China faces a new blackout: the industry begins to stop due to the drought

An unprecedented heat wave and drought in some parts of central China has caused the suspension of activity in numerous factories due to the increase in energy demand and production unable to cope with it, with the threat of cuts in residential areas.

Low levels in rivers and swamps, on which local energy supplies depend, led the central province of Sichuan to order a temporary suspension of production at factories in 19 of its 21 cities. This could aggravate the economic problems that China is already facing,

Extreme temperatures

According to the Hong Kong newspaper South China Morning Post, the Sichuan Government announced that the aforementioned measure would last from this Monday until next Saturday, August 20, for a total of six days.

In a statement published on its website, the Executive indicates that the region is facing “extreme” temperature levels not seen in six decades, while rainfall has fallen by 51% compared to the same dates in previous years and they are already at their lowest levels since there are records.

The consequent drop in water levels in the main river basins in the area has implied a “sudden drop in hydroelectric production”, which represents around 80% of the power generation capacity of the province, home to 84 million of people.

Differences with 2021

“Unlike last year, when the power outages in Sichuan province were the product of political decisions, the recent power outage is largely due to the weather and, above all, the drought in much of the country. part of China”, explain the experts at Julius Baer.

“The impact is manageable for now, although we are aware of the risk that power pressure spills over into other provinces. Within the market, this may put marginal upward pressure on lithium and polysilicon prices, upstream industries in electric vehicle and solar power supply chains, respectively. Coal-fired power plants have reacted positively to this news,” say experts at the Swiss investment firm.

The situation could worsen given the importance of the affected regions. For example, Sichuan accounts for about 30% of lithium salts (lithium carbonate and lithium hydroxide) in China. Assuming the power outage only lasts for six days, as currently planned, lithium carbonate supply may drop 3%, while lithium hydroxide may drop 8%.