‘Fortress China’ shows cracks as Iran war strains supply chains
S E E D E D C O N T E N T
China’s supply chains are beginning to show signs of acute strain as the US war in Iran tests the limits of President Xi Jinping’s years-long effort to prepare his nation for external shocks.
Analysts credited Xi’s administration in the immediate aftermath of the outbreak of the war as China, the world’s factory floor, appeared better prepared than many other major economies to weather a storm.
But six weeks into a conflict that has throttled global energy markets, sharp price increases and supply disruptions have emerged across key products that form the backbone of Chinese industry. In March China recorded its first year-on-year increase in factory gate prices since 2022.
Beijing is now hoping that the ceasefire announced this week by US President Donald Trump and Iran can hold beyond the initial two weeks, allowing oil and gas to flow through the Strait of Hormuz and global trade to resume.
Cameron Johnson, a senior partner at Shanghai supply chain consultancy Tidalwave Solutions, warned that the supply disruptions could be “worse” than during the Covid-19 pandemic.
He said that prices in China had doubled for some polyethylenes, disrupting the market for materials needed to make everything from plastic bags and bottles to clothing and toys. Prices for some carbon fibres, which rely on some feedstocks from the Middle East and are widely used across the auto and consumer goods industries, had risen 20 per cent, he added.
“It’s all the raw inputs — particularly anything that might be imported or where there’s already tight supply,” Johnson said. “It’s scarcity, it’s supply tightness, it’s a lack of visibility when things will be turned back on.”
Before the start of the Iran war, China relied on the Middle East for about one-third of its oil and 25 per cent of its gas imports. The region is also a key source of methanol, polyethylene and sulphur, among other petrochemical and agricultural commodities.
While China has not yet been forced to draw on its massive strategic petroleum reserves , higher oil prices and shipping delays have hit a panoply of oil-based products and chemicals.
Those strains are ringing alarms not just among manufacturers but even among high-level policymakers who now are questioning the strength of China’s fortress-like energy security system.
Peng Shaozong, a former official with the National Development and Reform Commission (NDRC), Beijing’s top macroeconomic planning body, cautioned in an unusually candid policy paper in late March that, amid a complex and severe external environment, China “must abandon wishful thinking” and start considering worst-case scenarios.
Peng, who is now vice-president of the China Society for Economic Reform, warned that costs in energy-intensive sectors such as logistics, transportation, aviation, shipping and steel had jumped as much as 25 per cent, eating into corporate profits and putting severe pressure on smaller companies.
Risks were surfacing across high-end manufacturing operations cut off from vital raw material supplies, including industrial gases such as helium used in critical sectors including semiconductors and medical technology, Peng said.
Analysts from Trivium China, a Beijing-based consultancy, said last week that domestic Chinese spot prices for some high-grade helium had surged 110 per cent since the attacks on Iran were launched while prices for some lower-grade liquid helium were tracking 65 per cent higher since the start of the year.
Before the Iran war, China relied on the Middle East for about one-third of its oil and 25% of its gas imports, spurring calls to diversify energy supplies © CN/STR/AFP/Getty Images
The supply crunch is also hitting lower-end manufacturers. A shelf maker based in Wenzhou in eastern China said that, due to the recent surge in prices of raw materials, especially of “core plastics”, the company decided this month that it would have to raise prices for all new orders of certain products.
Zhu Yuelai, a camping goods exporter in the trading hub of Yiwu, told the FT that prices of products such as tents and camping chairs were expected to rise following a 20 per cent jump in fabric costs.
“Some orders were postponed but others, already placed, were downsized from original expectations like 10,000 [units] to 3,000,” Zhu added.
The shortages are benefiting some, however. Several Chinese helium distributors who source from Russia told the FT that they were enjoying higher prices as buyers exposed to Middle Eastern supply rushed to stockpile.
China’s state-dominated oil sector has also absorbed some of the price increases, meaning the full extent of surging oil prices has not yet been fully felt by consumers.
Peng, the NDRC official, suggested that Beijing should release oil reserves in response to higher prices, rather than only scarcity issues, and urged stronger efforts to diversify oil supplies.
Beijing implemented a de facto ban on exports of diesel, jet fuel and some fertiliser products in the early days of the war in order to protect domestic supply. Analysts and diplomats have warned that a protracted conflict could trigger further export bans on products including plastics, fertiliser blends and industrial inputs such as sulphuric acid as China’s supplies start to run thin. This could threaten foreign countries that rely on Chinese trade.
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Over recent days, China’s leadership has signalled that the war has spurred authorities to double down on a years-long campaign to achieve energy self-sufficiency via the electrification of the country’s transport and manufacturing base.
Xi on Monday called to accelerate the construction of renewable energy projects alongside nuclear technology and coal to boost energy security, according to comments carried by state broadcaster CCTV, though he did not refer specifically to the war in Iran.
“A greener, more diversified and resilient new energy system will provide a strong guarantee for China’s energy security and economic development,” Xi said.
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Amidst the avalanche of propaganda, a dose of reality.
Winnie the Pooh isn't going to be happy with this...US helping Indonesia defend the Straight of Malacca chokepoint.
The dose of reality is that China will need to pass increased costs on to customers. The same thing is occurring elsewhere along the industrial Pacific Rim. South Korea, Japan, Taiwan, India, and Vietnam have been forced to tap their national oil reserves. Indonesia has been stretching its oil supply by blending palm oil. The Philippines doesn't have a national oil reserve and is being forced to augment its commercial storage at spot prices.
China is the least dependent on Middle Eastern oil. China has pipeline access to Russian oil that the other Asian countries do not. And China does have a massive national oil reserve that it has not tapped. China has essentially been eating some of the oil shock to maintain and expand market share. That's likely been subsidized by utilizing sanctioned oil purchased at a discount. Since the PPI has risen only 0.5% it seems apparent that the oil shock hasn't been felt yet.
Why would US consumers be insulated from the rising prices in Asia? The United States hasn't done very much to address supply chain vulnerabilities exposed during the COVID pandemic. The war with Iran is having a smaller but similar impact on supply chains. As the producer nations lose their flexibility in controlling prices, importers will need to pass more of those costs on to consumers.
The Financial Times article isn't talking about a weakening of China. It's a warning to importers. China has been absorbing some of the oil shock to keep prices stable and maintain market share. But that can't last forever. This would create an opportunity to reshore industry to the United States. But the US government and investors don't seem to have the will to build new factories.