China becomes focus of supply chain friction as energy sector staggers

The world is seeing continuing economic dislocation focussed on logistics and wider supply chain issues. Much of this is due to labour-force disruption but changes in trade patterns are also a major driver of friction. Congestion at the Port of Los Angeles, shortage of pork butchers in Britain or plywood in Germany seem to be driven by underlying forces in the global economy. The huge expansion in the money supply and the implications for inflation is an important source of the problem but the mechanisms through which higher demand is communicated seem to be opaque.

Yet at a global level, it is China that is probably the most significant focus of change. At present, it is a shortage of electricity that is one of the countries most pressing economic problems, with rolling power cuts across many parts of the country but especially in the northeast which is the location for much of China’s coal-consuming industries. And it is coal that is at the centre of the problem. Coal still accounts for 70% of electricity generation in China and its supply is crucial to the economy. The logistics of coal have been a problem for China for several decades, with coal shipments dominating the rail system and attempts to make room for other cargoes resulting in huge traffic jams of trucks carrying coal into China’s cities. The issue has been aggravated by China’s general resistance to reliance on imported coal, amplified by its recent poor relations with Australia which has often been a major source of coal imports. China has been attempting to boycott Australian coal production, however, this week Australian coal ships docked in Chinese ports, which illustrates how serious the energy situation probably is.  

Such power shortages are inevitably having an effect on wider production operations in China. Production for exports had been recovering aggressively over the year contributing to the growth in demand for shipping, however, activity across the exporting sectors has been hit severely and this will have extensive effects across numerous global supply chains. For example, any power disruption in China is also likely to affect steel production and thus areas such as shipbuilding, slowing the speed of newbuilds for container shipping lines and thus implying high freight rates for longer.

Yet possibly a longer-term threat is the financial instability in China. The huge property developer Evergrande is approaching the need for some form of restructuring, something which is probably shared with large parts of the ‘State-Owned’ sector in China. It is very unlikely there will be any form of bankruptcy event for this part of the economy, simply because it is effectively part of the Chinese state. However, it does appear that financial stress is affecting investment activity.

The trends are complex, opaque and hard to identify but the strong implication of these problems is that global supply chain architecture is undergoing violent change. Rather than issues around localisation, what is driving change is new technology, financial policy but also the evolution of the Chinese economy. All these hard issues have to be understood by supply chain managers if they are to create effective supply chain policies.

Source: Transport Intelligence, 5th October 2021

Author: Thomas Cullen