The Chinese government has put restrictions on electricity use, which has had an immediate impact on its manufacturing sector and on global markets such as wool.
- Restrictions on electricity use in China force wool mills to reduce production
- The Australian wool market fell sharply this week in response to the news
- The energy crisis is also expected to affect global fertiliser and glyphosate prices
Australian Wool Innovation (AWI) chief executive Stuart McCullogh said some Chinese mills had this week reduced production by up to 40 per cent because of the power cuts.
“There’s probably five big converters of greasy wool in China and some of them are domiciled in those provinces [affected by power cuts], so it will have an effect,” he said.
“How long this goes for … it’s completely out of our control.”
Australia’s wool industry benchmark, the Eastern Market Indicator (EMI), closed the week at 1337 cents a kilogram, down 31 cents, with a high pass-in rate of 22.7 per cent.
What’s caused the energy shortage?
It is understood power generators in China have been forced to limit supply because of tight coal supplies and high prices.
According to Rabobank analyst Wes Lefroy, the rationalisation of energy also comes at a time when China is looking to curb its greenhouse gas emissions.
He said industrial manufacturing had been hardest hit, and for Australian farmers, it could lead to fertiliser and glyphosate prices going even higher.
“This [energy] announcement is going to have some big implications for [the price of] inputs, particularly for glyphosate,” he said.
“China is responsible for 65 per cent of global glyphosate production and a large chunk of Australia’s glyphosate imports.
“What I’m hearing from colleagues in China is there’s going to be a 40 per cent cut in yellow phosphate production, which is a raw material in the production of glyphosate, and as a result, we’re expecting to see a big decrease in the level of glyphosate output.”
How long could this go on?
Australian Council of Wool Exporters president Josh Lamb said Chinese buyers expected potential shutdowns for up to six months.
“Most mills do go through some power restrictions through the height of summer in China, but this is the first time [there are] restrictions outside of that period,” he said.
“We’re just coming into the primary part of the season … and things are just starting to ramp up now at auction with growers wanting to sell their wool so it’s not good timing for us.
“It could put a dampener on the market over the next few months if mills can’t run at 100 per cent capacity they’ll be less inclined to purchase the usual quantity that they would most weeks.”
Tianyu Wool’s global purchasing manager Angus Hook says the power restrictions have had an immediate impact.
“We only found out early in the week about the shutdown,” he said.
“Luckily, we’ve got solar power on our top-making mills, so we can work during daylight hours.
Rabobank’s Wes Lefroy said a lot of China’s restrictions around pollution would likely remain in place until at least after the Beijing Winter Olympics in February 2022.