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Drought, power cuts worsen China's supply snarl

Srinivas Mazumdaru | Jose Qian Shanghai
August 25, 2022

China's power crunch threatens supplies of everything from metals such as aluminum to automotive parts — as well as food commodities.

A view of the Jialing river in the Chinese megacity Chongqing
Record low water levels in parts of China have put pressure on the nation's hydropower generatorsImage: Wang Quanchao/XinHua/dpa/picture alliance

A severe drought and sweltering heat have led to low water levels and a drop in hydroelectric power generation in China in recent weeks, causing power shortages and forcing the government to ration electricity in some provinces.   

The Yangtze river basin — stretching from the southwestern Sichuan province to Shanghai city on the coast — has been the hardest hit. The region is home to more than 370 million people and contains several key manufacturing hubs.  

China relies heavily on hydroelectric power to meet its electricity needs, with the source accounting for about 15% of its overall energy mix. In places like Sichuan, which has been the worst affected, the figure is as high as 80%.

Graphic: Energy production in China according to source, with coal accounting for 63.6%

Authorities in some places have resorted to energy-saving measures such as switching off decorative lights and cutting back on the opening hours of shopping malls, among other things. They are also boosting coal power generation and transfer electricity from other regions.

Steve Manners, a senior manager at 2K China Chengdu, a gaming company based in the outskirts of Chengdu, told DW that the software park where his firm was based turned off air conditioning in all the offices to cope with the power shortages.   

Authorities also told the company to allow all nonessential employees to work from home, he said.  

Power cuts affect both big and small firms

Though the government has made providing power to households and public facilities a priority, many factories have had to endure power cuts and slash production.

The affected region hosts the factories of some of major world carmakers such as Toyota, as well as manufacturers of auto parts that are crucial to global supply chains.

The power cuts have already disrupted the operations of companies such as Apple and Tesla.

Li Hong, an employee working for the Messer Group, a German supplier of industrial gases, in Chengdu, told DW that 90% of factories in Sichuan province have completely shut down.

This is not the first time that the region has faced power cuts, he said, but this is the first time even large firms are affected.

"There have been power cuts in the past, but they only affected small businesses and not big ones like ours," he said. "This time, it's a big deal for everyone."

Huang Huan, general manager at the European Union Chamber of Commerce office in Chengdu, echoed that.

She said 80% of businesses in places such as Chengdu and Chongqing were completely shut down for at least two weeks — regardless of industry or size.  

The impact was felt by not just small and local companies, but also by big state-owned enterprises, as well as foreign firms, she added.

Concerns over autumn harvests

The power crisis in the world's second-biggest economy came at a time when supply chains were already strained by the impact of the coronavirus pandemic, China's strict lockdowns and Russia's invasion of Ukraine.

It threatens supplies of everything from metals such as aluminum to automotive parts, as well as food commodities.

Ye Tan, an economist and founder of the consulting group Ye Tan Finance, told DW that the current crisis has also hit the agriculture sector hard. She said the provinces affected were the "food basket" of China — accounting for over 20% of the national agricultural output.

Poor autumn harvests in China will have a huge impact on the global market for agricultural commodities, causing already high prices to surge further, she said.

The investment bank Goldman Sachs issued a similar warning, saying rice harvests would be at the greatest risk should the severe weather continue.

China's Agriculture Ministry also said over the weekend that high temperatures and unusually low rains since July have posed "a severe challenge" to fall grain production, Bloomberg reported.

A bigger impact than 2021's outages?

In recent years, China's power consumption has been growing at almost double its usual rate, despite the government's attempts to reduce the economy's energy intensity.

Graphic: Rise of energy consumption per capita in China versus the rest of the world

China faced widespread electricity outages in 2021, when coal supply shortages, among other problems, forced energy companies to cut off power to millions of homes and businesses.

A broad range of industries was affected, including power-intensive sectors such as aluminum smelting, steel making, cement manufacturing and fertilizer production.

But Dan Wang, chief economist at the Hang Seng Bank, told DW that the drought and power shortages this year would have a bigger impact on the economy than 2021's outages.

She said the power cuts had adversely affected manufacturing, particularly in the case of energy-intensive sectors such as fertilizers, chemicals, steel and glass, among others.  

"These sectors are quite important for China's as well as global supply chains, so it's going to have a big knock-on effect on the economy," she said.

Wang expects China to record lower economic growth than previously estimated. "We're looking at 3% GDP growth for this year," she said — down one percentage point compared with a previous forecast.  

Better preparation needed for future crises

Jens Hildebrandt, the head of the German Chamber of Commerce in China, told the dpa news agency in Beijing on Wednesday that manufacturing companies are facing serious problems in China because of electricity shortages.

The production lines of German companies in the worst-hit regions have come to a halt, Hildebrandt said. "Absence of energy security is posing major challenges to German companies in China," he added.

Some experts warn that the growing water stress and intensity of droughts in China will likely cause similar and more acute crises in future — potentially causing major disruptions to the global trade in industrial materials, as well as foodstuffs.

Li, the Messer Group employee, said firms would need to be ready for such crises. "In the future," Li said, "we must make plans and stock up on more products for better preparedness."

Edited by: Uwe Hessler

Srinivas Mazumdaru Editor and reporter focusing on business and Asia