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cassindy chao

China has both water shortages and water quality issues. This has significant implications for:

1. China's ability to produce its own ethanol fuel
2. The sustainability of China's agriculture industry
3. Manufacturers who require clean water, such as paper producers and semiconductor fabrication plans ("fabs").

In the United States, many people take potable water for granted. And in China many people consider poor water quality to be the cost of economic growth. Alas, the relationship is not that simple. China's poor water quality can add significant risk to certain Chinese industries and foreign companies that are reliant upon them.

Both China and Canada possess around 7% of the Earth’s total fresh water supply, yet China is home to 40 times more people than Canada. China’s water reserves are only 25% of the global average and the United Nations reports that China has one of the 15 lowest per capita water supplies in the world. China’s industrial water use is also inefficient. To generate $1250 (10,000 yuan) in GDP, for example, China uses three times more water than the world average, and seven times more than the United States, according to the Worldwatch Institure. Further, only 60 to 65 percent of the water used by Chinese industries was recycled or reused in 2004, as compared to 80 to 85 percent in most developed countries.

China's Water Shortage

Implications for Industry

China faces a severe water scarcity problem with implications for agriculture and industries such as electric power, iron and steel, petroleum production, chemicals, paper and textile dyeing. China economic growth has been primarily driven by industry as it has becomes the world’s manufacturer. This growth has driven demand for coal power which has increased water contamination from acid rain. Moreover, much of these heavy industries are highly water consumptive. Recent weather has resulted in a 7 year drought in certain Western regions. Agriculture and industrial use are the two largest drains on China’s water supply. See Figure 1.

Figure 1
Source: China Statistic Yearbook 2005

No Incentive to Conserve

Water is currently underpriced which discourages conservation. China’s water prices are roughly 70% below prices in countries which have sufficient water supply. Until 1986, water costs were not charged to consumers. While privatization of water in certain municipalities has increased costs dramatically, the country as a whole still has subsidized water prices. Rising costs of a basic necessity such as water could lead to instability and unrest which is avoided by the government.

China is Water-Resource Poor

China has 6.2% of the world’s renewable fresh water supply, yet has 21% of its population. The Northern and Western regions of China are particularly vulnerable. Southern China residents have access to over 80% of the country’s water. 67% of China’s cities are impacted by water shortages. Weather has also worsened the water shortage. China’s North China Plain has seen 7 consecutive years of drought.

Water tables are falling dramatically. Over 60% of China’s water supports agriculture. The North China Plain’s water table, where much of China’s grain products are grown, falls about 5 ft per annum. As desperate farmers use pumps to drill deeper, aquifer depletion becomes a reality.

China's annual water deficit is around 40 billion cubic meters, roughly ten times the water demand of a major city like Beijing. Since 2002, around 26 million hectares of farmland in China have suffered from drought, which caused crop losses of 35 million tons per year. Nearly 320 million rural Chinese lack access to clean drinking water. And Xinhua News reports that roughly 400 cities are short of water supplies, including 110 with severe shortages.

Pollution Worsening the Problem

Pollution has intensified the water shortage problem. Acid rain and mercury from China’s coal power plant emissions is one major factor. In China, 39% of its rivers and 75% of its lakes are polluted heavily. According to SEPA, over 70% of China’s lakes and 5 out of 7 major river systems are so polluted as to be unsuitable for human contact.

Which Companies Benefit from China's Water Scarcity

Agricultural Reliance Upon Imports

Food production self sufficiency will increasingly become a critical issue. Therefore, it is likely for China to increase its demand for overseas grain and food production which would have implications for grain prices.

• Archer-Daniels-Midland Company (ADM) could benefit with most of its production in North America.

• Monsanto Company (MON) could also see demand for its higher yielding crops. It has received approval from China for certain soybean and corn strains.

However, China is also likely to source closer to home as exemplified by its recent US$4.9 billion set of agreements with the Philippines for rice, corn, and sorghum crops.

China's trade in agricultural goods typically involves the importation of land-intensive crops (e.g. grains, soybeans, cotton) and the exportation of labor-intensive commodities (e.g. fish, fruits, vegetables, poultry, and processed agricultural goods). In 2004, China imported over $16 billion of agricultural goods.

Privatization of Water Supply

Thames Water, Veolia and Suez have invested into China’s water market. In the 1990s, the Central government allowed private water companies to invest into China’s water marketdue to the need for substantial infrastructure investment to reduce leakage – pipe leakage was larger than the amount of water households wasted. To help fund these investments, the cost of water has risen 8x from 0.14RMB per ton in 1998 to 1.25RMB in 2003.

In May 2007, Qin Hong, deputy director of the Policy Research Centre under the Ministry of Construction, announced at the China Water Congress 2007 that China also will begin construction on desalination plants, water treatment projects and the updating of water facilities and “foreign investment will be encouraged, especially in wastewater treatment projects.” Meanwhile, a senior official with China’s Ministry of Water Resources said in a May 8 Reuters report that China will invest 29.65 billion yuan ($3.85 billion) on improvements to dams and rural drinking water systems. According to Water Technology Online, 3.2 billion yuan ($415.8 million) would be spent on the reinforcement of reservoir banks and more than 6 billion yuan ($779.7 million) would be used for safe drinking water projects for rural residents.

Water Remediation Companies Would Benefit

DuPont (DD) is actively working to supply its water treatment technology to China. In November 2000, the State Council issued a notice requiring all cities with a population greater than 100,000 to build one or more wastewater treatment facilities by 2005. To fund these plants, water tariffs are expected to rise as cities levy wastewater surcharges. Build-Operate-Transfer water remediation concession projects are also emerging.

What Companies are Hurt by China's Water Scarcity

Reduced Agricultural Output Could Hurt Domestic Ethanol Production

Another issue becomes government policy towards bio fuels vs. food production and self sufficiency. China is the world’s third largest ethanol producer. Ethanol plants use anywhere from 3.5 to 6.0 gallons of water to produce 1.0 gallon of ethanol. Thus, despite its water scarcity woes, Chinese farmers use thousands of gallons of water to grow a ton of corn, and then using more water to turn the corn into ethanol. As a result, corn may not longer be viable as an ethanol source and China may move towards cellulosic ethanol for more of its ethanol production. China’s grain production has already declined in volume with 490 million tons in 2006 vs. 512 million tons in 1998. Now there is a possibility that China may become a net importer of corn if it persists in using biofuels.

Electric Power Supply Impact

Hydrolectric power plants have been forced to reduce their output due to a reduction of water flows on China’s rivers. This impacts coal power plants that need water to wash the dirty coal and to help operate the boilers for power generation. Further, the growth of hydropower may affect water quality because large-scale hydropower projects often change the course of rivers, which can cause sedimentation and a deterioration in water quality. Dams for hydropower also affect food supplies by harming fish migration. For example, the Chinese sturgeon fish, which has reportedly lived in the Yangtze river for over a million years once swam upstream from the East China Sea to the upper Yangtze River every spring to spawn. Now this migration route has been blocked by the building of the Gezhouba Dam, the Yangtze’s first hydroelectric dam. As a result, the number of the fish found in the river has dropped dramatically, from some 2,000 two decades ago to less than 500 today.

Impact on the Technology Sector

Semiconductor computer chip fabrication plants ("fabs") require an uninterrupted supply of clean water. Fabs often use 1 million to 2 million gallons of water a day to clean and rinse silicon wafers. As much as 2,000 gallons of ultrapure water can be used to clean a single eight-inch wafer. These wafers contain more than 100 fingernail-sized microchips, built for running everything from consumer electronics to computers to traffic lights. For example, Intel just announced plans to build its first semiconductor fabrication plant in Asia in Dalian, China for $2.5 billion. Intel will be investing $4 billion overall in China and will be closer to the Asia Pacific market, which make up 50% of its net revenue, and customers in China such as Lenovo Group and Dell.

Without sufficient semiconductor fabs, China will:

1. Not have ready access to parts it needs for its light assembly factories
2. Be unable to diversify its economy beyond low-margin manufacturing.

Yet requiring these operations to arrange their own water supply may be cost-prohibitive to their expansion in China.

Water Dependent Industries Hurt

Maanshan Iron & Steel, Shanghai Petrochemical, and paper companies, amongst others, could be negatively impacted by water scarcity. These companies are in water-consumptive industries. With dwindling supplies, availability of sufficient water could hurt productivity and water costs would likely be higher. Industries impacted include iron and steel, petroleum refining and petrochemical plants, paper mills, chemicals, and textile dyeing.

Energy Concepts Renewable Energy  • Biofuels  • Carbon Trading  • Cellulosic ethanol  • China's Water Scarcity  • China's Coal Power Pollution  • Clean Coal  • Coal Power  • Corn Prices  • Oil Prices