By Tom Daly and Min Zhang

(Reuters) – Metal consumers in China, from appliance makers to auto, construction and solar panel firms, are readying themselves to face potential supply shocks after power curbs and shortages forced several smelters to cut production in recent weeks.

China’s aluminum and steel producers are used to output caps tied to winter emissions caps. Low coal availability and strong demand caused power limitations to drag on throughout summer, forcing the shutdown of energy-intensive businesses and worrying about adequate heating when cooler weather arrives.

When the Chinese region were instructed to double their efforts to achieve lower energy intensity and consumption targets earlier this year, power-hungry areas like cement and aluminium were likely to be first.

China power rationing map https://graphics.reuters.com/CHINA-POWER/jnvweyzazvw/chart.png

Fertiliser producers, also notorious energy hogs, have been affected by power cuts and surging costs as well, but because of their importance to food security they have been allowed to maintain high operating rates and assured of power supplies.

NO REPRIEVE

Many metal makers, however, have been ordered to reduce operations to conserve power, resulting in lost output of key industrial materials.

China has a large amount of its metal production in the areas that have severe restrictions on power, like Jiangsu. The reason is that the country’s electricity needs are increasing and forcing the government to take drastic measures to limit the damage.

China’s top producers of key industrial products & commodities https://fingfx.thomsonreuters.com/gfx/ce/zgpombendpd/ChinaProvinceProducersCommods.png

Investment bank Morgan Stanley (NYSE:) estimates 7% of aluminium capacity in China has so far been impacted by power curbs, while roughly 67% of China’s total steel capacity across 11 provinces have announced some output controls for the second half of 2021.

It stated that 35% of China’s cement production was affected and 30%-40% major petrochemical production capacities were also affected.

China will produce approximately 1.5 million tonnes more aluminium this year than was planned, according to Colin Hamilton of BMO Capital Markets. Steel sales are likely to rise even higher.

Steelmaking materials, such as ferrosilicon or silicomanganese have seen the largest commodity price rises in this year’s calendar. They have increased by 87% to 58% respectively due to power restrictions.

China’s coal and metal prices surge amid power crunch, forced output curtailments https://fingfx.thomsonreuters.com/gfx/ce/akvezqrowpr/ChinaCoalMetalPrices.png

“Power controls are the talk of the marketplace,” said Clare Hanna, senior steel analyst at CRU, who estimates China’s silicomanganese production plunged 40% in July from the previous month as curbs that began in Inner Mongolia spread to Guangxi and elsewhere.

    Hanna explained that they expect the power supply to be very tight during winter.

Also, in Inner Mongolia, the power supply was cut off for aluminium before it spread to Yunnan (China’s southwest). The province is also an important tin- and zinc hub. But severe drought in May/June this year has strained the grid.

China seasonal metals output https://fingfx.thomsonreuters.com/gfx/ce/byvrjldqyve/ChinaSeasonalMetalsOutput.png

Chinese aluminium companies had been looking to tap into the trend towards low-carbon aluminium, said Paul Adkins, managing director of consultancy AZ China.

However, he stated that “there is just not enough renewable energy” to supply more than 20%.

COSTLY CUTS

Smelters also face a costly dash to secure enough coal for their captive power plants, with Chinese thermal coal futures near record highs above 1,300 yuan ($200) a tonne.

China thermal coal prices https://fingfx.thomsonreuters.com/gfx/ce/gdpzyqjlwvw/ChinaThermalCoalSep272021.png

Dozens of manufacturers ranging from dye makers to soybean crushing plants have also had to curtail or stop operations at least through the end of the upcoming National Day holiday from Oct. 1, although some market watchers expect the curbs to last longer.

“China’s power shortages are a reflection of the global strain in energy markets and won’t be resolved overnight,” Capital Economics said in a note to clients on Wednesday.

Power rationing will limit industrial activity until domestic demand is low enough to restore equilibrium in the electricity market.

An array of end-users are currently facing increasing prices and risk from extended metal supply disruptions.

Morgan Stanley said that “a key concern for the automotive supply chain is cost-push inflation, tightening upstream supply which could affect downstream production/profits.”

China seasonal output of industrial goods https://fingfx.thomsonreuters.com/gfx/ce/lbvgngdlkpq/ChinaseasonalOutputIndustrialgoods.png

($1 = 6.4662 yuan)