Expect China Price Increases as Oil and Energy Prices Climb

In the past twelve months, China has learned the problems of having a centrally planned economy (despite its rhetoric about how Western free market models do not work). According to an article in yesterday's New York Times China "announced sharp increases late Thursday night in regulated prices for gasoline, diesel and electricity." Why did they do it? Consider that earlier this year, a number of coal-fueled power plants shut down various shifts because the price they could sell energy at (a regulated number) was less than the cost of the actual feedstock (which floats on the open market). This quietly wrecked havoc with a number of factories who shipped fewer containers for export, leaving many of those sourcing from China in a lurch.

The obvious solution is to move more towards a market-based system which does not attempt to manipulate prices. The good news: China is getting there with these recent increases which should have the effect of slowing consumption to levels which are more market driven. According to the Times, "the government raised the retail price of diesel by 18 percent, to the equivalent of $3.58 a gallon, and the price of gasoline by 16 percent, to $3.83 a gallon. Electricity tariffs and the price of jet fuel were also raised." The only danger in this is the chance that higher energy prices could help drive inflation, as the article also points out. But this is a problem the Chinese government created for itself, as "gasoline and diesel had been fixed since Nov. 1, even as world oil prices have risen 45 percent in that period."

What’s the takeaway for those sourcing from China? Expect higher prices. My guestimate is that between increased production and transportation costs within China, companies should expect a 1-5% price increase from suppliers -- potentially more in energy intensive industries.

- Jason Busch

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