Mainland China power shortages impact on Hong Kong SAR construction industry

In the Hong Kong Special Administrative Region (SAR), the construction industry is experiencing cost increases and delays to a number of construction projects due to shortage of materials supply resulting from the forced closure or suspension of operation of factories in mainland China.

Power shortage in the mainland China

Power shortages are nothing new in the mainland China. Production was occasionally interrupted by local electricity shortages, especially during the summer months. In such circumstances, factories were usually given prior notice by local electricity supply bureaus, in which event factories would reschedule their production plans accordingly.

The power shortage in 2021 is particularly disruptive for a number of reasons.

The Chinese government is making control of energy consumption a priority as the country committed to peaking carbon emissions by 2030 and becoming carbon neutral by 2060. Its ongoing “dual control” energy consumption policy is a regulatory effort aiming to control high energy consumption and to limit high-emission projects.

Following the government’s calls to reduce heavy industrial power usage, many parts of mainland China have been experiencing power outages and rationing, including major industrial provinces including Guangdong, Jiangsu, Fujian and Yunnan, which failed to meet the dual control targets for the first six months of this year.  

This year, the price of thermal coal, which is mainly used for power generation, has almost doubled due to reduced production and increased demand for electricity, especially as mainland China's economy recovers from the coronavirus pandemic. The price has surged this year from 671 yuan (US$104) per tonne to roughly 1,100 yuan. It doesn't help that trade tensions with Australia have caused the mainland China to put up barriers to importing coal from that country.

According to a report, the country’s power generators said they could no longer justify power production with record coal costs cutting into profit margins. They have already started slowing power generation, leading to widespread rationing and outages.

In October, mainland China’s State Council issued the country’s action plan to ensure carbon emissions peak by 2030. According to the plan, the use of non-fossil fuels in mainland China’s energy consumption is set to increase from 16% in 2020 to 25% by 2030, targeting a 65% drop in carbon dioxide emissions per unit of GDP from the 2005 level.

Impact on the construction industry in the Hong Kong SAR

The power cuts and power rationing under the dual control policy of the mainland Chinese government has led to a halt in production at many factories in mainland China, and production of metals and cement is expected to be affected the most given its energy intensive nature.

As construction materials, such as steel, cement and aggregate, used in the Hong Kong SAR are mostly imported from mainland China, the construction industry in the Hong Kong SAR is feeling the impact of the dual control policy as the supply of the materials has become unstable while prices have gone up. In particular, it is reported that the price of cement in the Hong Kong SAR has increased by more than 30% in the past month.

Without adequate and steady supply of construction materials, site progress will inevitably be affected. It is reported that the construction industry has written to the government voicing their concerns over the situation, but it is unclear at the moment whether the situation will be improved in the near future.

Legal impact

This is yet another legal challenge for the contractors following Covid-19. In view of the disruption in the supply chain and the uncertainties that it brings forth, contractors may want to claim additional time or costs under the circumstances. Whether there is any entitlement to extension of time or additional costs due to delay in supply of materials as a result of the dual control policy depends on the particular terms of the contract. Taking Covid-19 as a reference point, the government may also be, on a case-by-case basis, amendable to a more lenient interpretation of the contract provisions to alleviate the financial burden on contractors caused by the shortage of materials.

The standard forms of contract commonly used in Hong Kong SAR usually allocate the risks associated with supply and delivery of materials to the contractors. The Standard Government Form provides that an extension of time may be granted if the cause of delay is “any special circumstance of any kind whatsoever”. Contractors need to look at their contracts carefully to determine their entitlement and seek legal advice where necessary. Conditions precedent that are applicable to a claim should also be strictly observed.

At the moment, it is unclear how long the strict control over power consumption will last, but with winter approaching, it is expected that the power shortage will likely persist with the increase in demand for coal.

Many new public and private projects have also been recently announced by the government of the Hong Kong SAR including the development of the Northern Metropolis, Lantau Tomorrow Project and a new rail link connecting Hong Kong and Qianhai Modern Service Industry Cooperation Zone and no doubt the local demand for construction materials will remain very strong. With that in mind, contractors should factor this risk into their tendering pricing and consider placing their orders early or seeking alternative overseas suppliers to minimize the uncertainties caused by the supply delay and shortages.