The hit from China’s energy crunch is starting to ripple throughout the globe, hurting everyone from Toyota Motor Corp. to Australian sheep farmers and makers of cardboard boxes.
The extreme electricity shortage caused by soaring prices of coal in the world’s largest exporter is set to hurt China’s own growth, and the knock-on impact to supply chains could crimp a global economy struggling to emerge from the pandemic.
The timing couldn’t be worse, with the shipping industry already facing congested supply lines that are delaying deliveries of clothes and toys for the year-end holidays. It also comes just as China starts its harvest season, raising concerns over sharply higher grocery bills.
“If the electricity shortages and production cuts continue, they could become yet another factor causing global supply-side problems, especially if they start to affect the production of export products,” said Louis Kuijs, senior Asia economist at Oxford Economics.
Economists have already warned of slower growth in China. At Citigroup, a vulnerability index indicates that exporters of inputs to China’s manufacturing sector as well as commodities are particularly at risk to a weakening Chinese economy. Neighbors like Taiwan and Korea are sensitive, as are metal exporters such as Australia and Chile, and key trading partners such as Germany are also somewhat exposed.
As for global consumers, the question is whether manufacturers and retailers will absorb higher costs or will pass them along.
“This is looking like another stagflationary shock for manufacturing, not just for China but for the world,” said Craig Botham, chief China economist at Pantheon Macroeconomics. “The price increases by now are pretty broad-based — a consequence of China’s deep involvement in global supply chains.”
Beijing has ordered coal mines to increase production and is scouring the world for energy supplies at it tries to stabilize the situation. The impact on the global economy will depend on how quickly those efforts bear fruit. Many Chinese factories reduced production for this week’s “Golden Week” holiday, and economists are closely watching whether power shortages will return as they ramp up again.
Due to a strong Chinese government response “the worst of this energy crisis – but not the entire crisis – may be over soon,” economists at Societe Generale SA said in a note on Friday. Still, power use curbs on the most energy-intensive industries such as steel, aluminum and cement will persist for months and China will continue to aggressively target imports of natural gas, adding to global price pressures, they said.
Some industries are already under pressure, and the damage they’re seeing could fan out to other sectors.
Production of cardboard boxes and packing materials was already strained by skyrocketing demand during the pandemic. Now, temporary shutdowns in China have hit output even harder, leading to a possible 10% to 15% reduction in supply for September and October, according to Rabobank. That will add further complications to businesses already suffering from the global paper shortage.