China's Power Crisis More Frightening Than Evergrande... Raw Material Inflation Pressure

Raw Material Inflation Cycle Beneficiaries
=Chemicals, Steel & Nonferrous Metals, Energy

[Asia Economy Reporter Ji Yeon-jin] There are forecasts that China's power shortage will further exacerbate raw material inflation.

According to a report published on the 2nd by Samsung Securities Research Center, as the power crisis spreads in China, factories in the East Sea Belt, including Zhejiang and Guangdong, halted operations last month. This power crisis is analyzed to have escalated due to a surge in power demand caused by the shutdown of Southeast Asian factories amid the transition to eco-friendly energy policies and COVID-19, coupled with the ban on coal imports from Australia.

After the National Day holiday, seasonal power demand is expected to decrease, and policy responses such as expanding subsidies for power plants are anticipated to somewhat alleviate the power shortage situation. However, there is also a possibility that the power crisis will prolong in the mid to long term due to increased heating demand in winter and unstable supply and demand.

The key issue is coal supply. Since 2016, China's local governments have reduced coal production by about 600 million tons, and imports of Australian coal, which accounted for 26% of total imports, have been banned due to tensions between China and Australia.

On the 29th of last month, the Chinese government announced energy measures in preparation for the winter season, stating that coal production and imports will be expanded. Additionally, local governments in Inner Mongolia, Ningxia, and Shanghai were allowed to raise electricity prices. However, these policies are far from the eco-friendly policies of the Xi Jinping administration, and there is a dilemma as it takes time to increase coal production and expand overseas imports.

This power shortage could worsen China's economic hard landing, and if production disruptions occur due to power shortages in winter, it could drag down China's economic growth rate in the fourth quarter. There is a possibility that production indicators will decline alongside the slowdown in the real estate market and weak demand caused by the Evergrande Group crisis.

The bigger issue is that China's power shortage intensifies upward pressure on global raw material prices. China drove raw material inflation from 2003 to 2012, a period of explosive investment demand. For this reason, this power crisis is also expected to lead to a mid- to long-term raw material inflation cycle. Samsung Securities identified chemicals, steel, non-ferrous metals, and energy as beneficiaries of raw material inflation.

This content was produced with the assistance of AI translation services.