China’s Power Crisis. What is Happening. What the Impact Is/ Could be. And What You Should Do

Wednesday, January 30, 2008 6:28
Posted in category Uncategorized

This is a story that has been building for a while, and it is something that I have been covering on a few different posts, but given the fluid situation I thought I should bring it all together under a new post.

First, what is known at this point. (updated Feb 3)
As of the last reports, upwards of 17 of China’s provinces are experiencing power brownouts. the severity seems to depends on several things, but while Guangdong’s train station has been the major focus, the province of Guizhou, and its 35 million residents, are having extremely serious issues.

CNN and other mediums are reporting this as a major inconvenience for “the mess” that is the transportation network. But the story is much bigger. there are people stranded on trains, in buses, and for sure there are stories that have yet to make it into onto the air because many areas inland are just not accessible to even the army.

Update 1: According to the Shanghai Daily, the city of Chenzhou in Hunan province, population of 4.6 million, has been without power and water for 6 days. Full details in article.

Update 2: The news in other parts of China is growing more grim as cities like Chenzhou are still without power or water (7-10 days now). fortunately, the donations are starting to role in. Charity machine rolls into action as more snow is on the way.

Update 3: China’s banks have been told to pump money into the affected economies through loans to the ongoing concern of affected economies (more on this later…)

Update 4: A friend in the north reports that coal mines recently shut down have been reactivated (more on this later….)

Update 5: As I forewarned below, all rail transportation is being  diverted to support coal and relief. 42000 rail cars yesterday alone were loaded (makes me wonder if Santa will need a new mineral to give to the bad kids), and stockpiles in Guangdong are beginning to rise

What happened, and how we got here
There is a FT article that is online now that does a good job of presenting what the current situation is, however as I have covered on a number of posts previously and in the comments section of another post, the core issues surrounding this problem is not a spat between the power companies and the coal miners.

The core problems: rail capacity and drought.
18-24 months ago China began importing coal from Australia/ NZ to support Guangdong. the basic issue being the rail network could not get the coal out of Shanxi and into GZ. so, they had to import.

At the same time, the south has been going through a drought that has reduced hydro capacity significantly. Another addition to the problem, but not a massive problem even with the other problem above

Match both of those to a diesel shortage, and you have a third strike, but this one is more subtle… because it is what prevents trucks picking up the capacity following 1 and 2

Now, bring all those together… add a snow storm.. then add the factors in the article, and it you get a massive problem.like this…. Guizhou declares blackout emergency

What the impact has been so far
If there is a sad irony to this, to foreigners there will be limited immediate impact. Factories were already shutting down for the holiday, safety stocks were built, and we were already planning on 2-3 weeks of downtime.

However, with that said, this situation may result in a few disturbances over the next 3-6 months. (1) factories may be forced to accept a longer vacation as employees may not return as planned (2) inputs and energy are going to increase; and (3) this situation will inflame the domestic inflation issues (more on that later)

What the impact could be
To be honest, nobody knows how bad this could get. More storms are predicted through the weekend, and there are reports that there are coal plants running a dangerously low coal piles (2-5 days). So… it can get much worse.

From an economic standpoint, the risk is that inflation will only increase as supply chains grind to a halt (domestic trunk links are a mess), oil supplies are diverted to support energy, crops freeze before hitting the market, etc.

Update 1:  In thinking about the impact of this storm on production, I cannot help but think that if there were ever a time for the entire transportation and power grid to go down it is now.  I understand that there are a lot of miserable people right now, but from a production standpoint, many factories had already prepared for 2-3 week holidays and had moved a lot of containers in January to beat the yearly traffic jams at the ports.  The question for me will be the ability of raw material deliveries to happen around the 3rd week of the month.  this is when people will start trickling back from their hometowns, but managers will have already begun placing orders the week before to get inventories of materials back to normal.  If the rail/ highways are still a mess around the third week, then the economic impact could be much more significant.

Additionally, from a consumer base. Chinese New Year is the biggest holiday of the season. As my girlfriend says, no one closes shop before the New Year, because everyone sells something before it. but, if people are stuck, and forced to stay away from home, people may choose not to spend… short term bad… medium term deflationary.

What needs to be done
the army has been deployed already, and so I expect that means that a lot of supplies are already on the move (via air network). Update (Feb 3). More than a 500,000 troops and paramilitary (not sure why they are involved) are on the ground now cleaning up the snow from roads and rail.

China needs to find a way to get the trains running (electricity) and get more coal into the critical plants. Obviously, the snow has made this problem worse, but a large part of the Guangdong problem is lack of coal. Update (Feb 3) – China has put an extra 1000 trains on the track. I expect this means that the old diesels that were taken out of service by the recent electrics are now back online.

so, the short term will lead to a focus on turning ships around, building a coal train of bulk carriers, and building up the piles in front of all the power stations.

On a long term basis, China will need to begin to build power capacity on a much more sustainable and balanced basis. the lost capacity from hydro levels has really hurt them, and things were left to run with little room for error.

And that failed.

Gas prices, price caps, snow, and so on all played a role, and lessons need to be learned.

As updates come in, I will continue to update this post, but I expect this will get worst. I do not see this as a destabilizing event by any stretch of the imagination nor I do not see this as an event that will hurt exports for next 2-3 weeks (I know some readers are concerned about that).

The power shortage is something that has been coming for a long time… and the snow only exacerbated the problem. Were this not the run up to the holiday, exports would have been impacted, but for the short term this will be a domestic issue and the impact will be here.

Updated: What You Should Do
Following a little more thought (the above was written on the fly while watching a CNN report), here are a few things that I think firms/ individuals should know about what they can do.

Nothing. Short term, this is like a hurricane. It is going to be something that needs to clear first before anyone really knows what the real severity of the problem will be.

If you are traveling in China over the new year. Don’t travel by train for two reasons (1) the lines are going to be crazy and (2) others need your seat more than you

If you are a manufacturer in China and supplying export market, call your forwarders when you get back to the office to find out what the backlog at the docks is likely to be. Perhaps we will get lucky on this and the impact will not be that great, but it is possible that some of the docks that are typically reserved for containers are prioritized for bulk shipments like coal

Ongoing, safety stocks should be increased through the spring and summer just in case. this is a problem that will impact manufacturers for time time… particularly if this summer brings another drought

If you are manufacturing in China, and in Guangdong. Have your GA (Government affairs) person contact the local officials to see what the power supply looks like. Like I said, this is not some freak inefficiency in pricing that the power stations are trying to take advantage of. This shortage was something that was reported widely this summer, and I expect that it will continue well after the snow thaws (although, the snow pack melt may helps alleviate short term hydro issues).

Ongoing, safety stocks should be increased through the spring and summer just in case. this is a problem that will impact manufacturers for time time… particularly if this summer brings another drought

If you are manufacturing in China, and are buying bulk materials (especially metals). Wait to place your orders, particularly if you need aluminum, iron ore, or god forbid coal. These goods are ones that will see impact right away. Smelters are already down in Guizhou (10% of capacity), and I would expect others will be taken off as they are huge energy consumers and the power needs to be diverted to support other things. Prices should go down if you can wait as emergency orders are processed and supply can resume normal levels

If you are an investor or a member of the clean tech sector in China, this could work out in your favor as China is going to look to really ramp up on energy reserves. My guess is that the Energy Law that has been stuck in a round of inner-ministerial ping pong, will come out very strong as the central party will use this to bring people into line (think of the effect of the labor scandal on the labor law – or the nationalist rhetoric on the M&A law).

If you are an investor in the Stock market. Hedge short term towards the down. The market here has been overpriced for a while, inflation is going to kick this country in the economic gut, and pumping the stock market is just not helping anyone.

Updated: What you should not do
Don’t use this as an excuse to get out of China. there is a lot of talk about Vietnam and India right now, and to be blunt…. they would have blown faster. What really is scary about this situation is that China has been throwing a lot of money at infrastructure and they are still having this size of a problem. Imagine Vietnam or India, which have historically spent much less on their infrastructure. A sudden move to either of these countries en mass would simply paralyze their logistics systems… and lord only knows what the grid would do.

So, stay focused. China is still a good place to be. Sure, the risk is a little higher, but I am guessing that over the next 2-5 years we will see that membership will have its privileges. the global market is experiencing pains in many markets, and China is certainly one of them, but overall China is still very stable and this crisis has yet to show me any sign that that will change.

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2 Responses to “China’s Power Crisis. What is Happening. What the Impact Is/ Could be. And What You Should Do”

  1. Mike Tucci says:

    January 31st, 2008 at 12:02 am

    Congrats on a very well written article. This is about as thorough as possible and contains actionable advice in the areas of investing, travel etc. While the economy will surely feel some pain from this energy/transportation crisis, I also feel bad for the normal guys and girls just trying to get home for the new year. It still amazes me the sheer number of people who “migrate” back home for the holiday and back to work in the cities each year.

  2. Rich says:

    January 31st, 2008 at 5:58 am

    Mike,

    What amazes me is the fact that the system actually has to be built around the fact that a few hundred million people want to crisscross the country in the span of a week…. and that were it not for the snow, the system probably would have been fine.

    Great job on Sourcejuice. Enjoying it.

    R