Explained: How China’s energy crisis can benefit Indian steel, chemical firms

The global supply situation remains in a precarious position, with energy crises and supply chain breakdowns across continents. China is reeling under its own energy crunch, unable to keep up with the sudden bounceback of the global economy. This could spell an unexpected windfall for India. Indian steel and chemical companies could capitalise on the faltering supply of Chinese steel and chemicals.

China’s troubles

China is the largest producer and consumer of coal. The country uses coal to power its thermal plants to generate electricity, and also supplies it to various sectors like steel and chemicals, that require coal for their manufacturing processes,.

As the global economy rapidly rebounded, demand for products, and thus coal, also soared. Heavy rains, disrupted supply chains and local factors prevented the supply side from responding adequately. The result was an energy crisis that has left the world’s most populous nation in the grip of a power shortage. Many industries, especially in the regions that largely rely on coal-generated power, have seen a decrease in output due to power cuts.

For industries that use coal as raw material, the supply shortages mean not only power cuts but also a dearth of a vital input needed for the manufacturing process.

India’s answer

With output decreasing from the Chinese manufacturers, many domestic and even foreign end-users of steel and chemicals are now quickly turning towards Indian companies to fill up the supply gap.

“China’s energy crisis and resultant likelihood of shutting down of Chinese companies or intermittent curbs on manufacturing would prove advantageous to Indian companies, as the demand for their products is bound to rise in both the domestic and international markets,” said India Ratings and Research (Ind-Ra), the rating agency under Fitch Group. The economic recovery has created a strong demand for both steel and chemicals across the globe.

India has its own problems

India has not been immune to the effects of the crisis. Several companies and sectors in the country, hit by shortages, have been clamouring for electricity and coal. India, which is the world’s second-biggest consumer and producer of coal, has suffered a similar disparity in the supply and demand of coal domestically.

While coal from other countries is available for purchase in the international market, the energy crisis in China and Europe will cause a massive surge in price. Steel and chemical producers will pass on their costs to their subsequent customers; and they, in turn, will pass it on to the end-user.

The coal shortage, and consequently the power shortage, can be potentially catastrophic. With an over-reliance on coal power, India may be paying for its tardiness in switching to renewables.
Source: CNBCTV18