News Focus: China power shortage hits petrochemicals

21 May 2011 10:25  [Source: ICB]

China's power shortage is hitting the petrochemical sector hard

Power constraints in the world's economic growth engine pose huge challenges for the petrochemical sector

China is grappling with its worst power shortage in years, particularly in the country's main industrial bases in the east and south. This will lead to reduced economic output in the second quarter, according to industry sources.

China typically faces a power crunch from June to September, when demand is at its peak. But this year, the shortage came about in March, and it is expected to worsen, said a source from the State Grid Corp. of China, which builds and operates China's power networks.

The China Electricity Council, a power industry federation, said in late April that a power generation shortfall of about 30GWh will be seen this summer and that the demand gap will likely expand.

"This is about twice the shortage that Japan is facing after the March quake. And this is in addition to the gasoline/diesel shortage," said Gordon Kwan, head of energy research at South Korea-based investment bank Mirae Asset Securities.

A fuel shortage has resulted from heavy demand for diesel since March, as the manufacturing season approaches its peak. State-owned oil firms are trying to address the lack of fuel by cutting production of chemicals and curbing exports. The power restrictions in place in select regions of China will only aggravate the fuel shortage, analysts said.

INDUSTRIAL OUTPUT CURBED
"China's industrial output will be hit in this round [of] power ­shortages," said Dong Xian'an, chief economist at China-based investment research firm Peking First Advisory. "According to our forecast, China's industrial output in the second quarter will fall by one percentage point, to 14% from our earlier expectation of 15%, while GDP will be dragged down by 0.5 percentage points to 9.7%."

In April, China's industrial output grew at a slower pace of 13.4% year on year from March's 14.8% expansion.

More than 10 provinces, including Zhejiang, Hunan, Anhui, Jiangsu, Hubei, Sichuan and Henan, are facing a serious lack of electricity supply, according to media reports.

The government has been rationing power in some regions, prioritizing its use for households rather than for industries.

OPERATING RATES CUT
In Hunan, the hardest-hit province, daily demand is outstripping supply by 80m kWh, which is one-third of the province's requirement, the Shanghai Securities Journal reported. Small and medium-sized petrochemical producers in the affected regions have had to cut operating rates or shut down operations because of the power restrictions. "Downstream plastic plants in Ningbo were ordered to shut down for one day a week from March," a Chinese polypropylene (PP) trader said.

In the eastern Zhejiang province, some polyvinyl chloride (PVC) facilities and their downstream pipeline plants reduced operating rates by 10-20% from March, sources said.

Some polyester plants in this province have bought diesel ­generators, hoping to keep up normal production at plants in anticipation of the power rationing. "It looks like the power shortage this year will be [of] unprecedented intensity," an industry source said.

China's energy giants, China National Petroleum Corp. (CNPC) and Sinopec, are boosting domestic supply of diesel amid the power shortage.

"High coal prices and the capped electricity price have also reinforced fears that the regional power rationing could further [affect] many manufacturing hubs (e.g. Guangdong, Zhejiang and Jiangsu) amidst the government's monetary tightening," Kwan said.

Energy companies are reluctant to increase supply by building new coal-fired power plants because of surging prices for this fossil fuel. They are bound to ­continue incurring heavy losses since electricity prices are being controlled by the government, analysts said.

China's top five power producers incurred a loss of more than yuan (CNY) 60bn ($9.2bn) between 2008 and 2010, the State Electricity Regulatory Commission stated in a report in early May.

On April 10, China's National Development and Reform Commission raised on-grid prices in 16 provinces, including Shaanxi, Shandong and Henan, by an average of CNY0.012/kWh ($0.002/kWh) to encourage power producers to increase supply.

However, "Such a small hike could not offset any losses of power producers," said the source from the State Grid.

By: Judith Wang
+65 6780 4359

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