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Printed: 26 September 2023 12:01 AM


26 Oct 2021 - The Winter of Discontent

By: Arminius Capital

The Winter of Discontent

Arminius Capital 

12 October 2021

The winter of 1978-1979 was disastrous for the UK economy. A combination of freezing weather, rising inflation, union wage demands, and public and private sector strikes caused fuel shortages, food shortages, and essential services failures. The press christened the period "the winter of discontent", borrowed from the first line of Shakespeare's Richard III. Not surprisingly, Margaret Thatcher won the May 1979 election.

The coming winter of discontent will affect much of the northern hemisphere, but particularly the UK and China. The US is all but self-sufficient in energy, although it will continue to suffer supply chain disruptions. The EU has sufficient spare generating capacity and cross-border electricity transmission to mitigate the power problems, and Russia has promised to step up gas supply. India has managed to create its own coal shortage without having a Communist Party or a Conservative Party to make mistakes, but very few global investors have any exposure to the Indian share market.

Boris Johnson doesn't have to face a general election until May 2024, but the winter of 2021-2022 is shaping up as a major public relations disaster for his government. Rising oil, gas, and commodity prices are exacerbated by higher transport costs, not to mention labour shortages in essential functions such as truck drivers, butchers, and process workers. Lack of truck drivers has forced the government to use the army to deliver petrol to service stations, and supermarkets are already suffering stock-outs of basic items such as eggs, milk, pasta, and canned fruit.

The shortages have been blamed on COVID-19, Brexit, EU bloody-mindedness, UK government incompetence, private sector inadequacies, and global supply disruptions. What is clear is that there are no quick solutions.

Xi Jinping is facing the same types of problems in China: power cuts and supply disruptions. The nationalistic (State-owned) media has blamed these on the usual suspects - corrupt officials, foreign saboteurs, counter-revolutionaries, and "bad elements" generally - but in China's case the true causes are well-documented.

Demand for Chinese goods surged in 2021 as the global economy recovered. This meant that demand for electricity surged. But more than half of China's electricity comes from coal-fired plants, and since 2016 the central government had been forcing the closure of small coal mines, not in a quest for net zero emissions, but because of the very high levels of local pollution and industrial accidents in these small mines. Alex Turnbull makes a persuasive argument that part of the shortage was caused by the disruptive effects of anti-corruption campaigns in Inner Mongolia - see

So China needed more electricity than it had the coal to produce. The obvious next step was to import more coal. Unfortunately, the rest of the world wanted more coal too, so prices had already risen sharply. To complicate matters, in 2019 the central government had unofficially halted thermal coal imports from Australia, and the spare Australian coal had been sold to other countries.

By mid-2021 it was clear that many Chinese provinces did not have enough electricity to power their economies. Yunnan, for example, has built an aluminium industry on cheap and abundant power from its hydro stations. But in 2021 low rainfall reduced hydro power supply, so Yunnan was forced not only to shut down alumina smelters, but also to reduce electricity exports to the neighbouring province of Guangdong.

What made matters worse is that, because two-thirds of China's provinces had missed their targets for reducing energy consumption and energy intensity, the central government told cities which were home to major polluters to shut down the worst offenders for several hours a day or a few days each week. This means heavy industries such as steel, cement, glass, and paper manufacturers.

Another complication: local power prices are set by the government, usually for the benefit of industrial and residential users. When higher coal prices pushed coal-fired power stations into losses, most governments would not agree to any power price rises. In response, generating companies stopped buying expensive coal and temporarily shut down their unprofitable power stations.

Xi Jinping and his Politburo are several management levels above the grassroots, and bureaucrats are never keen to bring bad news to their bosses, so the extent of the problems did not become obvious until September. The eventual response shows that - unlike Boris Johnson - Xi Jinping took matters very seriously indeed.

  • The three main coal-producing provinces have guaranteed that their mines will supply an extra 145 million tonnes.
  • Because the coal price under long-term contracts is less than half the current spot price, suppliers will be allowed to double their price.
  • "Flexibility" will be permitted in electricity prices, which means that end-users will bear part of the cost increases.
  • Residential and agricultural users will have priority of supply over industrial users.


Whatever happens in the UK will have very little impact on Australian investors. As a trading partner, the UK is slightly more important to us than Thailand. Ever since the Brexit vote in June 2016, the UK share market has traded at a 20% discount to other developed markets, so a lot of bad news is already priced in.

By contrast, the power cuts in China are globally important, reinforced with the property market turmoil caused by the Evergrande default. The net effect will be to reduce China's GDP growth rate below 4% annualized over the next six months. Chinese imports of Australian iron ore will fall by 10% over this period, but Chinese imports of Australian thermal coal will rise unobtrusively.

The Chinese factory shutdowns will add to the world's supply shortages and keep commodity prices weak until the Chinese economy is visibly back to normal - probably by March 2022. China's power outages will worsen global supply chain disruption, but the key factor which will end the US import shortages is consumers reducing their spending on goods and switching to spending on services.

For China's share markets, the impact of the power cuts is negative, but it is far smaller than the damage done to China's tech giants already by the central government's regulatory crackdowns.

Because Australia is already on the receiving end of China's unofficial trade war, the downside for us is minimal. Lost iron ore exports are offset by record coal exports. But Australian investors need to watch the Chinese economy, just in case it doesn't recover within six months. If so, there will be more negative consequences for the global economy.

Funds operated by this manager:

Arminius Capital ALPS Fund, Arminius Capital GMMA Fund

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