China's Power(lacking) Grid Leads to Supply Disruptions Across Industries

Compared with India, China often comes out looking like the far more advanced country from an infrastructure perspective. But looks can be deceiving, especially when available demand outstrips capacity the energy sector. After all, without power, you don't have the means to operate a production line for any type of continuous period (generators are too expensive in China for most factories to have them as a back-up option). I recently learned of the current energy crisis from a few sources including this Industry Week article as well as this post from Lisa over on MetalMiner. According to Lisa, "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 ... 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."

Clearly, this is not an isolated example. Supply disruptions are occurring across the manufacturing sector thanks to an acute shortage of power in key areas. But where can we trace the shortage back to? The combination of communism conflicting with the free market, that's where. Lisa writes, "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." And that, my friends, is one example of the many growing pains which we'll continue to see as China transitions to a truly market-based economy. And we'll all end of paying for it either in higher inventory levels -- as we create buffer stock to guard against future disruptions -- or through the added costs of creating alternative supply options.

- Jason Busch

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