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 Chemical Sector: The Indian chemical sector, which had been sourcing raw material from China, had already been grappling with higher import costs of intermediates/key raw materials due to the high cost of logistics. With the increased cost of energy in China, the overall cost of these raw materials will increase for Chinese companies. This would lead to a double whammy for Indian manufacturers, as they would have to source it at high prices either from China or from Indian counterparts. The prices of organic chemicals in India may rise over the near term, leading to short-term inflationary pressure in the industry. However, the agency believes China’s energy crisis and resultant likelihood of shutting down of Chinese companies or intermittent curbs on manufacturing would prove advantageous to Indian companies, as the demand for their products is bound to rise in both domestic and international markets. Furthermore, the agency opines that the domestic end-user industries for chemicals, such as dyes and pigments, pharmaceuticals, agrochemicals and others, will pass on the overall increase in costs to consumers, thereby maintaining their profitability.


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 global markets.

 

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Analyst Names

  • Jyoti Chauhan

    Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40356119

    Prateek Goyal

    Associate Director
    0124 6687294

    Siddharth Rego

    Analyst
    +91 22 40356115

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121