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Page added on May 25, 2011

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Are China’s factories running out of power?

Are China’s factories running out of power? thumbnail

Why has Global Sticks, a manufacturer of wooden ice cream sticks, moving from Dalian, China, to Thunder Bay, Ontario?

It’s the kind of low margin manufacturing that is never supposed to come back after it leaves North America for cheaper labour abroad.

But wage costs are no longer everything they were cracked up to be. In today’s world of soaring energy costs, power rationing and export taxes on key commodities such as wood, wage gaps are less important. When the power goes off, it suddenly doesn’t matter if your labor is expensive. Factories don’t run on sweat alone.

As the price of the bunker fuel that transports those ice creams sticks to customers around the world tracks soaring world oil prices, the distance between your factory in Dalian and North American kids lining up at their neighborhood ice cream store, becomes more expensive every day.

When the price and availability of energy start to dominate your business plan, you say goodbye to your inexpensive Chinese labor force, and pack up and leave.

Of course, not everybody can leave. Those that stay are bracing for what China’s Electricity Association is warning will be the nation’s largest power shortage in years this summer. As many as 20 provinces and territories have already been put on power rationing, including the country’s industrial heartland.

The provincial government in Zhejiang, a manufacturing hub close to Shanghai, has notified 44 major industries about limits on their power consumption. Companies that exceed these limits face prohibitive power tariffs that would threaten much of the region’s low margin manufacturing. The story isn’t any different in Guangdong, south China’s manufacturing hub. Its industries must also cope with limits on power usage.

It won’t be long before all that power rationing starts to curb economic growth, particularly in the power-intensive centres of China’s industrial production such as aluminum and steel.

The failure of regulated power prices to keep pace with soaring world coal prices lies at the heart of the China’s power crisis (as well as in similar power crisis sweeping neighboring India and Pakistan.) Chinese power prices have gone up as little as 1/10 of the rise in world oil prices.

Not only is this practice economically untenable for coal fired power generators, who supply over three quarters of China’s power but it encourages unsustainable rates of coal consumption. Last year, the power hungry Chinese economy burnt a staggering 3.2 billion tons of coal.

Beijing has already warned the country may soon hit peak coal production, forcing greater reliance on ever-more costly imports. In the meantime, China has banned the export of diesel fuel, which may soon be needed for power generation.

As China’s power crisis worsens this summer look for more firms such as Global Sticks to relocate production and come back home.

Globe and Mail

2 Comments on "Are China’s factories running out of power?"

  1. DC on Thu, 26th May 2011 4:46 am 

    Its all about subsidies. Everywhere you look some industry is being propped up by a bzyantine network of government props.

    Indust-Ag, Nuclear Power, TBTF Banks Oil,Coal, car-dependency, Few would survive if the market had to bear the true costs of these dangerous industries. But governments everywhere picks up a large part of the tab, and we all suffer for it. Massive debts, pollution, bad food, it never ends. China wont pass on the cost of energy to industry and end-users. Did that help prevent these ration plans, nope. If anything, subsidies ensure power shortages down the road by encouraging wasteful power patterns. Energy is expensive everywhere, and dirty energy has many price tags, some hidden, some not. Like the air-quality in China.

    If industries come back home, government,ie taxpayers, will probably be picking up the tab for that too. They bailed you for greener pastures, which costs us in lost jobs and taxes, when those pastures turn out to all be covered in coal-soot, they come running back ‘home’, hat in hand for ‘support’.
    A lose\lose if there ever was one.


  2. Kenz300 on Thu, 26th May 2011 9:08 pm 

    Let’s bring those jobs closer to home. Shipping fruit, vegetables and low cost items around the world may not make any sense in a world of high energy prices.
    We need to move to a more locally sustained economy with local jobs and local production of goods and services.
    Is the era of sustainability coming?

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