of power in the northeast had shut down traffic lights, residential elevators and 3G mobile phone coverage as well as triggering factory shutdowns.
Jilin is one of more than 10 provinces that have been forced to ration power as generators feel the heat of soaring coal prices that they can’t pass on to consumers.
LNG and oil prices have surged as well so local governments and power companies can’t resort of using thousands of diesel-powered generators to supplement the shortfall in electricity, as they did in the winter heating season in 2020-21.
Reuters said that speaking to local power firms, Han Jun, the governor of Jilin province, with a population of around 25 million people, said “multiple channels” needed to be set up to guarantee coal supplies, and China should source more from Russia, Mongolia and Indonesia.
He said the province would also urgently dispatch special teams to secure supply contracts in the neighbouring region of Inner Mongolia, according to the province’s official WeChat social media account.
The China Electricity Council, which represents the country’s power suppliers, said on Monday that coal-fired power companies were now “expanding their procurement channels at any cost” in order to guarantee winter heat and electricity supplies – for a second winter in a row.
It said China needed to increase the production and supply of coal while guaranteeing safety and environmental protection. More medium-and long-term contracts needed to be signed to raise power plant inventories ahead of winter.
The government owned Global Times newspaper reported on Tuesday that measures to reduce electricity use in factories are currently being enforced in 10 provincial-level regions, including the economic powerhouses of Jiangsu, Guangdong and Zhejiang provinces.
That’s an admission that rationing of electricity supplies is now in force across the country’s economic heartland.
Electricity supply problems have also resulted in blackouts for some household users in Northeast China.
“There is a nationwide electricity shortage to some extent, and the main cause is greater-than-expected electricity demand growth driven up by earlier economic recovery and higher prices for energy-intensive products,” Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University told The Global Times.
Lin said that the surging prices of energy-intensive products, such as steel and nonferrous metals, have contributed to the rapid growth in electricity demand this year.
