Global Energy Crisis
Over the last few weeks, more than 20 provinces in China have rationed electricity, affecting the daily lives of millions of people. Some factories were forced to shut down temporarily or operate on limited hours, while some storekeepers were left to rely on candles or portable flashlights to light up their shops. The primary cause of this energy shortage is China’s continued reliance on coal, which accounts for more than 60% of the country’s electricity generation. Prices of coal-fired electricity in China are typically allowed to rise by 10% and drop by 15% from their base levels. As a result, when coal prices rise substantially, coal power plants may find it unprofitable to continue producing electricity. Last Friday, thermal coal futures on the Zhengzhou Commodity Exchange surged more than 5% to CNY1,647 ($256) a ton, bringing them up more than 150% since the beginning of the year and setting a new weekly peak since they began trading in 2013. The hike comes as a result of rainstorms and flooding that have caused the closure of 60 of Shanxi province’s 682 coal mines, which generally generate more than a third of China’s entire coal supply.
The Chinese government has recently taken a number of measures to bolster coal output in response to electricity shortages, including mandating 72 mines in Inner Mongolia to increase production by a total of 98.4 million tons. In addition, China’s National Development and Reform Commission (NDRC) will fully liberalize pricing for coal-fired power and require all industrial and commercial buyers to purchase directly from the exchange market. It is anticipated that allowing the market to set prices rather than the government will encourage loss-making power producers to raise output in order to fulfill current market demand.
However, China is not the only Asian powerhouse facing an energy crisis. Likewise, India is now confronted with a looming power crunch, as coal stockpiles in power plants have plummeted to a historic low level, and government is now warning of electricity
outages. Inventories of coal, which contribute around 70% of India’s power production, have fallen by 80% year to date to 7.4 million tons. Experts have highlighted that the power blackouts are not due to a lack of local coal supply, but rather to the failure of energy suppliers and India’s state-owned coal producer, Coal India Limited, to store enough coal to match the projected uptick in demand.
To help alleviate the issue, Coal India Limited suspended all online coal auctions excluding those for the power sector. The decision to prioritize supply to power stations is intended to assist replenish low inventories, which are threatening continued operations. Nonetheless, it may exacerbate the situation for other businesses such as aluminum smelters and cement manufacturers, providing them with the tough decision of seeking more expensive alternatives or cutting production.
Europe, on the other hand, is now facing natural gas shortages. The Title Transfer Facility (TTF), a European benchmark for natural gas, has recently reached a record high, growing over 400% since the beginning of the year. The surge in natural gas prices was partially due to an increase in global demand as the economy began to recover from the COVID-19 pandemic. Gas output in Europe has decreased, and natural gas reserves are below average levels. Moreover, Europe is increasingly reliant on gas import from Russia. However, Russia’s natural gas producers do not increase natural gas exports highly enough to fulfill European demand since Russia is simultaneously stockpiling natural gas reserves for its own use.
The Nord Stream 2 pipeline, a new export gas pipeline that runs from Russia to Europe over the Baltic Sea, is expected to play a critical role in resolving Europe’s gas crisis. However, given the additional regulatory requirements placed by Europe, the specific timeframe for the start of deliveries remains unknown. The combined capacity of Nord Stream 2’s two strings is 55 billion cubic meters of gas per year. As a result, when integrated with the operating Nord Stream, total capacity will be 110 cubic meters of gas per year.
All in all, we anticipate that the energy crisis in China, India, and Europe will have only short-term impact on global economic recovery since the issues are not likely to persist and governments are working to find solutions. However, the IMF has trimmed its global GDP projection for this year to 5.9% from 6% in July, citing supply disruptions as one of the causes.