China’s worsening energy situation has impacted not only its commercial and industrial segments and forced factories to cut production but it is also threatening to impact the growth of the country's vast economy and place increased strain on global supply chains. With Chinese players grappling with the energy issues, Indian Ratings and Research (Ind-Ra) opines that companies in India, particularly those operating in the chemicals and steel sectors, would benefit in the domestic as well as international markets.
Globally, the increased coal prices, high logistics costs and logistical challenges have led to a rise in raw materials costs across sectors. However, the order books of Indian manufacturers would witness growth on account of lower supply by Chinese counterparts. Moreover, the increase in raw material prices has led to a rise in the prices of the exported goods, and the resultant adverse impact on the terms of trade (export price to the input price) is one of the reasons for dollar strengthening against the rupee. The weakened rupee coupled with China’s production crunch will give a boost to Indian exports. However, the increased coal prices have pushed up manufacturing costs globally, and the agency believes producers across sectors will pass the increased costs to the end-user industries, thereby leading to inflationary pressures, which could eventually trickle into the Indian economy as well.
Impact on Indian Steel Sector: The agency had opined in its Steel Outlook that the China is likely to cut its steel output in 2HFY21 after having recorded crude steel production of 560 million tonnes in 1HFY21 ( up 10.5% yoy), to reduce industrial carbon emissions and improve air quality. The fall in China’s steel output and India’s imports of intermediate steel products would benefit Indian steel players by way of lower import risks and greater export opportunities. The changes in China’s energy policy related to the price band for power could cause a key structural shift within the sector, thereby supporting steel prices in the international as well as domestic markets. Furthermore, lower Chinese exports, the prevailing trade tensions between China and the western world, the Biden administration’s proposal for a USD2 trillion infrastructure bill, and healthy steel demand from the EU would collectively prove beneficial for Indian steel players. However, while the overall steel prices will rise due to curbs on Chinese production and/or high input costs, the benefits to Indian players will be limited on account of high logistics costs and challenges such as container shortages.
Dynamics of China’s Electricity Sector: China has been walking a tightrope on energy generation as it tries to increase its reliance on renewable power sources and reduce its dependence on conventional power generation. In 2019, China’s electricity consumption stood at a high 6,880 terawatt hours, while India’s consumption stood at 1,309 terawatt hours. About 70% of China’s energy demand is met through thermal power production, close to 17% by hydro and rest by other sources of renewable power generation. With China’s aim of becoming carbon neutral by 2060 and high energy consumption, the country needs to look for alternatives to thermal power generation in the long run.
The rebound in global economic activity with lifting of COVID-19-led restrictions has exposed the shortages of fuels used for power generation in China and other countries, leaving industries and governments scrambling. The shortage is mainly attributed to irregular rainfall, which led to flooding in the mines and strict mining safety norms in China. As coal prices have soared in the international markets, Chinese producers have been looking for alternative energy supplies such as oil and diesel, leading to an increase in oil prices in the global markets. Chinese commercial and industrial consumers have been allowed to source coal from the market amid the energy crisis. At the same time, the prices have been allowed to fluctuate up to 20%, in order to give some relief to power generators.
The energy prices have particularly soared for sectors that
are highly dependent on power, such as cement, steel, textiles, as the prices
for the industries can surpass the 20% fixed band. The agency believes the
increased input cost in these sectors will eventually be passed on to commercial
and industrial customers, leading to inflationary pressures in the domestic and
Additional information is available at www.indiaratings.co.in.
Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.