The global energy crunch continues, marked by surging commodity prices and building speculation around supply. This week, eyes are on China—the world’s largest exporter of goods—as the country grapples with ongoing shortages and their ripple effect across the nation’s economy and key commodities, especially metals crucial in the manufacturing sector.
The week opened with an increase in crude oil prices topping $80 per barrel for both West Texas Intermediate and Brent benchmarks. Although many discussions have been centered around surging gas prices and the potential for global power shortages, the impacts of the crunch are broad and will affect a wide variety of industries and consumers.
In response to escalating shortages in China, its government announced that it would relax coal power pricing through several means to allow power companies to accept and sell coal-fired power. The government had previously implemented tariffs and grid price ceilings on coal-generated power to stabilize the market and meet climate goals. Relaxing pricing mandates will in effect cause prices to the consumer to rise further, up to 20%, according to Bloomberg, and will certainly have an impact on energy-intensive industries such as manufacturing.
In particular, base metal production (iron, steel, copper and aluminum), already down this year, is facing uncertainty as manufacturing wavers due to energy shortages. This will affect manufacturers that rely on such metals. China’s official purchasing managers index, a key indicator of manufacturing activity, entered into contraction in September for the first time since February with a reading of 49.6, slightly below the contraction threshold of 50, according to Bloomberg.
While the overall impact on manufacturers will depend on the duration and scale of the hit to production, there are several consequences to consider. China is a major trade partner with the United States, and one of the leading sources of U.S. metal imports. A slowdown in production in China will lead to higher prices and a lower quantity of metal imports into the United States.
Globally, major exporters of metal with more stable power prices and supply—in other words, those not experiencing a power crunch—will benefit from China’s move, as metals from other countries are perfect substitutes. Countries with the capacity to do so will push production to fill China’s gap in the export market.