China Market Insider Unprecedented Crisis in China's Chemical Industry — Power Shortage Leads to Price Explosion

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The energy crisis in China has triggered a price explosion for many chemical products. Around a quarter of all chemical companies in the People’s Republic have had to curtail or temporarily halt production since electricity became scarce in September, Chinese media report.

Beijing/China – “Several chemical companies have announced the suspension or reduction of their production,” PROCESS (China) reports. At least ten listed chemical companies, such as Chenhua, Hongbaoli, West Gate Tianyuna, and Chengxing Group, were among them, stated the report.

China’s central planners had ordered many of the country’s provinces to save electricity after they previously missed their savings targets in light of Chinese President Xi Jinping’s ambitious climate goals. The rise in coal prices worldwide and in China made it unprofitable for energy companies to continue producing electricity at total capacity.

Because more than half of all Chinese provinces are now affected by the power shortage, several strongholds of the chemical industry in China have also been hit hard, such as the eastern provinces of Jiangsu and Zhejiang, and the southern province of Guangdong.

The historic scale of the crisis

Orders such as those currently fluttering across the desks of many chemical companies, such as “open for two days and close for five” or “reduce production by 90 %,” are “unprecedented in the history of China’s petrochemical industry,” writes PROCESS in Beijing.

The energy-saving measures to “dual control” total energy consumption and energy intensity in production have hit the country’s chemical industry during the “silver September and golden October” of all times -that is, the peak season of chemical production.

The crisis has now begun to have a substantial impact on the prices of certain chemical products. Thousands of chemical companies have directly been affected, and “prices of chemical raw materials have skyrocketed,” according to a commentary in the Chinese chemical newspaper Zhongguo Huagong Bao.

From September till the end of the first week of October, prices for “48 kinds of Chinese products” have risen, it said. The price increases are particularly significant for basic materials that require a lot of energy to produce. For caustic soda, epichlorohydrin, ethyl acetate, formic acid, and acrylic acid, for example, prices have risen by more than 20 % within a few weeks, writes the chemical newspaper.

Domino effect expected

Because of the complex supply chains in the chemical industry and the difficulties in running chemical plants up and down at short notice, a domino effect is to be expected that could affect chemical production in the entire People's Republic. It could even further fuel inflation elsewhere in the world, fear analysts in Beijing and Shanghai.

Two factors, in particular, have triggered the current power shortage. China's top central planning agency, the NDRC (the National Development and Reform Commission), had severely reprimanded several Chinese provinces for failing to meet energy-saving targets set by the Chinese state and party leader Xi Jinping in the first quarters of this year.

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China would be carbon-neutral by 2060, Xi had promised. "Dual quotas" had been imposed, mandating both total energy consumption and the energy intensity of manufacturing plants. However, energy consumption in nine provinces had not fallen in the first half of the year; on the contrary; it had even risen further.

Enraged by this “loss of face,” central planners had taken action in August and ordered many provinces to take drastic measures. As a result, many industrial companies throughout China received sudden letters telling them that they had to limit their production or even temporarily stop it. In some places, electricity was also cut off immediately without any warning.

Expensive coal plays a role

At the same time, the rationing of electricity due to the climate targets came up against an already tense situation in the energy market. A number of factors have driven up the price of coal sharply in China and also regionally. For example, from January to August this year, electricity generation nationwide had initially risen by 11.3 % compared with the same period last year. China's factories were producing at record levels, partly because corona lockdowns in Southeast Asia and globally caused demand for “made in China” goods. At the same time, however, coal production in China increased by only 4.4 %.

On the other hand, because the price of electricity in China is primarily set by the government, coal is at least partially priced in the market. For many power plants, it had therefore become unprofitable to generate coal-fired electricity. Yet 67 % of all power plants in China still heat with coal, writes the Chinese business newspaper Caixin in a recent report. While coal prices are now skyrocketing, electricity prices remain the same, “every kilowatt-hour of electricity generated results in a loss” for power companies, comments the Global Times newspaper.

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Australian coal import ban

Political squabbles with Australia have also played a part in worsening the coal shortage. Australia has traditionally been the second-largest exporter of coal after China. But because of disputes over the origin of the Coronavirus and arguments over issues such as suspected Chinese cyberattacks and new nuclear submarines in Australia, relations between Beijing and Canberra are currently icy.

China punished Australia with an import substance, among other things, with coal. While the People's Republic had imported 9.79 million tons of coal from Australia in June last year, it had “virtually zero” coal from Australia in January this year, Reuters news agency reported.

Meanwhile, central planners have ordered coal-fired power plants in China to resume procuring coal and producing coal-fired electricity “without regard to cost.” However, the power shortage and crisis in the chemical industry will continue for at least the fourth quarter of this year, think chemical industry insiders in China.

* Henrik Bork, former China correspondent of the German Süddeutsche Zeitung and the Frankfurter Rundschau, is Managing Director at Asia Waypoint, a Beijing-based consulting agency. ‘China Market Insider’ is a joint project of the Vogel Communications Group, Würzburg, and Jigong Vogel Media Advertising in Beijing.

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