– The key cause is the structural problem of energy consumption dependent on coal power generation –
– The complete marketization of coal-fired electricity prices may lead to an increase in corporate production costs –
– It is difficult to solve the power shortage in China in the short term, so companies need to prepare long-term countermeasures –
The severe power shortage in China, which started in the third quarter of this year, has continued into the fourth quarter. Some local governments are demanding companies to cut power consumption and, in severe cases, temporarily suspend power outages or plant operations. In the case of Liaoning Province, an aging heavy industry base in China, ahead of the National Day holiday (September 3), the second level of power shortage warning was issued, and the power saving operation order was raised to the second level (the highest level is level 4).
Note*: According to the 'Electricity use management method (有序用电管理办法)', if the power shortage is less than 5%, the level is 4, 5~10% is level 3, 10~20% is level 2, if it exceeds 30%, it is level 1 Measures to issue a power saving operation order and to restrict the use of electricity by businesses and residents depending on the situation. The higher the level, the larger the limit range and the longer the limit time.
The root cause is an imbalance in the supply and demand of electricity and coal
Experts are diagnosing this power shortage as “the result of a combination of imbalances in supply and demand caused by coal supply shortages, abnormal temperatures such as floods, and high-intensity carbon emission suppression policies.” Among them, the prevailing view is that electricity consumption has increased rapidly due to an increase in industrial production following the economic recovery, while the supply of power generation materials is disrupted due to a problem in China's energy consumption structure.
Since the second half of 2020, China's economy has continued to recover. In the meantime, industrial production and exports have driven China's economic recovery, which eventually led to a surge in industrial electricity consumption*. Although industrial production and export growth rates have slowed since the second quarter of this year, China's main power grid load capacity has far exceeded the previous year's level. In particular, after exceeding 2 billion ㎾h in June, it reached 6 billion ㎾h in July, exceeding 10 billion ㎾h for three consecutive months.
Note*: China's electricity consumption structure (as of FY20): primary industry 1%, secondary industry 1.1%, tertiary industry 2%, residents' living 68.2%
With the economic recovery in 2021, the load power of major power grids in China will exceed the previous year.
Looking at the power consumption status by industry category, secondary and tertiary industries, especially high-tech industries and manufacturing in the middle and downstream sectors, are leading the rise in power consumption. The contribution of the secondary industry to the increase in China's electricity consumption was more than 2% as of August this year, up 3%p from 2% in 8. During that period, the contribution of the tertiary industry increased from less than 65% last year to more than 2020% this year. Looking more subdivided, in the middle and downstream sectors, the higher-tech sector than the upstream sector, the high-tech sector, and the sector related to industrial upgrades, such as facility manufacturing, showed a more pronounced increase in electricity consumption than the general sector.
Contribution to the increase in power consumption by sector (top), rate of increase/decrease in power usage (bottom)
Among the tertiary industries, power consumption in the charging/battery replacement service and information and communication technology service fields has significantly increased. In the first half of this year, along with the booming new energy vehicle market, the rate of increase in power consumption in the charging/battery replacement service industry reached about 3%. Power consumption of information and communication technology services increased by 96% thanks to the expansion of new SCOs such as 5G base stations and data centers. “With China’s industrial sophistication and the development of the 26th industry, the increase in electricity consumption is accelerating,” said Dongqi, an analyst at Guo Taijunan Securities.
Growth rate of electricity consumption by tertiary industry in the first half of 2021 (3-year compound)
Meanwhile, China's electricity supply has been held back by coal at a time when electricity demand is soaring. More than 60% of China's total power generation relies on coal. Among them, 96% is self-sufficient in China, and the rate of increase in coal production in China until August this year was only 8%. This is in sharp contrast with China's electricity consumption (4.4%), which showed a double-digit increase during the same period. Of the three major production bases, which account for 13.8% of China's total coal production, only Shaanxi increased production by more than 70% compared to the same period last year, while production in Inner Mongolia, the largest producer, is at a standstill.
Yearly Production Trend of China's Major Coal Production Bases
This year, due to unusual weather factors, China's power supply has become more dependent on coal power generation. The contribution of hydropower to China's electricity production growth in 2020 reached 18%. However, this year's contribution is close to '0' due to abnormal weather (based on July cumulative total). On the other hand, the contribution of thermal power generation greatly increased from 7% last year to 43% as of July this year.
Contribution to China's electricity production growth by generation type
As a result, coal for power generation in China (power coal) has been in short supply of more than 3 million tons since last March. The imbalance between supply and demand led to a sharp rise in coal prices for power generation, exacerbating the situation. As of the end of September, the price of Qinhuangdao power coal exceeded 1000 yuan/ton, up 9% from the same period last year. On October 113, right after the National Day holiday, it is continuing its high-altitude march, exceeding 1600 yuan/ton. Considering that the highest price of Qinhuangdao power coal between 11 and 2000 was around 2007 yuan/ton, the market is responding that there is no choice but to be concerned about this surge in coal prices.
Price soaring trend due to imbalance in coal supply and demand
The imbalance between coal supply and demand has led China's thermal power plants to run out of coal stocks. Since September, coal stockpiles at power plants in seven provinces along the eastern coast of China have maintained the level of 9 days. It is half of the 7-13 level and the lowest since 2019.
Coal Inventory Shortage in 7 Provincial Power Plants along the Eastern Coast
(Vertical axis: number of days available for power generation for stockpiles, horizontal axis: number of weeks)
The Chinese government's countermeasures
The Chinese government has come up with various countermeasures to overcome the country's severe electricity shortage. First, at the central government level, the local government ordered a re-examination of strict restrictions on fishing and electricity use, and ordered the expansion of coal supply. Prime Minister Li Keqiang, the head of the administration, convened the National Energy Commission on October 11 and suggested that “China is still a developing country and it is necessary to enhance its energy self-sufficiency.” He also emphasized that “to achieve the carbon peak in 2030 and carbon neutrality in 2060, long-term hard work is required, and the roadmap for each step needs to be demonstrated in depth.” He also instructed that it is necessary to improve the irregular and irrational power restrictions and production stoppages in some areas, and to secure heating in the northeast area.
On October 12, the National Development and Development Commission announced the 'Notice on Deepening Reform for Marketization of Electricity Rates for Coal Power Grids' and promoted complete marketization of coal-fired electricity rates. 1) Expansion of the upper limit on electricity rates traded in the market (extended from the current 10-15% to 20%), 2) All users use electricity at the market price (1.5 times the general market price when purchasing through a power grid company), 3 ) decided to implement measures such as stabilization of electricity rates for residents and agriculture. In China, only 44% of commercial and industrial electricity users currently use electricity at market prices and the rest at fixed prices.
Inner Mongolia, one of China's three largest coal production bases, announced on October 3 that it will immediately expand production to 7 coal mines in four cities, including Xilinguoreo, Erdus, and Hurunbeer, on the premise of safe production. instructed The scale of the increase is known to reach a total of 4 million tons.
Prior to this, the National Development and Development Commission also expanded the coal inventory of thermal power plants. After the National Day holiday, the number of thermal power plants with 'less than 7 days' worth of coal stockpiles' decreased by 90% compared to before the holiday.
What is the impact of the power shortage?
The impact of power shortages is expected to vary somewhat by industry. Industries with high power consumption, such as non-metallic, steel, chemical, non-metallic minerals, and mining, are subject to restrictions on operation and electricity use, so measures such as plant shutdowns and production cuts may continue for a certain period of time. In fact, China's steel production was hit hard by this incident. Production in August, before restrictions began, was 8% compared to the same month of the previous year.
This power shortage is expected to affect China's industrial production and further economic growth. Chen Xing, an analyst at the Zhongtai Securities Research Institute, predicted that China's industrial production would drop 2 percentage points in the fourth quarter if the last month's restrictions on operation and electricity use continue for two months. It was also estimated that if the restraint strength was strengthened by 4% or the scope of the restraint was expanded by 3.2%, the growth rate of industrial production could decrease by 20 percentage points. On the other hand, if the measures are relaxed, the reduction effect on industrial production will be lowered. Channelist Chen Xing said the government has been pouring out various measures recently, so the impact on industrial production will be less than this.
Effect of restrictions on operation and electricity use on industrial production (%p)
On the other hand, there is a possibility that the electricity price marketization reform promoted by the government as a solution to the electricity shortage will lead to an increase in the production cost of companies. According to the National Bureau of Statistics on the 14th, China's producer price index (PPI) rose 9 percent in September compared to the same period last year. This is the highest since China's PPI statistics were compiled in 10.7. On the other hand, the consumer price index (CPI) fell for four consecutive months, only 1996%. A surge in PPI has not translated into a rise in CPI, and amid the deepening imbalance in China's economic recovery, rising international raw material prices continue to rise, power shortages, floods, and other unfavorable factors are increasing inflationary pressure. The market is concerned about an increase in production costs due to an increase in industrial electricity prices and is concerned that it will increase inflationary pressure.
China PPI/CPI Trend
Prospects and Implications
The market believes that this power shortage can be partially alleviated with various government countermeasures, but it will continue until the end of the year. As the heating season in the northern regions begins in 4Q, coal demand should expand further. It is analyzed that short-term prescriptions focusing on supply expansion cannot solve the fundamental problem of power shortages.
According to China's economic development and industrial sophistication, electricity consumption is continuously increasing, and it is expected to maintain an increase rate of 6% until next year. In 2022, the growth rate of electricity consumption is expected to be slightly lower than this year as the economic growth rate is further slowed due to the weakening of the base effect and slowing exports. The growth rate of electricity consumption in the tertiary industry is also expected to subside to the 3% range from 9% this year.
China's electricity consumption expected to grow at 6%
Companies entering Korea should closely monitor the electricity supply and demand situation and review long-term strategies. Due to the complete marketization of industrial electricity rates in China, it is inevitable that production costs will rise in the short term. It is time to diversify and flex the global value chain (GVC) through supply chain analysis. On the other hand, as the Chinese government's recent cost-reduction-focused projects are being promoted, it is necessary to identify and actively utilize regional cost-reduction policies.
Note*: The Chinese government announced <Notice on Priority Projects for Cost Reduction in 2021> (May 21), presented 5 major tasks in 8 areas, and based on this, each local government is expected to establish a series of action plans.
Source: Wind, Guo Taijunan Securities, National Bureau of Statistics, Zhongtai Securities Research Institute, KOTRA Beijing Trade Center