At its strongest in 25 years: the rise in production costs increased last month in China at a record pace, against a backdrop of soaring commodity prices which are weighing on the activity of the workshop of the world.

The global recovery has led to a sharp rise in the cost of raw materials, especially coal on which China is heavily dependent to power its power plants.

Electricity producers are struggling to recoup their costs but cannot pass the price increase on to their customers because China strictly regulates electricity prices.

Consequences: power plants are idling despite strong demand and electricity is rationed, which has boosted production costs for companies.

Last month, the cost of production has increased by 10.7% over one year, announced Thursday the National Bureau of Statistics (SNB).

This is its highest pace on record according to NBS data dating back to October 1996, higher than August’s (9%), which was already a 13-year record.

In September, “prices in industry continued to rise as a result of rising coal costs and in some energy-intensive sectors,” noted Dong Lijuan, a BNS statistician. Coal prices rose 74.9% year on year last month.

Carbon neutrality and pressure on prices

This surge in prices has led in China to total or partial closures of factories, which are struggling to be supplied with current while the authorities are imposing electricity rationing in several regions.

This penalizes production, pushing up costs for companies at a time when global supply chains are already under strain.

In China, electricity prices are usually tightly controlled and cannot exceed 10%.

To alleviate these shortages, the government authorized an exceptional increase in electricity prices on 8 October to allow producers to recoup their costs. This increase is capped at 20%.

“The ambitious goal [des autorités chinoises] carbon neutrality exerts a continuous pressure on the prices of raw materials, which companies will eventually pass on “to their customers, remarks economist Zhiwei Zhang, at Pinpoint Asset Management.

This is obviously not the case at the moment.

The consumer price index, the main gauge of inflation, thus rose moderately in September (+ 0.7% over one year), against 0.8% a month earlier.

This trend is partly explained by the drop in the price of food products, especially pork, which was 46.9% lower than last year.

At the same time, prices in the tourism sector fell in September by 9.9% year on year, thanks to an epidemic resurgence this summer in China in several regions that has deterred many Chinese from traveling.

However, higher prices for consumer goods seem inevitable in China “if electricity rationing persists,” warns analyst Julian Evans-Pritchard of Capital Economics.


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