China was recently hit by one of the worst power shortages in a decade. At press time, around 20 provinces/municipalities are undergoing local power restrictions of varying degrees. Currently, the temporary power shutdowns that have occurred in most provinces since September are only targeting industrial users. For example, Guangdong (one of the largest papermaking provinces) implemented a reduced supply schedule in September for its industrial users, according to Guangdong Power Grid.
The root cause of this energy crisis is complex. Key factors include the coal supply gap, which was caused by the closure of mines and reduced imports from Australia; and skyrocketing coal prices, which can’t be passed on to electricity customers since China has rigid electricity price guidelines for its state-owned grids. In the first half of 2021, the “red warning light” of energy consumption lit up in many provinces as the targets for reducing energy intensity (total energy consumption per unit of GDP) and total energy consumption were not met.
This is crucial because coal is the primary source of fuel in China and, within the paper industry specifically, 94 percent of power boilers are fueled by coal, followed by oil and gas (see Fig. 1). Coal prices have doubled compared with prices in 2019, significantly increasing the manufacturing cost for most paper mills (see Fig. 2).
Immediately following the power reduction policy, the China National Development and Reform Commission announced a notice implementing new on-grid tariffs. This notice allows the market trading price of coal-fired power in sales contracts signed between gencos and users or distributers to be raised or lowered by up to 20 percent of the benchmark on-grid tariff—from the current 10 percent to 15 percent, respectively. However, high energy consumption industries are not limited by the 20 percent range, as they are likely to pay a higher price when power is in short supply.
Even though the paper industry is not covered in the high energy consumption ranges, the market still expects a power price increase very soon as we experience more volatility in electricity prices. Provinces like Yunnan, Guansu, and Jiagnxi have announced that new pricing plans will take effect in 2022.
This situation has negatively impacted production for many industries, especially those with high energy consumption rates and low energy efficiency such as producers of steel, cement, electrolytic aluminum, and chemicals, which are the most strictly monitored industries. The paper industry only consumed around 1 percent of China’s total electricity during the first half of 2021, so it is not considered a high-priority industry during the power reduction. However, since the rollout of massive outages in different provinces, all manufacturers in specific areas have been affected, including paper mills and downstream printing houses, converters, corrugators, etc., depending on location.
At the time of this writing, the estimated production loss announced by the leading public producers is around 700,000 metric tons from September to October 2021 (Table 1). Compared with production during the same period in 2020, so far 2021 represents a loss of 5.1 percent of production due to the power crisis. However, based on Fisher’s research, there are many other non-public producers also being impacted, and it is reasonable to estimate that the entire Chinese paper industry will experience production losses of roughly 5-10 percent because of the energy crisis in 2021.
Not only is paper-making capacity affected during this time, but the downstream converting industry has also been hit—especially in the southern and eastern regions, which represent most converting capacities in China. It is difficult to estimate how much production loss there has been because the operating rate of downstream converting is always quite low, with lots of excess capacity that could later help make up production gaps if the electrical supply returns to normal. That said, the outages have slowed the paper supply chain and impacted downstream industries; lost production in the converting sector has already resulted in price increases of 3-5 percent, and 50 to 100 RMB (about US$8-15) per metric ton in the containerboard sector.
Energy cost accounts for around 10 percent of total manufacturing cost for China’s containerboard producers, which ranged from US$35-130 per ton in 3Q 2020 based on fuel ratio and energy consumption within different companies. In 3Q 2021, energy costs jumped by $US 25-30 per ton on average while raw material costs also surged, which significantly increased total manufacturing costs, as seen in Fig. 3.
At the time of this writing, Fisher experts predicted that the energy crisis could last into late 4Q 2021 or beyond if the situation continues. It is reasonable to assume that in the future, Beijing’s dual-control system on energy consumption will carry more weight than it does today in the context of China’s pledge to reduce carbon emissions. Smaller paper mills with high energy consumption and energy intensity might be forced out of the market quicker than expected. For example, during outages, small mills would face more serious cash-flow problems since they are not exposed to the same financing channels as big public companies.
To secure a sufficient power supply, some paper mills are considering installing photovoltaic power generation equipment. On October 24, China’s CPC Central Committee and the State Council issued an opinion that, by 2030, the proportion of non-fossil energy consumption will reach about 25 percent, and the total installed capacity of wind power and solar power generation will reach more than 1.2 billion KW.
This raises an important question for both the near- and long-term paper industry in China: If the energy crisis intensifies as the government continues to pursue low-carbon economic policies, will this dynamic accelerate consolidation within the industry? If so, who is most advantaged—and who is most disadvantaged—in the current market, and who will be in the best position to take advantage of opportunities in the coming decades?