Water is a costly necessity for the production of textiles, also in China
Practically daily, we get new on water shortage, draught, polluted water, sinking levels of ground water, and Swiss Nestlé’s Chairman, Peter Brabeck-Letmathe has a blog on water voicing opinion on these matters. Other companies state their efforts in using less water in the production of their products or on processes using less water, this is particularly true in the textile and clothing related areas, textile machinery and textile chemicals
As we are all aware, China is still the largest textile and clothing manufacturer, and the resource water has many aspects needing action by the Chinese government to protect its population, as well as to preserve the resource for processing in various industries. Swiss Bank J. Safra Sarasin has a long record of sustainable investment research and has recently published a report titled “Water stress in China triggers strong government response”, and this is the basis of today’s feature in TextileFuture’s Newsletter, among other resources.
China’s water problems, shortage and pollution are based upon a large population, fast economic growth, urbanisation and high consumption of various industrial sectors. Therefore the government has to apply a sustainable way to ensure the long term economic prosperity and the well being of its citizen, certainly not an easy task to balance all. On the other hand, sustainability creates also opportunities for new businesses and knowhow.
The chart belowe shows teh Water use by sector in China 2010
China represents the world’s fourth largest country by land area and owns considerable fresh water resources, namely 6 % of global reserves, but also a population of 1.4 billion people, or 21 % of the world’s population. The bank’s analysts, Viara Nedeva Thompson and Ennio Perna, declare: “Despite its large water endowment, the average water availability per capita is earmarked at 2100 m3 annually, thus relatively low compared to the world average of 6200 m3 per year. Furthermore, there are significant regional discrepancies in water resources and population density, with the north being much drier than the south of China. Most suitable are the eastern and southern parts of the country, whereas the west is extremely mountainous with harsh living conditions. Thus, the north eastern regions with low water resources and high population density are experiencing water stress.”
Table 1 shows the China Water Stress Index
Economic growth harms water availability
China’s current water problems are resulting from the large economic growth over the past 30 years, leading to better living conditions, but causing serious environmental problems, such as the scarcity and severe pollution of water, the authors continue. And they add: “Population growth and rapid economic growth have had a pronounced effect on the agriculture sector, which is by far the biggest user of water, with 61 % of total consumption, while this sector contributed 10 % to China’s GDP Gross Domestic Product in 2012, down from 15 % in 2000. The need to feed more people, and constantly changing consumption habits (more meat and higher calorie intake per capita) has caused an expansion of farmland.” TextileFuture adds that this is also stemming from the somewhat more liberalised rules for owning arable land in China. The authors add: “Currently over 65 % of Chinese cultivated land is in the drier northern provinces, which in turn has increased the need of irrigation, thus more consumption.”
This following table gives you an impression of China’s annual precipitation:
Also, the cooling of thermoelectric power generation facilities, such a coal, nuclear and gas power plants, accounts for 10 % of total water withdrawals in China. Power plants use water to fill up their cooling systems and replenish the water evaporating during the cooling process. In addition, China’s energy demand is further on the rise. The government endorses investment in energy supply from both fossil fuels and renewable resources, remark the authors. Coal power plants currently comprise 70 % of the Chinese power generation capacity and their planned expansion will put even greater stress on the country’s water resources.
Poor water infrastructure in urban centres
The growth of China’s cities is also driving higher demand. In 2011 urban population reached 6909 million or 51 % of the total population, in 1982 this figure was earmarked at 20 %. Projections are that this figure will grow by a further 300 million by 2030. All of these aspects are also mentioned among the concerns of a recent IMF report on urbanisation in China, and these findings TextileFuture will bring to your attention in the near future. It is a given fact, urban consumers are disposing of more income, are more sophisticated as against the rural population, thus the urban population tends to consume more water than rural people, and water is readily available via the municipal network. However, the existing water infrastructure in the cities is not only outdated, but also inadequate to cope with such a demand. The UN United Nation FAO Food and Agriculture Organisation has listed 33 % of the 661 Chinese cities as experiencing water stress and 17 % as experiencing severe water stress, report the bank’s analysts.
In addition, China’s water problems are exacerbated by a high degree of contamination. According to FAO, the water quality in 80 %of China’s major rivers is too poor to support fish. In addition, a 2012 government survey found 57 % of groundwater to be severely contaminated. Water pollution is caused by municipal and industrial discharges, such as waste from coal mining, chemicals and textiles. Even though, the country had pollution control standards for several decades in place, but these have not been enforced and toxic discharges have been allowed to flow feely into the rivers, causing health problems for local residents and they brought a loss of biodiversity, the authors explain.
The Water Flow Chart shows how the system works
As we all know, these facts were criticised also by non-government agencies and documented, with a particular focus on China’s textile and apparel industry. In turn these reports were leading to a rethinking policy of many important companies and retailers sourcing in China to establish new rules for the suppliers.
The following Table gives you some background for what the apparel manufacture is responsible
The current 12th Five Year Plan (2011-15) sets ambitious targets related to the quality and efficient use of water resources. They include a 30 % reduction of water consumption per unit of industrial output, reduction of ammonia and nitrate emissions in wastewater, and a target for the urban wastewater treatment rate of 85 % by 2015. Also the support of modern irrigation methods in the agricultural sector and increases in water tariffs are included. In 2012, the Chinese government developed the “Three Red Lines” policy as overall framework to guide efforts in the development and utilisation of water resources, water use efficiency and restrictions of pollutants in water areas. According to the bank’s analysts underline “This policy sets strict national performance targets, which are then allocated to specific targets for each Province”. These targets can be had from the following chart
The Chinese government has additionally announced several financing initiatives to improve the quality and availability of water, including subsidies for the construction of sludge treatment facilities, ranging from 30 % (for eastern provinces) and 60 % (for western province) and a commitment of RMB 2 trillion (around EUR 238 billion) to support the implementation of the Three Red Lines targets.
The Swiss Bank J.Safra Sarasin analysts see emerging new business opportunities for water utilities, in irrigation and industrial water pollution control, the latter is now in our focus.
TextileFuture would like to stress, that particularly European manufacturers of textile machinery and accessories are making considerable contributions with their sustainable deliveries of state-of-the-art equipment, adding to less water and power consumption in China’s textile and clothing industry. It is also noticeable, that textile finishing and coating processes, as well as colour applications and textile effects become more sustainable and allow that wastewater can be recuperated and reused.
China’s industrial sector is not only a big user of water, but also a heavy contributor of pollution (air and water). According to the bank’s analysts, this sector is responsible for 24 % of water withdrawals and 32 % of wastewater discharges. Industrial companies spent over USD 10 billion in 2012 on wastewater treatment, which includes applying chemical solutions or using water treatment technology (filters and membranes). The market for water treatment chemicals alone grew 12 % annually from 2005 to 2010, amounting to RMB 8.5 billion (EUR one billion) in 2010, and is expected to keep growing rapidly, encouraged by the government targets. However, the business is highly fragmented and dominated by domestic private companies, the most prominent are Chine BlueStar (a subsidiary of state owned China National Chemical) and the privately held Wujin Fine Chemical Factory. In the textile and clothing area there are major contributions by German BASF, Bayer, Archroma (USA) and DyStar, and specialised water treatment firms present in China. Other international contributors are Nalco, Ashland and Toray Industries, among others, are offering chemical and technology for water treatment, as well as services to improve water use efficiency.
In former times, the easiest way to sanction water pollution has been to order a shutdown of polluting factories. For example, the city of Shiyan, home of the 370 km2 Danjiangkou reservoir, has closed over 300 factories in recent years to maintain acceptable water quality, comment the authors.
According to the World Bank, water stress in China is already costing 2.43 % of GDP, with 1.3 % due to water scarcity and one percent due to water pollution. Firms face the risks of water-related supply chain disruptions, stranded assets, and health and safety issues for customers and employees, and increased operating costs for water treatment, along with higher power costs. The authors add that the planned reforms and investments in China is taking place, and it is likely that the cost of water for all users will also be on the rise. For example, water utilities may try to recover their investment cost by requiring water tariff increases. Wastewater treatment tariffs increased at 10 % from 2001 to 2013, and are likely to continue growing as Waste Water Treatment capacity grows.
The inherent risks
Another open question is how the Chinese government will raise the money that it plans to channel into water infrastructure investments and subsidies. During the electricity reforms in China, the government imposed charges on all electricity users in order to partially cover the subsidies to renewable types of energy, and it is likely that it will take a similar approaching the water reforms. It is worthwhile to mention other risks, the acquisition or construction of Waste Water Treatment plants is capital intensive, and firms require a strong balance sheet to finance such growth. If water utilities chose to finance investments through debt, they are exposed to the rising cost of financing in China. Equity financing is also an option, but it may bring dilution to investors.
The involvement of state owned enterprises as large minority investors in private water utilities offers another risk to private investors. On one hand, such companies may provide low cost funding, but on the other hand, such companies are more likely to have inadequate corporate governance practices and pursue projects for political reasons instead of economic returns.
The authors conclude that the problems of water scarcity and pollution have become a great challenge for China. Furthermore, the solutions will be difficult and costly due to their scale and complexity. The decisive political steps and financial support from the government are creating the right political and economic environment for this tremendous change.
TextileFuture adds that with the focus on the textile and clothing manufacture in China, along with wage increases and the lack of skilled labour, it is foreseeable that the price level for such produced goods (and others) will increase and make sourcing in China less attractive. Thus, it is understandable, that private Chinese manufacturers are dislocating their production facilities to countries offering a lower cost level in order to remain competitive.