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China orders energy firms to secure winter fuel supplies at all costs

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China has ordered state-owned energy companies “to do whatever it takes” to secure fuel supplies, putting further pressure on the price of gas paid by already struggling UK energy suppliers.

The vice-premier, Han Zheng, told China’s energy companies to make sure there is enough fuel to keep the country running as Beijing battles to manage a power crisis that threatens to hit growth in the world’s second-biggest economy.

Britain’s energy suppliers have come under severe strain in recent months after a spike in gas prices. Several have gone bust after they made promises to customers of maintaining fixed prices that they were unable to honour.

Ministers have faced criticism from business groups for a lack of planning that has left the UK acutely vulnerable to price swings on international energy markets.

A rise in global gas prices, coupled with the soaring cost of diesel and petrol at the pumps after a driver shortage, is expected to help push UK inflation above 4% over the coming months, hitting the living standards of millions of people.

China has been hit by widespread power cuts that have closed or partly shut factories, hitting production and global supply chains.

China’s factory activity in shock slowdown as energy crisis hits homeRead more

Beijing is seeking to secure supplies of gas and coal for its power stations, which still provide more than 50% of the country’s electricity generation.

The crisis has been caused by a confluence of factors, including rising overseas demand as economies reopen, record coal prices, state electricity price controls and tough emissions targets. More than a dozen provinces and regions have been forced to impose curbs on energy usage in recent months.

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Gazprom, the Russian state-owned gas producer, is understood to be preparing further price increases, though it mainly supplies continental European countries.

US liquified natural gas (LNG) suppliers have increased production in recent weeks, but not by enough to cope with rising demand as winter approaches in the northern hemisphere.

Britain still has large gas resources in the North Sea, but has become dependent since it decommissioned most storage facilities on a steady stream of ships from the Middle East carrying LNG.

Prices have risen more than fivefold over the past 12 months in Europe and Asia, in what Toby Whittington, lead energy economist at Oxford economics, described as “the perfect storm in global natural gas markets”.

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Longstanding supply issues, depleted inventories, surging demand, and the coming northern hemisphere winter mean that prices are likely to remain elevated until spring 2022,” he said.

Beijing has reduced its reliance on coal since 2017, bringing down the proportion used to generate electricity from more than 80% to just over 50%, but Whittington said China was likely to increase production again, threatening carbon emission targets.

“Coal supply will improve as Beijing has restarted several mines, but reserves will take time to ramp up, and consequently, the market will remain tight this winter,” he said.

Han, who supervises the nation’s energy sector and industrial production, made the demand for energy companies to secure supplies at an emergency meeting this week with officials from Beijing’s state-owned assets regulator and economic planning agency, the report said.

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Data published on Thursday showed China’s factory activity contracted unexpectedly in September and for the first time since the Covid-19 pandemic took a grip in February 2020. The weaker than expected manufacturing survey reflected the curbs on electricity use and rising prices for commodities and parts.

Han’s statement raised concerns that already high commodity prices could soar even higher. The order “to me implies that we are in no way on the verge of a cool-off. Rather it looks like it is going to get even more crazy,” said Bjarne Schieldrop, an analyst at SEB.

The power crunch prompted the banks Nomura and Goldman Sachs to this week cut their growth forecasts for China, as they expect more disruptions to supply chains and production.

Factories that supply multinationals such as Apple and carmaker Tesla are among those affected and told to halt production.

A note from Capital Economics on Friday said: “Power shortages seem unlikely to ease any time soon.”

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One factory worker in the industrial hub of Dongguan told AFP this week they were working overnight after being forced to cease daytime production.

“Of course we’re unhappy…… but we’re going along with the hours that the power curbs take place,” he said.

Chinese coal futures on Thursday soared to a record high as the country grappled with shortages in the run-up to a national holiday, with many factories shut for the week-long break.