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Sky-high prices for natural gas and electricity have made the headlines in recent weeks as energy crises started to erupt all over the world. The most menacing of them is taking place in China, where coal stocks hit perilously low levels. Chinese officials warned that China’s energy crunch will have greater consequences for the global economy than other energy squeezes now occurring in Europe, South-Eastern Asia, and Africa.
Several Chinese regions have started to conserve energy and issue rationing mandates to factories, ordering plants to halt or significantly reduce production over the next weeks. At least two-thirds of the entire country faced severe blackouts last week as China struggled with the worst power shortages in over a decade. Just this year, energy prices have more than double in China due to soaring electricity demand from factories and lower than expected output from the country’s coal mines.
If China’s economy slumps any further this year, the whole global economic rebound can be derailed, and that will lead to even higher inflation in global markets, warn economists. “China’s energy crunch is set to have a rippling effect across the world”, says Howie Lee, an economist at Singapore’s OCBC Bank. The outlook doesn’t seem very promising, particularly considering that official government figures released last month indicate that that Chinese factory activity in September dropped to the lowest level since February 2020, when lockdowns crippled the economy.
The unexpected slowdown in factory activity will add further pressure on an economy already facing serious problems in its inflated property sector, mostly in the form of the decaying giant Evergrande. While the property sector accounts for up to 25% of China’s GDP, the country’s huge tech sector is also experiencing major disruptions as the power outages are forcing widespread factory shutdowns. At this point, shortages are already emerging and hitting stressed global supply chains, with both Apple and Tesla temporarily closed. Other small businesses that play a key role in global manufacturing are recording an output collapse like no other.
This crisis is coming at the worst possible time: just as businesses get ready for the Christmas shopping rush. This means that shortages will not only be seen in China but also on shelves in western countries, including America. Moreover, given the Vice Premier’s order, China seems to have made an abrupt policy change regarding its commodity markets approach. Many local reports are stressing the fact that the central government has given state-owned energy companies a directive to secure winter energy supplies “at any and all costs”.
However, with commodity inflation already soaring and straining large importers, supply shortages are becoming more and more frequent across the globe. The plan now is to hoard all available supplies no matter the cost, in order to support continued economic growth, particularly due to the threat of a cold winter scenario. This may turn the commodity market upside down. China’s rigorous steps to ensure energy supplies are likely to trigger a panic buying spree just as we witnessed early in the health crisis, when consumers depleted inventories of toilet paper and other household items, and more recently, in the UK’s ongoing supply chain crisis.
Therefore, “in addition to the speculative interest, the world’s biggest commodity importer is now going on a historic buying spree. As such, this buying is a strong tailwind for oil, as supply certainty trumps price in the near term,” as explained by Ryan Fitzmaurice, the senior commodity strategist at Rabobank. Speculators have gigantic piles of money at hand to bid the market even higher, especially knowing that China has every motive to panic buy supplies and central banks have flushed extraordinary amounts of liquidity to fund huge purchases on global financial markets.
“This new policy has the potential to trigger panic buying in physical markets, which will likely spill over into financial markets as institutional money chases returns,” Fitzmaurice wrote in a recent note to clients. Sadly, world leaders are just now realizing that, unlike artificially-created money, you cannot print commodities nor artificially create energy supplies. The rules are not the same. The commodity market is volatile and dangerous.
The lack of energy is a life-threatening issue, and that was conclusively demonstrated earlier this year during the Texas power grid collapse. As the price of energy skyrockets, those increased costs will fall disproportionately upon the poorest in society, and those devastating income inequalities will be dramatically exposed as the most millions have to face a painful choice: Heat or Eat.Don’t be mistaken, this winter is going to be shocking. Dark clouds are looming on the horizon and the perfect storm is coming for us.
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