CHINA’S ENERGY CRISIS SUPPLY CHAINS ARE FRAYING

CHINA’S ENERGY CRISIS  

SUPPLY CHAINS ARE FRAYING

Not only is China loosening restrictions on coal production for the rest of 2021, but it is also making special bank loans available for mining companies and even allowing safety rules in mines to be relaxed.

This is having the desired effect: On Oct 8, after a week in which the markets have been closed for a national holiday, domestic coal prices promptly dropped by 5 per cent.

This will presumably ease the crisis as the winter approaches, notwithstanding the government’s embarrassment going into COP26. So what lessons can be learned for the road ahead?

First, supply chains are fraying.

Since the disruptions to global supply chains caused by COVID abated, the mood has been one of getting back to normal. But China’s power struggle illustrates how fragile they can still be.

The three provinces of Guangdong, Jiangsu and Zhejiang are responsible for nearly 60 per cent of China’s US$2.5 trillion  exports. They are the nation’s biggest electricity consumers and are being hardest hit by the outages.

In other words, so long as China’s economy (and by extension the global economy) is so dependent on coal-fired power, there’s a direct conflict between cutting carbon and keeping supply chains functioning. The net-zero agenda makes it very likely we will see similar disruptions in future. The businesses that survive will be the ones that are prepared for this reality.