BEIJING China looks set for its worst power shortages since 2004, putting pressure on already squeezed industries and raising the possibility of the world's second-largest economy turning into a net importer of diesel.
As the peak summer heat rolls around, power-intensive metals firms are likely to be hardest hit, while export-oriented factories may be forced to trim production, with Beijing taking a harder line against power guzzlers in a bid to improve energy efficiency.
Chemicals and construction material makers as well as other producers with outdated capacity in heavy industry will also bear the brunt of power supply strains. The service industry and even households could join the victims when shortages spread.
"Smaller energy-intensive businesses have a bigger chance to be cut off from power than their larger rivals," said Wang Jing, an analyst with Hongyuan Securities.
"As production of many commodities is energy intensive, it's worth watching whether power rationing would push up commodity prices."
Already, the current power crunch has hurt domestic demand for aluminum and lead as smaller smelters suspended output in key Chinese provinces in April after power supplies to intensive energy consumers were cut to ensure normal supplies to others.
Output of aluminum and steel both hit record highs in April, but could be easy targets if the government decides to ration power.
Power shortages have eaten into steel production in central, eastern, southern and southwestern provinces, though key producing regions in northern China have been unaffected so far, according to China United Steel, an industry information provider.
"Imagine how the steel industry might struggle later on, given that the top four steel producers -- Hebei, Liaoning, Shandong and Jiangsu -- are expected to face serious power shortages," it said in a report on its website www.custeel.com.
The National Energy Administration forecasts electricity consumption would grow about 11 percent year-on-year to 2.2 trillion kWh in the first half of 2011, with full-year consumption estimated at 4.61-4.69 trillion kWh, a growth rate of 10-12 percent.
The China Electricity Council, a power industry association, has estimated around 30 gigawatts of power shortfall nationwide in summer. That is about 3 percent of China's generating capacity, similar to the total in Sweden or Argentina.
"This is about twice the shortage that Japan is facing after the March quake. And this is in addition to the gasoline/diesel shortage," Gordon Kwan, head of energy research at Mirae Asset, said in emailed comments.
But the actual shortfall could be much higher. According to estimates by regional grid operators and local governments, in just 12 of China's 31 provinces the expected shortfalls total 40 GW, similar to the nationwide power gap in 2004.
Analysts say the power crunch could push up diesel demand and convert China, normally a diesel exporter, into a net diesel importer.
Last year, many power users such as factories and businesses switched to stand-alone diesel generators, leading to a spike in diesel demand and forcing the world's second largest oil consumer to slash exports from November while raising imports of diesel.
But China still managed to be a net exporter of light diesel fuel last year, shipping out a net 58,100 bpd on average.
China's oil balance, particularly for diesel, has been far more sensitive to demand surprises this year because refiners have less spare capacity than in the last two years, according to Soozhana Choi, head of Commodities Research with Deutsche Bank in Asia.
"The regional gasoil balance would be significantly tightened if China's diesel demand this year grows on par with the 2010 rate of 13 percent, as it would imply net imports of some 140,000 barrels per day," Choi said.
The power shortage is likely to be good news for suppliers of liquefied natural gas (LNG), according to an official with an LNG import terminal developer.
"For gas-fired power plants, gas cost is certainly a concern, but with government subsidies in place and high power price affordability in the coastal regions, I expect more demand for LNG, including LNG produced in inland China," he said.
China's LNG imports surged nearly 70 percent in 2010, with more than half burned by power plants.
SAME OLD TRAP
Loss-making coal-fueled power generators are in no mood to boost generation in line with expected rising coal prices and power demand in summer because they are unable to pass on increases in coal costs.
Under China's tight price caps on energy products such as power, fuel and gas, a surge in feedstock costs reduces energy producers' profit margins and undermines their willingness to increase supply.
Coal is the energy source for around 80 percent of China's power generation.
"Power generators do not have the incentive to operate at high utilization rates because the profit per unit of electricity generation has become smaller," said Pierre Lau, head of Asia Pacific utilities research with Citigroup.
"If you look at the average utilization rate of coal-fired power plants in 2011, it is still well below the peak levels in 2004 and 2005 when China suffered severe power shortages."
China's five state-owned power generating groups, including the parent companies of China Power International, Datang International Power, Huadian Power and Huaneng Power International, lost over 60 billion yuan ($9.24 billion) on their thermal power businesses in the past three years.
China's thermal coal prices last week rose to the highest since November and inventories at China's top coal port fell to their lowest in at least six months, though prices were still some 30 percent off the 2008 peaks.
"Severe power shortages could trigger another round of power tariff hikes like we saw in 2008 in spite of high inflation," Citi's Lau said. ($1 = 6.494 Chinese yuan)
(Editing by Sugita Katyal)