A post-COVID economic rebound in China has caused electricity demand to outstrip what Chinese power plants are able to supply. As a result, around two-thirds of the country is reported by state media to have engaged in some form of power rationing. One major reason for this is that there is not enough coal currently available in the country to ramp up power generation. The result for Amazon FBA Sellers is that the Chinese factories that supply products for many brands are having to limit their production volumes and raise prices.
China’s Energy Demand and Supply Balance – Lights out
Official data from China’s Electricity Council (CEC) shows that the country’s energy demand has surged in 2021 due to a post-COVID economic recovery and strong global demand (including Amazon FBA businesses) for Chinese exports. Electricity consumption was up around 14% in January – August, compared to last year, and for reference that’s the same as the entire energy consumption of multiple large US states (think Texas) being added onto the power grid.
Yet why has this demand jump surpassed what China’s energy infrastructure can supply? The simple answer is that despite major investments in renewable energy, the country is still heavily reliant on coal (CEC data shows that around two-thirds of China’s electricity was generated by coal in 2020) and there isn’t enough of it available.
China’s coal shortage is due to multiple reasons and some of the major ones include:
- A political dispute between China and Australia led to China unofficially banning imports of Australian coal, which at one-time was China’s largest source of imported coal
- China has been making major commitments to curb emissions and so has been limiting domestic coal production growth and investment in new facilities
- A global economic rebound which has increased global coal demand and created a tight market for imports
- Extreme weather issues, including flooding in some coal producing areas
China’s coal-fired power plants were also disincentivised from ramping up production as the price they can sell their energy at is regulated while the coal price is set by the market, meaning that as coal prices increased, coal power enterprises were seeing rapidly growing losses.
China’s Government Begins to Intervene – Will it be enough?
In response to the power outages, China’s government has also been reported by state media and various multiple news outlets to have begun ramping up coal market interventions in order to improve availability at power plants and bring prices under control.
These measures include:
- Ordering coal mines to produce at full capacity (even during holidays)
- Issuing approvals for new coal production facilities
- Potentially loosening import restrictions
- Curbing coal prices
Power plants have also been allowed to raise their electricity prices to end consumers more than the usual government regulations allow in order to protect their balance sheets and encourage them to ramp up their power generation more quickly.
These measures should help China to close the gap between its power demand and supply, but whether the market can get back towards an equilibrium quickly or whether it will take until next year is yet to be seen.
Additionally, weather reports show that winter has come early to parts of northern China and if a colder than average winter ensues then additional strain will be put on power plants.
Why this is important for Amazon FBA Sellers
If your Amazon FBA/E-commerce business is supplied by products from China, or even in Asia in general as we will discuss shortly, then there are some risks to consider.
1. Prices – Officials figures from China’s producer price index in September showed a year-on-year increase of 10.7%, the highest since records began. Factories are facing a situation of reduced production capacity (with power rationing meaning they sometimes have to be offline for entire days) and rising electricity costs. The result is that to protect their own profit margins they will have to pass on some of this cost to their consumers, which will potentially be you.
2. Raw material prices – Adding to the price pressure, the raw material producers that supply factories in China and in many other countries, including India and Vietnam are facing a similar situation. This means that they will also be raising their prices, which will put more pressure on the end-product factories to raise their prices further.
3. Delays – Factories' reduced production capacity means that they will have to cancel or push back orders to adjust to the new environment, which means additional stock out risks for your supply chain, before we even consider the numerous shipping delays that are being seen in the current freight markets.
What can Amazon FBA Sellers do?
So, given these risks, if you are an Amazon FBA Seller, what can you do to navigate your business through this turbulent market?
Reduce your cost uncertainty - it’s worth looking at negotiating longer-term contracts with your suppliers in China or elsewhere in Asia due to the transfer of inflation via raw material prices from China and the fact that China is not the only country facing coal supply challenges (e.g. India). This means that you might be able to lock in longer-term prices with suppliers to limit your exposure to price fluctuations. This can protect you from price rises and reduce uncertainty in your business model (but it may also mean that you can’t take advantage of price falls immediately, so such negotiations should be carried out carefully).
Invest in your sourcing and logistics (team) – The more information you have, the better prepared your supply chain will be. That might mean just investing more time in checking through your orders and sales forecast, or if you have the resources, investing in new software or even developing a team of professionals within China to ensure that you can have more direct and immediate contact within the country.
Build a risk averse and diverse supply chain – Given the current global logistics environment, your orders and shipments are likely to encounter more challenges and delays than usual. Given that this is the case, then there are benefits in taking risk averse actions to pre-empt and limit the damage that any single event could cause to your cash flow. This includes, among other measures, keeping more buffer stock at your in-market place warehouse, increasing your lead time estimates to account for the chance of delays and also undertaking more regular checks on order statuses and processes. Additionally, you may also consider diversifying your manufacturing base i.e. spreading out where your products are produced, so that an issue in one country doesn’t affect the profit margin of your entire business.
If you are interested in learning more about supply chain issues and also how to improve the durability of your own supply chain, please take a look at our previous article, where we discussed volatility in the 2021 freight market, here.
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