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Impact of Power Cuts on the Chinese Food Sector

China
Market Situation
Oct 13, 2021
Written by
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Mzingaye Ndubiwa
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In recent weeks, power cuts in 16 Chinese provinces have disrupted production across industrial sectors. The impact is rippling through the supply chain, both in China and around the world. The pressure on processing and correlated sectors, including packaging and logistics, is rising. Several oilseed crushing plants temporarily ceased operations. Corn is currently in season, and the capacity utilization of corn mills has also dropped due to the power cuts.

Factors causing the power shock

The power supply crisis was caused by several factors. The main factor was the reduction of the country's coal supply due to reduced imports and closures to coal mines in recent years. Other factors include increased power demand due to the recovery of Chinese manufacturing and exports, increased electricity usage to weather, and Beijing's strict emissions reduction targets. According to Goldman Sachs, a leading global financial institution, 44% of China's industrial activity has been affected by power cuts. As a result, China, the world's second-largest economy, is set to expand by 7.8% this year, down from the previous estimate of 8.2%.


(Source: BBC)

Impact on the Food industry

The impact of the power crisis on the food industry is varied as some sectors are coping better than others. The raw production of staples, such as grains, meats, and vegetables, has not been affected much. However, the processing, packaging, and logistics sectors, which are heavily dependent on electricity, have been the most affected. Power cuts have already led to a reduction in food processing. The rising input costs, such as cold storage, logistics, and packaging, along with the increasing difficulty of operational planning, will put more pressure on processors. Operations have temporarily ceased in several oilseed crushing plants, potentially leading to a decline in soybean meal supplies, following low import volumes, due to negative crushing margins in previous months. These factors have already caused a recent increase in prices. Corn is currently in season, and the capacity utilization of corn mills has dropped due to the power cuts. Low drying tower operations also pose a challenge to traders and processors in new crop procurement and storage.

The production of farm inputs such as fertilizers and agrochemicals has been hampered by the current coal shortage and electricity cuts. However, the Chinese government has emphasized securing power supplies for fertilizer production. The government plans to limit exports of nitrogen and phosphate fertilizers, potentially increasing prices in the global market. Persistent power cuts could severely impact the Chinese dairy sector. The dairy processing sector is dependent on electricity, and the power cuts could limit processing capacity, packaging availability, storage, and distribution channels. The power crisis could also disrupt the functionality of milking machines, milk storage facilities, water pumps, and manure pumps.



Consumer Demand to decrease

The power shortage could result in an increase in unemployment and a decrease in income, impacting consumer confidence and buying behavior. Before the power cuts, the consumer market was undergoing weakness. According to China’s National Statistics, the country’s foodservice sector decreased by 4.5% year on year in August 2021, a stark contrast to July’s 14.3% sales growth. The Consumer Price Index for food (CPI) decreased month on month to -4.1% year-on-year in August. This was different from the Producer Price Index (PPI) for means of production, increasing month on month to 12.7% in August. All the above factors highlight limited consumer demand, a key reason for the stagnant prices of animal protein products, including poultry, dairy, and pork.



Measures to control the power cuts

According to the National Development and Reform Commission (NDRC), China's economic planner, several measures have been outlined to mitigate the electricity problem. The measures include the Chinese government collaborating with generating firms to increase output, ensuring adequate coal supplies, and promoting the rational usage of electricity. According to the China Electricity Council, coal-fired power companies are expanding their procurement channels to ensure winter heat and electricity supplies.

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