Coface, China resists Hormuz closure but shocks on production costs

(Il Sole 24 Ore Radiocor) - Tensions in the Middle East are driving up production costs in China, putting pressure on corporate margins especially for SMEs that are struggling to pass on price increases. This is highlighted in a new study by Coface, one of the world leaders in credit insurance and trade risk management. Although China is proving better prepared than other Asian economies to handle the energy shock - and the risk of supply problems remains under control for now - rising production costs, coupled with slowing global demand, are increasing pressure on companies. "China is currently managing to avoid a major supply shock thanks to its energy mix and industrial ecosystem. However, the prolonged rise in costs is creating a new vulnerability: that of margins, especially for more exposed companies with less ability to pass on price increases," points out Junyu Tan, economist for North Asia at Coface. "The tensions in the Middle East confirm how quickly geopolitical shocks can be transmitted to global value chains, even when they do not immediately lead to physical disruptions of supply", adds Ernesto De Martinis, Coface Mediterranean & Africa Region CEO and Board Member. "For companies operating in international markets, this scenario makes it even more important to monitor the soundness of trading partners, the ability of counterparties to cope with rising costs and the resilience of demand throughout the value chain".

Unlike many Asian economies that are heavily dependent on hydrocarbon imports, the study explains, Beijing has several protective factors in the event of a prolonged crisis in the Middle East. In fact, its energy mix remains largely dominated by domestic coal, while oil and gas together account for 39% of final energy consumption, a much lower share than the world average (62%). This is in addition to significant storage capacities. In the event of temporary disruptions, strategic oil reserves can cover nearly 100 days of net imports. Consequently, despite the crucial role of the Strait of Hormuz, through which 35% of the oil flows to China transit, the risk of immediate physical shortages remains low for the time being.

In March, producer prices rose by 0.5 % year-on-year, marking the first increase in over three years, with a further acceleration in April (+2.8 % year-on-year). In particular, the petrochemical sector contributed significantly to the monthly increase in producer prices. For the time being," notes the Coface study, "this cost pressure is mainly being absorbed by the intermediate and downstream sectors, in a context where final demand remains fragile. Consumer prices remain moderate, thanks in part to fuel regulation mechanisms, the growing diffusion of electric vehicles and subsidies granted to state refineries.

However, the persistent rise in input costs is beginning to erode the profitability of companies. According to the report, some sectors, including textiles, chemicals and synthetic fibres, are already reducing production. This pressure is compounded by tighter regulatory constraints and higher compliance costs. SMEs appear particularly vulnerable because they have more limited negotiating power to pass cost increases downstream. In contrast, large conglomerates can rely on long-term supply contracts, economies of scale and stronger balance sheets, which enable them to better absorb the shock.

Paradoxically, the crisis could strengthen China's industrial position compared to other Asian competitors more exposed to energy shocks, such as the Asean countries and India. At the same time, global demand for Chinese green technologies, especially electric vehicles, batteries and solar energy, is accelerating. The main risk, however, remains a prolonged conflict. A persistent rise in energy prices could in fact weigh significantly on global growth,