Why does China limit electricity and control energy? What is the impact on the chemical industry?

Recently, the “red light” of dual energy consumption control has been lit in many places in China. In less than four months before the year-end “big test”, the areas “named” by the Ministry of Industry and Information Technology have taken measures to improve energy consumption as soon as possible. Major chemical provinces such as Jiangsu, Guangdong, and Zhejiang have even hit harder, taking measures such as suspension of production and power outages on thousands of companies, making local companies caught off guard. Why is there a power cut and a production stop? What impact will it bring to the industry?

Power cuts in multiple provinces to limit production

Recently, Yunnan, Jiangsu, Qinghai, Ningxia, Guangxi, Guangdong, Sichuan, Henan, Chongqing, Inner Mongolia, Henan and other places have begun to implement measures to limit electricity consumption and control energy consumption for dual energy consumption control targets. The curtailment of electricity and production has gradually spread from the central and western regions to the Yangtze River Delta and the Pearl River Delta in the east.
Sichuan: Suspend non-essential production, lighting, and office loads.

Henan: Some processing enterprises have limited power for more than three weeks.

Chongqing: Some factories halted power production in early August.

Inner Mongolia: Strictly control the time limit of electricity for enterprises, and the price of electricity should not exceed 10%.
Qinghai: A warning for power rationing was issued, and the scope of power rationing continued to expand.
Ningxia: High-energy-consuming enterprises stop production for one month.

Shaanxi’s power curtailment until the end of the year: Shaanxi Yulin City Development and Reform Commission issued a dual energy consumption control target, requiring that from September to December, newly built “two highs” projects should not be put into production, and new “two highs” projects that have already been put into production this year will have a production cap of the previous month. The other “two highs” enterprises implemented measures such as reducing the operating load of their production lines and shutting down submerged arc furnaces to limit production to ensure a 50% reduction in production in September.

Yunnan: Two rounds of power rationing have been carried out, and the follow-up will continue to increase. The average monthly output of industrial silicon enterprises from September to December is not higher than 10% of the output in August (ie a 90% reduction in output); the average monthly output of the yellow phosphorus production line from September to December must not exceed 10% of the output in August 2021 (ie a reduction 90% production).

Guangxi: Guangxi has introduced new dual control measures, requiring that starting from September, restrict production of high-energy-consuming enterprises such as electrolytic aluminum, alumina, steel, and cement, and give clear production reduction standards.

Shandong energy consumption dual control, power shortage 9 hours a day: According to the early warning announcement of Rizhao Power Supply Company, the coal supply in Shandong province is insufficient, and Rizhao saves 100,000-200,000 kilowatts of electricity every day. The main time period is 15:00-24 : 00, the shortcomings lasted until September, and the electricity curtailment measures started.

Jiangsu: At the beginning of September, the Jiangsu Provincial Department of Industry and Information Technology instructed to carry out special energy-saving supervision of enterprises with annual comprehensive energy consumption of more than 50,000 tons of standard coal, covering 323 enterprises with annual comprehensive energy consumption of more than 50,000 tons and 29 "two highs" in the province. The special energy-saving supervision action of the project company is in full swing. The printing and dyeing agglomeration zone issued a production suspension notice, and more than 1,000 enterprises "opened two and stopped two".

Zhejiang: Implement power reduction for key energy-using enterprises within its jurisdiction, and suspend production of key energy-using enterprises. Production is expected to be suspended until September 30.

Anhui Electric Power has a gap of 2.5 million kilowatts, and the province’s orderly power consumption: Anhui Provincial Energy Supply Leading Group Office News: There will be a gap in power supply and demand in the province. On September 22, the province’s maximum power load is expected to be 36 million kilowatts. There is a gap of about 2.5 million yuan in the balance of power supply and demand, and the supply and demand situation is very tight. Decided to start the province's orderly electricity use plan from September 22.

Guangdong: Guangdong Power Grid stated that it will implement the “on-two-stop-five” power plan from September 16th, and implement peak shifts on Sundays, Mondays, Tuesdays, Wednesdays and Thursdays. On peak-shift days, only the security power load will be reserved. The security load is below 15% of the total load!

A number of companies announced that they will stop production and reduce production

Affected by the dual control policy, various companies have issued announcements on production suspension and production reduction.

On September 24, Limin shares announced that Limin Chemical, a wholly-owned subsidiary, will temporarily suspend production in order to comply with the regional "dual control of energy consumption" requirements.

In the afternoon of September 23, Jinji shares announced that, recently, the Administrative Committee of Taixing Economic Development Zone in Jiangsu Province received the "dual energy consumption control" requirements of higher-level government departments and recommended that relevant enterprises in the park implement "temporary suspension of production" and "temporary production restriction", etc. measure. The company actively cooperated and implemented temporary production restrictions on the wholly-owned subsidiaries Jinyun Dyestuff and Jinhui Chemical, which are located in the park, from September 22.

That night, Nanjing Chemical Fiber issued an announcement stating that due to the tight power supply in Jiangsu Province, the wholly-owned subsidiary Jiangsu Jinling Cellulose Fiber Co., Ltd. has temporarily suspended production on September 22 and is expected to resume production in early October.

On September 22, Yingfeng shares announced that, in order to alleviate the coal inventory situation and ensure the safe and orderly production of heating and heating enterprises, the company will temporarily suspend production on September 22-23.
In addition, 10 listed companies including Chenhua, Hongbaoli, West Gate, Tianyuan, and *ST Chengxing announced the suspension and restriction of production of their subsidiaries due to the "dual control of energy consumption".

Reasons for power outages, production restrictions and shutdowns

1. Lack of coal and electricity

The power cut is essentially a shortage of coal and electricity. National coal production has hardly increased compared to 2019, while power generation is rising. Beigang stocks and coal stocks in power plants have dropped significantly. The reasons for the lack of coal are as follows:

(1) In the previous coal supply-side reform, a number of small coal mines and open-pit coal mines with safety issues were closed. There were no large-scale coal mines. Under the background of improving coal demand this year, coal supply was tight;

(2) The export situation this year is very good. The power consumption of light industrial enterprises and low-end manufacturing industries has increased. Power plants are large coal consumers. The high coal prices have increased the production costs of power plants, and the power of power plants to increase production is insufficient;

(3) This year, coal imports have changed from Australia to other countries. The price of imported coal has risen sharply, and the price of coal in the world has also remained high.

2. Why not expand the supply of coal and curtail electricity instead?

In fact, the total amount of power generation in 2021 is not low. In the first half of the year, my country’s total power generation was 3871.7 billion kilowatt-hours, twice that of the United States. At the same time, my country's foreign trade has grown extremely fast this year.

According to statistics released by the General Administration of Customs recently, in August, the total value of my country's foreign trade imports and exports was 3.43 trillion yuan, an increase of 18.9% year-on-year. It achieved positive year-on-year growth for 15 consecutive months, further showing a steady growth. In the first eight months, the total value of my country's foreign trade imports and exports was 24.78 trillion yuan, an increase of 23.7% year-on-year and an increase of 22.8% year-on-year.

This is due to the fact that foreign countries are affected by the epidemic and unable to produce normally. my country’s production tasks have increased as a result. It can be said that my country has almost single-handedly guaranteed the global supply of goods throughout 2020 and even the first half of 2021. Therefore, my country’s foreign trade has not been affected. The impact of the epidemic is actually much better than the 2019 import and export data.

With the increase in exports, the demand for raw materials will increase, and the demand for bulk commodity imports has soared. The sharp increase in steel prices since the end of 2020 is caused by the increase in the prices of iron ore and iron fine powder. One of the main means of production in the manufacturing industry is raw materials and the other is electricity. As production tasks increase, my country's electricity demand continues to increase.

When it comes to backing up, why not expand the supply of coal, but curtail electricity instead?

On the one hand, the demand for power generation is large, but the cost of power generation is also increasing.

Since the beginning of this year, domestic coal supply and demand have continued to be tight, thermal coal prices have not been weak in the off-season, and coal prices have risen sharply and remain high. The price of coal is so high that it is difficult to fall, and the production and sales costs of coal-fired power companies are seriously inverted, and the operating pressure is prominent. According to data from the China Electricity Council, the unit price of standard coal for large-scale power generation groups rose by 50.5% year-on-year, while electricity prices remained basically unchanged. The loss of coal-fired power companies was significantly enlarged, and the coal-fired power sector suffered a loss as a whole.

According to calculations, for every kilowatt-hour of electricity generated by the power plant, the loss will exceed 0.1 yuan, and the loss of 100 million kilowatt-hours will cause a loss of 10 million. For those large power generation companies, the loss will exceed 100 million yuan a month. On the one hand, the price of coal remains high, and on the other hand, the floating price of electricity is under control. It is difficult for power plants to balance the cost by raising the on-grid electricity price. Therefore, some power plants would rather generate less or even no electricity.

In addition, the high demand brought by incremental orders for overseas epidemics is unsustainable. The increased domestic production capacity due to the settlement of incremental orders will become the last straw to crush a large number of small and medium-sized enterprises in the future. Only by restricting production capacity from the source and preventing some downstream companies from blindly expanding can they truly protect the downstream when the order crisis comes in the future.

On the other hand, it is urgent to realize the requirements of completing the industrial transformation.

China needs to eliminate backward production capacity and supply-side reforms. In addition to achieving the dual-carbon goal and demanding environmental protection, there is also an important goal-to achieve industrial transformation, which is to shift from traditional energy production to emerging energy-saving production. In recent years, my country has been moving towards this goal, but since last year, due to the epidemic, the production of high-energy-consuming products in my country has increased due to high demand.

With the epidemic raging, global manufacturing has stagnated, and a large number of manufacturing orders have returned to the mainland.

However, the current problem in the manufacturing industry is that the pricing power of raw materials is controlled by international capital, which has skyrocketed all the way, but the pricing power of finished products has fallen into the internal friction of capacity expansion, competing to bargain prices.

At this moment, the only way is to limit production, through supply-side reforms, to enhance the status and bargaining power of China's manufacturing industry in the global industrial chain.

In addition, China will need high-efficiency production capacity for a long time in the future. The increase in the added value of the company’s products is the dominant trend in the future. At present, many companies in traditional fields in China are most likely to survive by lowering prices. This is for the overall competition in our country. Unfavorable force. New projects are all replaced by outdated production capacity in a certain proportion. From the perspective of technical aspects, to greatly reduce the energy consumption and carbon emissions of traditional industries requires large-scale technological innovation and device transformation. In the short term, in order to complete the goals set by my country's industrial transformation, my country cannot simply expand coal supply. Power cuts and production restrictions are the main path for traditional industries to achieve dual control indicators for energy consumption.

In addition, preventing inflation risks cannot be ignored.

The United States has overprinted a lot of dollars. These dollars will not disappear out of thin air. They have come to China. Chinese manufactured goods are sold to the United States and exchanged for U.S. dollars. But these U.S. dollars cannot be spent in China and must be exchanged for renminbi.

The central bank of China has to exchange the equivalent renminbi for the amount of dollars that Chinese companies earn from the United States. As a result, the renminbi is increasing. The flood of water in the United States has poured into China's circulation market.

In addition, international capital frantically speculates on commodities, and prices of copper, iron, grain, oil, and beans are easily driven up, thereby triggering potential inflation risks.

The overheating of money on the supply side can stimulate production, but the overheating of money on the consumer side can easily trigger price increases and inflation. Therefore, controlling energy consumption is not only a requirement of carbon neutrality, but also the country's good intentions!

3. Assessment of "dual energy consumption control"

Since the beginning of this year, in order to achieve the dual-carbon goal, the assessment of "dual energy consumption" and "two highs" management and control has been relatively strict, and the assessment results will be used as the basis for the evaluation of the work of the local leadership team.

The so-called "dual control of energy consumption" policy refers to the related policy of dual control of energy consumption intensity and total amount. "Two highs" projects are high energy-consuming and high-emission projects. According to the category of ecological environment, the scope of the "two highs" project covers six industry categories, including coal power, petrochemical, chemical, steel, non-ferrous metal smelting, and building materials.

On August 12, the "Barometer of Completion of Energy Consumption Dual Control Targets in Various Regions in the First Half of 2021" issued by the National Development and Reform Commission showed that in terms of energy consumption intensity reduction, Qinghai, Ningxia, Guangxi, Guangdong, Fujian, Xinjiang, Yunnan In the first half of the year, the energy consumption intensity of 9 provinces (regions), Shaanxi, and Jiangsu rose instead of falling, and was classified as a red first-level warning; in terms of total energy consumption control, Qinghai, Ningxia, Guangxi, Guangdong, Fujian, Yunnan, and Jiangsu 8. Eight provinces (regions) in Hubei are listed as red first-level warnings.