What does China's power-shift mean for metal producers, and other energy hogs?
Beijing's liberalization of China'' power markets, which allows producers to charge market prices to commercial and industrial customers, has significant consequences for energy-intensive industries, who previously were able to lock in fixed power costs.
What the policy change entails, which industries will be most affected, and what it means for China's economy is described below.
What's the latest China power policy change?
China said on Tuesday that it will allow coal-fired power plants to charge commercial and industrial customers market-driven electricity prices from Oct. 15, as a rising energy crisis prompted authorities to adopt their boldest power sector reform in decades.
Together, these measures should provide some relief to power generators who have been forced to curb production this year due to soaring operating losses due in part to coal-fired power prices fluctuating by up to 20% from base levels.
According to the state planner, some high energy consumers may face price increases that exceed the 20% increase in order to encourage greater energy use efficiency.
More than half of all commercial and industrial power users in China had some sort of fixed-price agreement with grid operators prior to the switch to 100% market pricing for industry, which marks a significant shift in the country's power landscape.
Residential and agricultural users, as well as public welfare initiatives, will continue to be charged fixed fees.
Warum has China made the shift?
Some 54% of China's power comes from thermal coal, and utilities have struggled to keep pace with post-pandemic demand for electricity this year as tighter safety checks at domestic coal mines restricted supplies as demand from industry and manufacturers increased.
Coal prices in China have surged dramatically, rising nearly 200 percent from a year ago, making it uneconomic for most power plants to produce electricity in recent months. read more
This cutback in coal-fired power in turn triggered power shortages in several parts of China, including major industrial centers on the east and south coasts, where much of the country's huge manufacturing industry is based. read more
Which industries have been hit by power restrictions?
During the recent power crisis, several industries, from chemical plants and cement producers to fertilizer makers and even shopping malls, have faced restrictions, putting service to households above business.
As generators pass on some rising costs to consumers and increase power supplies, power-hungry industries such as steel, aluminium, cement, and chemical producers are expected to face higher and more volatile power costs as past fixed-cost arrangements are replaced by market-based pricing.
How will the output of key metals be affected by this?
Analysts claim that China's world-leading steel industry may be forced to reduce output from electric arc furnaces (EAF), which account for approximately 15% of China' total steelmaking capacity.
Electric furnaces run on electricity and emit less emissions than traditional blast furnace combustion, but have a high power consumption.
"The general story is that steelmaking costs will rise, primarily for EAF. According to Li Wang, a senior steel analyst at consulting firm CRU, this could amount to about 4.5% of current rebar prices, which are currently at (5,860 yuan per tonne).
China is also limiting traditional steel production until mid-March next year to reduce smog, which may further dampen steel prices.
According to CRU analyst Ross Strachan, China is also the world's top producer of aluminium, but power shortages for the past several months have forced the production of 2.9 million tonnes of China'' incredibly energy-intensive aluminiun capacity to be cut.
That's already helped aluminium prices in China rise 50% this year, and any continued power-fuelled supply restraints should help the market.
"Aluminium prices are already at record highs, and these shifts on the primary input cost will only increase those high prices," said Paul Adkins, managing director of China-based aluminium consultancy AZ China.
"The downstream industry is already suffering from the combined effects of power shortages and high electricity prices, and this will only make matters worse."
What effect will higher costs have on the economy?
China's factory gate prices hit 13-year highs in August due to higher power and commodity prices, and may rise further as higher energy costs are passed on by utilities. read more
According to Ting Lu, Chief China Economist at Nomura in Hong Kong, "we estimate the new pricing scheme could raise power prices for non-agricultural businesses by about 10%, adding 0.4 percentage points to China's GDP deflator (the ratio of nominal GDP to real GDP) when rising power costs pass through to the rest of the economy."