I received a phone call last evening from a friend in Shanghai. He had asked me if I heard about the power shortages and energy crisis in China. Oddly enough, I had been planning on writing a short piece on how power shortages were having an impact on various metals markets. In China, the country’s largest aluminum producer shut down operations at two plants in Guizhou and Zunyi, according to this recent article in Forbes. With annual production of “320,000 and 110,000 tons respectively”, the loss of this production is bound to have ripple effects in the Chinese and possibly wider markets. No date has been set for when the plants will begin production again. The effect on aluminum prices coming out of China remains to be seen. I have read that the prices of alumina, will drop due to lack of demand but the cost of primary aluminum or semi’s may increase. How serious is this crisis you might ask? According to this article, coal reserves were down to emergency levels and stockpiles were only large enough to generate power for the whole country for eight days. At issue is a change in government policy, essentially allowing coal prices (which generates 80% of China’s electric supply) to float freely on the market according to this Reuters article whereas power tariffs are fixed. Power plants then make the decision to shut down capacity as opposed to producing at a loss. The article goes on to say that it may not be until the middle of this year that Beijing allows the power tariffs to increase. It seems like a no brainer that the government ought to allow power tariffs to float as well but given rampant inflation and social unrest, the government is hesitant to take action.
How is this affecting other businesses? Well according to my friend, plants throughout the country (even in provinces not greatly affected by the shortages) are having to curb production. A mattress innerspring manufacturer that was scheduled to ship seven containers this month informed their customer it would only be filling six, because it didn’t have enough electricity to complete the full order. In the mid term, high energy intensive industries, in particular aluminum, may see some price spikes out of China.
But the energy crisis is not limited to China. In South Africa, “state electricity provider Escom has reportedly told the mines [gold and platinum] it cannot guarantee the continuity of electricity supplies” according to this Mineweb article. Several mines closed down their operations as health and safety could be compromised if the electricity were to cease during operations. Gold prices hit a new high of $920 after this news was announced.Supply risk and supply disruption are two factors that are tough to quantify when financial analysts or market watchers such as ourselves make metals price predictions. But buyer beware, supplier disruption is alive and well in 2008.