Are China's Factories Running Out of Power?

05/27/2011 02:36 pm ET | Updated Jul 27, 2011

Why has Global Sticks, a manufacturer of wooden ice cream sticks, moved from Dalian, China to Thunder Bay, Ontario?

It's the kind of low margin manufacturing that is never supposed to come back after it leaves North America for cheaper labor abroad.

But wage costs are no longer everything they were cranked up to be. In today's world of soaring energy costs, power rationing and export taxes on key commodities such as wood, wage gaps are less important. When the power goes off, it suddenly doesn't matter if your labor is expensive. Factories don't run on sweat alone.

As the price of the bunker fuel that transports those ice creams sticks to customers around the world tracks soaring world oil prices, the distance between your factory in Dalian and North American kids lining up at their neighborhood ice cream store becomes more expensive every day.

When the price and availability of energy start to dominate your business plan, you say goodbye to your inexpensive Chinese labor force, and pack up and leave.

Of course, not everybody can leave. Those that stay are bracing for what China's Electricity Association is warning will be the nation's largest power shortage in years this summer. As many as 20 provinces and territories have already been put on power rationing, including the country's industrial heartland.

The provincial government in Zhejiang, a manufacturing hub close to Shanghai, has notified 44 major industries about limits on their power consumption. Companies that exceed these limits face prohibitive power tariffs that would threaten much of the region's low margin manufacturing. The story isn't any different in Guangdong, south China's manufacturing hub. Its industries must also cope with limits on power usage.

It won't be long before all that power rationing starts to curb economic growth, particularly in the power-intensive centers of China's industrial production such as aluminum and steel.

The failure of regulated power prices to keep pace with soaring world coal prices lies at the heart of the China's power crisis (as well as in similar power crises sweeping neighboring India and Pakistan). Chinese power prices have gone up as little as one tenth of the rise in world oil prices.

Not only is this practice economically untenable for coal-fired power generators, which supply over three quarters of China's power, but it encourages unsustainable rates of coal consumption. Last year, the power hungry Chinese economy burnt a staggering 3.2 billion tons of coal.

Beijing has already warned the country may soon hit peak coal production, forcing greater reliance on ever-more costly imports. In the meantime, China has banned the export of diesel fuel, which may soon be needed for power generation.

As China's power crisis worsens this summer, look for more firms such as Global Sticks to relocate production and come back home.