Water XXXXXXXXXXXX
Simon Powell Head of Sustainable Research [email protected] (852) 26008626
Jonathan Galligan (852) 26008888 Alasdair King (X) 2600888
13 January 2010
Asia Sustainable
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www.clsa.com
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Prepared for: [email protected] Thirsty Asia 2
Simon Powell Contents Head of Sustainable Research [email protected] (852) 26008626 Executive summary ...... 3 Jonathan Galligan (852) 26008605 Peak water is with us ...... 5 Alasdair King (852) 26008888 China - Tariffs to double ...... 11
Lack of water means less food ...... 18
Industry - Disclose and reduce...... 29
Dying for the toilet ...... 35
Western trickle versus eastern torrent...... 40
Investing in the space ...... 48
All prices quoted herein are as at close of business 13 January 2010, unless otherwise stated
Tapping related research
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Thirsty Asia 2 China and India face the Water stress is increasingly prevalent in Asia, due mainly to increasing biggest issues demand from agriculture, industry and higher populations. China and India are under the greatest stress because of underground-aquifer overpumping, heavy reliance upon irrigation and accelerated melting of the glaciers that feed Asia’s major rivers. We believe that change in agricultural practices are overdue and are an emerging area that investors should look at closely.
The world has already hit Any further decline in freshwater availability could have serious consequences “peak water” for food security, industrial growth and environmental sustainability. A recent study by Mckinsey highlighted that the world used 4.0tn m³ of freshwater in 1995, estimating this to increase to 4.5tn m³ in 2010. An ongoing 2% Cagr assumption to 2030, based on current population growth, would result in demand of 6.9tn m³ (assuming no efficiency gains). With current reliable accessible supply at 4.2tn m³, the world has already hit “peak water”.
Major issue is population The highest forecast increase in water usage is in agriculture. Water for growth driving food growing food makes up more than 70% of global use at 3.1tn m³. Mckinsey demand and the need for forecasts this to rise by 45% to 4.5tn m³ by 2030. So in a constrained world, more irrigated land a major issue is one of population growth driving food demand and thus the need for more irrigated land. Nowhere is this more prevalent than in Asia - specifically China and India.
China can’t hold back Asia used more than 2.8tn m³ of freshwater in 2009, and this should increase the effects of climate by 1,800bn m³ by 2030. For India, agriculture in the northern region is highly change forever vulnerable to a change in river flow resulting from glacial melt. In China, the effects have included, among others, shrinkage of lakes and rivers, the retreat of glaciers and declining grassland and desertification. While China achieved a good wheat and rice harvest despite extreme drought in 2009/10, it cannot hold back the effects of climate change forever.
Significant shortfall in Global water demand and supply 2010 versus 2030 supply by 2030 8,000 (bn m3) Municipal & Domestic Industry Agriculture 7,000 6,000 2,800 5,000 4,500
4,000 700 Groundwater
3,000 3,100 2,000 1,500 3,500 Surface water 1,000 800 600 900 0 Existing 2030 Shortfall Existing accessible, withdrawals withdrawals reliable, sustainable supply
Source: Mckinsey, 2030 Water Resources Global Water Supply and Demand Model
Hot themes for water This report identifies “hot” investment areas in the sector. These focus on conservation and efficiency - especially in the context of agriculture, which accounts for 70% of water use. Recycling and reuse, sewage treatment and potable water, along with tapwater quality are the hottest themes. However, as in every trade, there are also challenges for investors. The industry has been heavily consolidated and lies mostly in the public sector. Listed
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private-sector companies are typically small caps. In addition, the sector tends to attract competition in terms of new infrastructure development. Pure water plays are also hard to find with many companies engaged in other activities such as property development.
Water efficiency in With up to 70% of global consumption from agricultural usage, the issue of agriculture water and “peak water” is linked to food and food demand. As peak water is reached in key countries such as India and China, it is new approaches to food production that can yield the greatest efficiency gains at the lowest cost.
We like drip-film These feature the familiar technologies of better water application, such as irrigation increased drip-film and sprinkler irrigation. Crop-productivity measures include, among others, nontill farming and improved drainage, utilisation of the best available germplasm or seed development, optimising fertiliser use, and crop-stress management, applying improved practices (such as integrated pest management) and innovative crop-protection technologies.
Sewage treatment, water Some of the forecast deficit in available water could be met through increased recycling and reuse levels of water reuse. Cleaning up wastewater to a level where it is suitable for agriculture could go a long way to meeting global shortfalls. In Asia, we see the greatest uplift in wastewater-treatment investment in China and India. Beijing has assigned more than Rmb75bn in the soon-to-be-announced 12th five-year plan for 2011 to 2015 to build sewage-treatment plants to improve the treatment rate. We estimate that less than 60% of sewage is treated before being discharged into rivers or waterways in China. As treatment rates rise, sewage-plant operators will be able to sell “grey water” back to industry, delivering new revenue streams. Investors should focus on the following when picking stocks in this space: Government spending in China and India will be significant Tariffs will rise faster for sewage operators than potable-water operators Revenue collection for sewage is more difficult than for potable water Additional earnings upside is likely to come from selling treated water
Desalination Despite being one of the most expensive supply-side solutions, we continue to expect new desalination projects in Asia. China is planning more, including one of the world’s largest plants, at Tianjin (1,000 m³/day). While the cost per cubic metre is very high relative to water tariffs in Asia, we believe that governments will continue to invest in the technology as a way to supplement water sources. According to the National Sea Water Utilization Special Program, China’s need for desalinated water will almost triple over the next 10 years.
Pipelines and Asian water lags other key infrastructure in capacity and coverage. Pipelines infrastructure are in big demand for both new projects and to replace ageing ones. With new capacity and connections needed across the region there will be extensive investment in water-treatment plants, sewage-treatment plants and pipeline networks. We expect increased spending on water storage as traditional sources such as rivers and aquifers show signs of stress.
Bottled water After many years of strong growth in demand for bottled water, developed- market demand has stalled and is now contracting. In sharp contrast developing markets are still growing fast. Concerns over water quality will continue to drive strong demand for bottled water across the developing markets of China and India.
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Peak water is with us Losing supplies As we highlighted back in our 2007 report ‘Thirsty Asia’ the world has a finite through pollution of supply of available freshwater, and growth in demand coupled with existing sources destruction of resources through pollution and climate change means that peak water has already been reached.
The US Geological Survey estimates that more than two-thirds of the earth’s surface is covered with water, yet less than 1% is fresh and easily accessible.
Figure 1 Lots of water - but only 1% is on the surface and fresh
Rivers 2%
Swamps Ground water 11% 30.1% Other Saline Fresh water 0.9% (oceans) 3% Surface water 97% Icecaps 0.3% Lakes 68.7% 87%
Source: US Geological Survey
Fixed supply + growing In total, 69% of the world’s freshwater is inaccessible, frozen in earth’s ice demand x pollution caps, glaciers and permafrost. Of the 10.7m km³ that is accessible, the vast = shortage majority (10.5m km³) is underground. The remaining 135,000km³ flows above ground in rivers, lakes and wetlands. These accessible freshwater resources are distributed unevenly around the world, aggravating water- supply pressure.
About one third of world’s The incremental demand that is expected to materialise over the next 20 population lives in years will simply add more pressure to an already overstretched resource. countries with moderate The World Health Organisation estimates that more than one billion people to high water stress lack reliable access to clean drinking water and 2.6 billion people lack adequate sanitation. About one third of the world’s population lives in countries with moderate to high water stress (ie, where water consumption is more than 10% of the renewable freshwater supply). The problems are most acute in Africa and North Asia, but the lack of water is already a major constraint to industrial and socioeconomic growth in many other areas, including China, India and Indonesia. According to the United Nations, if current consumption patterns continue, two thirds of the world’s population will live in water-stressed conditions by the year 2025.
Figure 2 Demand already exceeds Global water demand and supply 2010 versus 2030 available supply 8,000 (bn m3) Municipal & Domestic Industry Agriculture 7,000 6,000 2,800 5,000 4,500
4,000 700 Groundwater 3,000 3,100 2,000 1,500 3,500 Surface 1,000 800 water 600 900 0 Existing 2030 Shortfall Existing accessible, withdrawals withdrawals reliable, sustainable supply
Source: McKinsey, 2030 Water Resources Global Water Supply and Demand Model
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Future demand - agriculture the big factor India and China Incremental demand for water is split across agriculture, industry and representing 36% of domestic use with agriculture representing 56% of the additional 2.7tn m³ growth in demand needed. India and China’s demand account for 36% of the total.
Figure 3 Most growth in demand is Increase in annual demand for water 2005 to 2030 for growing food China
India
Sub-Saharan Africa
Rest of Asia
N. America
Europe Agriculture S.America Industry Municipal and domestic MENA
Oceania (bn m³)
0 100 200 300 400 500 600
Source: McKinsey, 2030 Water Resources Global Water Supply and Demand Model
Mapping existing total consumption and per capita consumption shows that as per capita consumption in China and India rises those two locations become the main focus of water stress.
Figure 4 Water usage by country
700 (km3/yr) Water extracted (LHS) Water extracted per capita (m3/yr) 1,800
1,600 600 1,400 500 1,200
400 1,000
300 800
600 200 400 100 200
0 0 USA India Brazil Spain China Japan Egypt France Mexico Canada United Vietnam Pakistan Thailand Australia Malaysia Kingdom Indonesia Philippines Bangladesh Saudi Arabia
Source: Pacific Institute, The Worlds Water 2008-2009
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Desalination starting to look attractive A feasible alternative Desalination is being considered or adopted in parts of the world where demand has increased beyond sustainable supply, where water sources are fragile or overdrawn, or where climate change has made previously reliable sources unreliable.
Prices have declined sharply for multi-stage flash (MSF), but reverse osmosis (RO) is still the cheapest desalination method.
Figure 5 Cost per tonne is still Total cost of desalination above developing market Cost (US$/tonne) end-user tariffs Multi-stage flash (MSF) 1 Declined from US$9 per m³ in 1960s Reverse osmosis (RO) 0.5-1 Declined from US$5 per m³ in 1970s Multiple-effect distillation (MED) 2-10 Declined from US$10 per m³ in the 1950s Vapour compression (VC) 2-3 Electro dialysis (ED) 1-3 Can be less than US$1 for brackish water Source: Research Unit Sustainability and Global Change, Hamburg
China turns to The Middle East, North Africa, the Caribbean, Southern Europe, China, desalination for major Singapore and the USA already employ desalination extensively for major public supplies public supply.
MSF and MED thermal Despite membrane desalination’s lower operating costs, the MSF and multiple methods preferred in the effect distillation (MED) thermal desalination are still the preferred technology Middle East in the Middle East, partly because it is more robust (reports that a number of RO plants have failed in areas of high salinity) and partly because the thermal plants come with attached powerplants.
Global Water Intelligence (GWI) forecasts suggest that China, Australia and India are set to grow their installed desalination capacities significantly over the next 10 years to meet growing demand for freshwater and water for industrial use.
Figure 6 China ramping Forecast growth in desalination capacity in Asia desalination 16 (m m³/d) China Australia Singapore India 14 Indonesia Thailand Pakistan Philippines 12 Malaysia Hong Kong, China
10
8
6
4
2
0 2006 2011F 2016F
Source: GWI, CLSA Asia-Pacific Markets
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Figure 7
Desalination plants by country Current plants Additional planned Comment No. Total capacity No. Capacity (‘000m³/day) (‘000m³/day) Australia 2 130 4 750 Plant in Perth, planned in Melbourne, Sydney and Queensland Spain 700 1,600 29 1,600 Saudi Arabia 30 3,000 6,000 Struggling to keep up with demand Israel 1,096 2,055 China 22 120 20-30 3,000 US 104 246 11 600 Mostly brackish water projects in Texas, California (3), Tampa (1) UK 1 140 Proposed for London Source: WWF
In Mumbai the government has just started planning the city’s first desalination plant, which will start treating seawater for use from mid-2011. Work on the project begins this year. However, debates are raging over space to build the plant so we expect delays.
Recycling water - From toilet to tap Wastewater treatment Indirectly drinking what Recycled water is wastewater (sewage) that has been treated and purified for comes out of the toilet reuse rather than discharged into a body of water. In some locations, it is treated to be cleaner than standard drinking water, and is used indirectly for drinking. In others, it is only intended for nonpotable uses, such as irrigation.
Suitable for drinking? Concerns prevent In many locations, reclaimed water is not directly mixed with potable large-scale use (drinking) water for several reasons: Humans may face psychological barriers against drinking reclaimed water, since it was formerly sewage. Small amounts of pathogens and pharmaceutical chemicals (eg, hormones from female hormonal contraception) may pass through the filtering process, potentially causing danger to humans. RO is helping to overcome this problem. An experiment by the University of New South Wales showed a RO system removed ethinylestradiol and paracetamol from wastewater, even at 1,000 times the expected parts per million.
Authorities play safe Some regulatory agencies ban reclaimed water for drinking, bathing in or filling swimming pools. They also caution those who use reclaimed water for irrigation to place a sign on their property warning people not to drink from the irrigation system, and not to use it directly on fruit or vegetables.
Singapore to use 2.5% Some municipalities are investigating planned “indirect potable use” (IPU) of reclaimed water by 2011 reclaimed water. For example, reclaimed water may be pumped into reservoirs, where it will mix with (and diluted by) rainwater. This mixture of rainwater and reclaimed water can then be treated again and finally used as drinking water. This technique may also be referred to as groundwater recharging or reservoir augmentation. Singapore plans to increase the amount of reclaimed water in its reservoirs from 1% to 2.5% by 2011.
London drinking Unplanned indirect potable use existed before the introduction of reclaimed upstream sewage water. Many cities already use water from rivers that contain effluent discharged from upstream sewage treatment plants. It is sometimes said that
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water in London has been drunk five times before it arrived at the tap. There are many large towns on the River Thames upstream of London (Oxford, Reading, Swindon and Bracknell) that discharge their treated sewage into the river, which is used to supply London with water downstream. This phenomenon is also present in the USA, where the Mississippi River serves as both the destination of sewage-treatment-plant effluent and the source of potable water. And in Australia, the water in the Murray River passes through many agricultural areas and towns before it reaches Adelaide. Research conducted in the 1960s by the London Metropolitan Water Board demonstrated that the maximum extent of recycling water is about 11 times before the taste of water induces nausea in sensitive individuals. This is caused by the build up of inorganic ions, which are not removed by conventional sewage treatment.
China targets increasing From discussions with a number of sewage treatment plants in China, we urban wastewater learnt that water-quality standards of the final output are extremely high. In treatment from 45% many instances there is indirect flow on to the potable water systems as the to 60-70% by 2010 discharge into the river is then picked up as the raw water source by a city or town downstream. As the government places increasing restrictions on where industry can source its water, we expect demand for recycled water to grow.
Reclaimed water - A new income source Many big cities in China, particularly those in the water-scarce north, are promoting the use of recycled water - ie, wastewater that has been treated and purified for nonpotable use - as a critical solution to the water crisis. In Beijing, the reclaimed water price is set at Rmb1/tonne, highly competitive compared with the regular Rmb3.7/tonne water price. Total use of reclaimed water in Beijing exceeded 10% of total water consumption in 1H07. The municipal government plans to add five new reclaimed water projects and 200 kilometres of reclaimed water distribution networks, which will raise the city’s reclaimed water-use ratio to 20% of total water consumption by 2010. The government has also pledged to lift the reclaimed water price in accordance with increases to the regular water price. We predict that in water-scarce cities, market acceptance of the use of reclaimed water will quickly accelerate, driven by government promotions and price incentives, and this will provide considerable added value to wastewater treatment firms.
Advanced systems Conventional water-treatment technologies are being supplemented in water- are supplementing short areas by advanced systems capable of processing wastewater for reuse conventional ones in certain applications. In Kuwait, GE (US) recently completed the world’s largest membrane filtration water purification plant, which will treat up to 100 million gallons of wastewater per day for reuse by agriculture and industry.
Leading providers: Wastewater treatment: Siemens (Germany), Suez (France), Veolia (France), RWE (Germany) and GE (US). Membrane suppliers: Asahi Kasei (Japan), Vontron Envirotech (China) and Saehan (South Korea).
Irrigation Irrigation is the greatest One of the largest uses of water worldwide is for irrigation for food and fibre human use of water production. Growing populations, increased competition for water from urban centres and rising prices are putting pressure on agricultural water allocation. As a result, efforts are expanding rapidly to improve the efficiency of irrigation-water use to permit more food to be grown with less water.
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Growth opportunities Providers of high-efficiency irrigation systems, such as precision sprinklers for high-efficiency (including low-energy, precision application systems), drip irrigation and irrigation systems advanced monitoring and control systems for irrigation management are seeing growth opportunities. Drip irrigation can reduce water use by 30-70%, reduce risks of increased soil salinity and increase agricultural yields. Although drip irrigation accounts for only a few percentage points of the irrigation market, it is growing rapidly globally and is regionally significant. In 2005, nearly 70% of Californian orchards were watered via drip/precision sprinklers, up from 0% in 1970.
Leading providers: Rainbird (US), Toro (US), Hunter Industries (US), Eurodrip (Greece) and Netafim (Israel). Asian players: Jain Irrigation (India) and Xinjiang Tianye Water Saving Irrigation System (China).
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China - Tariffs to double When we wrote ‘Thirsty Asia’ in 2007, what struck us was how low tariffs for potable water were in China, so in revisiting the topic of water we are able to look again at our projections of rising tariffs.
In 2007 we said: ‘China could only ease its water shortages by controlling rampant pollution. Official data in 2006 indicates that just 40% of the country’s surface water is drinkable, 32% is suitable only for agricultural and industrial use and 28% is too polluted to be used for anything. Incremental water consumption over the next decade will come mainly from “third-” and “fourth-tier” cities. Annual water price increases (Cagr) would hit 8% year-on-year by 2010, with wastewater treatment fees increasing at a slightly faster pace to account for 34% of the total water price by 2010, up from the 30% now. Manufacturers will have to bear higher water charges as Beijing is likely to use water price hikes more frequently in future as part of its campaign to reduce energy-consuming and high-polluting industries.’
In most cases our predictions were frighteningly accurate:
Sewage treatment rates have risen sharply. The average residential wastewater-treatment ratio increased from 44.4% in 2004 to 65.4% in 2006, and is now at 79%.
Potable water tariffs are up more than 27% since 2006. With an average Cagr of 8.6%, while the wastewater tariff has not risen as much as we had predicted, it is still up 25% since 2006.
Water prices rising off a low base Hong Kong has the China’s average tariff for water is extremely low. Hong Kong SAR has the highest but still low in highest tariff nationally, followed closely by Beijing. What is interesting is that global terms the difference in prices between cities does suggest some attempt to make prices higher in those parts of the country that are relatively dryer.
Figure 8 Figure 9 Global water prices Water in China
Denmark Water/m³ for 15m³/month user Wastewater/m³ for 15m³/month user UK Australia Hong Kong USA Japan Beijing Canada Spain Indonesia Tianjin Korea Hong Kong Water/m³ for 15m³/month user Chonqing Beijing Wastewater/m³ for 15m³/month user Philippines Guangzhou Taiwan Shanghai Hangzhou Vietnam India (US$) Shanghai (US$) Pakistan
012345678 0 0.1 0.2 0.3 0.4 0.5 0.6
Source: GWI, CLSA Asia-Pacific Markets
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Beijing - A city in water crisis In terms of water resources per capita, Beijing is a Surface water, in the form of 85 reservoirs, including capital in crisis. Estimates put total water resources at the two most important, Guanting and Miyun, provide 3.7bn m³ making the per capita level 300m³ or 1/8 of 40% of the city’s needs with a staggering 60% coming the national level and 1/32 of the world average. The from groundwater with seven large waterworks bottomline is that Beijing has a severe water shortage. exploiting groundwater.
Perhaps the most direct evidence of the scale of the Seeding clouds has become a common way to try and problem is that the government is spending in excess of elicit precipitation in the typically dryer winter months. US$60bn on the South-North Water Diversion project Most recently in late 2009 the authorities caused (SNWD). It would not be doing this if it did not think significant snow to fall while cloudseeding. there was a real and pressing issue. SNWD will transfer water from the Yangtze River in the water-rich south to Surprisingly agriculture is a big user the water-poor north. The project was originally due to One interesting data point that jumps out in analysis of be completed by 2010 but has suffered ongoing delays. Beijing’s water use is the amount that agriculture Construction began in 2002 and will continue into the consumes. Perhaps it is not surprising when investors mid-2030s. More than 2,500km of canals will be built in consider that across China agriculture accounts for three separate projects. almost 70% of total water use (mainly through irrigation) and that agriculture is still dominated by China’s SNWD project - Pipedream to reality small holdings and market-garden type operations.
Limits reached soon The government has projected that by 2010, water demand in Beijing will be close to 5.7bn m³, while surface and underground water can only supply 4.1bn m³ per year as an average, and the lowest water available a year will be around 3.4bn m³ and 3.8bn m³. So the deficit will be between 1.7bn m³ and 2.3bn m³.
Pollution of surface water One of the biggest causes of the water stress on the capital is the pollution of existing water sources by incorrect discharge of wastewater. In Beijing almost 3m Source: CLSA Asia-Pacific Markets m³ is being discharged daily and the treatment rate is low at less than 40%. Its not like it doesn’t rain in the capital Average annual rainfall in Beijing is 585mm but there According to the “2005 Environmental Quality Report in are extremes with some years close to 1,400mm and Beijing,” only 19 sections of 71 sections of rivers being others when it is down to 270mm. The issue is uneven monitored are able to reach the water-quality standards distribution and insufficient storage. required. Water quality in 600 kilometres of the 1,400 kilometres of rivers monitored were in the fourth and It is the typical issue that when it rains it comes at the fifth grade or worse than fifth, which accounts for 40% “wrong time”. About 85% of the rain falls from June to of the total length of the rivers checked. September but in some years up to 70% of the annual total falls in the last ten days of July and the first ten While Beijing’s tariff has risen sharply since the late days of August. The result is lost run off and severe 1990s, rising fourfold, it is still on an absolute cost water stress through the dryer parts of the year. basis low compared with other countries.
Beijing - Split of water usage Beijing - Split of household use Beijing - Residential water tariffs Environment Cooking and 5 (Rmb/m³) Sewage treatment cost 2% cleaning dishes 5% Residential use water price Washing 4 clothes 21% House cleaning 3 Municipal Agriculture (floor, furniture, and 39% Watering yard, etc.) 30% 2 Residents gardens 1% 39% 1
0 Self cleaning
Industry 97 98 99 00 (washing face, Drinking 10CL 20% 2003 2004 bathing etc.) 41% water 2% 81-91 92-96
2000-02 2004-09 Source: CLSA Asia-Pacific Markets Source: Government Data, CLSA Asia-Pacific Markets
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One of the biggest This opens up the question of affordability. While it is hard to characterise the anomalies with water average family in China in terms of average income it does appear that for is its price many affordability is high with China’s typical bill representing just over 1% of a typical disposable income, compared with higher levels in other parts of Asia. This supports our view that there is significant headroom for tariff growth. Something we have highlighted extensively in previous reports.
Figure 10 High affordability in China Water affordability
4.5 (%) Water bill as a % of disposable income (LHS) (%) 110 4.0 Rural population with access to an improved water sources 3.5 100 3.0 90 2.5 2.0 80 1.5
1.0 70 0.5 0.0 60 India China Japan Vietnam Malaysia Indonesia Singapore Philippines Hong Kong South Korea
Source: World Bank, ADB, CLSA Asia-Pacific Markets
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In 2007 China Reality Research (CRR) visited 15 cities in China and spoke to David Murphy government officials, water-utility investors and industrial manufacturers in Head, China Reality Research 13 cities in 12 provinces across the country. We documented CRR’s findings in [email protected] Thirsty Asia and highlighted then the key trends, including ongoing tariff (86) 1059652028 increases, action to curb pollution and significant investment in sewage treatment. CRR returned to the same cities in 2009 to see what had changed.
Figure 11 CRR’s China water survey - Then and now 2007 2009
Tariffs Annual water price increases (Cagr) Compared with 2006 when we last time CLSA Asia-Pacific Markets will hit 8% year-on-year by 2010, with did the research water prices have gone wastewater treatment fees increasing up by 28% on average, with a Cagr of at a slightly faster pace to account for 8.6%. 34% of the total water price by 2010, up from the 30%. Of the 15 cities, 11 plan to raise water prices in 2010, by an average rate of about 10% (industrial 11%, household 10%, sewage 11%).
Wastewater Local governments in the 13 cities we The sewage treatment rate has treatment visited have begun to take serious increased more than we expected going action against water pollution with up to 92% in industries and 79% in targets to increase the number of households. wastewater-treatment plants by 50% and raise the wastewater-treatment ratio to more than 80% in 2010. But they are in urgent need of external investment to achieve these goals.
Users Manufacturers will have to bear higher Only the low income families feel the water charges as Beijing is likely to pressure from the current water prices use water price hikes more frequently on their daily life. Urban families still in future as part of its campaign to have room to withstand over 50% water reduce energy-consuming and high- tariff hike before they are forced to cut polluting industries. water consumption. Source: CRR, CLSA Asia-Pacific Markets
Dipping our toe in the water in 13 cities Pollution renders large Half of the 13 cities CRR visited are located in naturally water abundant areas, quantities of water such as Wuhan in Hubei province and Jiaxing in Zhejiang province. But water resources unusable scarcity is still a problem in these cities as heavy-water pollution has rendered large quantities of existing water resources unusable. If measured according to the water consumption/resource ratio, a model used by the United Nations to gauge water scarcity levels, only two of the cities we visited, Chongqing and Liuzhou, would be considered relatively water abundant areas. Even Chongqing has faced serious droughts during the past two summers.
There have been no In Jiaxing, a city lying in the basin of Taihu Lake and the Yangtze River, an drinkable water resources official at the local environmental protection bureau told us that there has in Jiaxing since 2000 been no drinkable water resourced in the city area since 2000. Home to thousands of textile, chemical and papermaking workshops, over 88.5% of Jiaxing’s surface water has become too contaminated even for industrial use. In 2006, the city invested Rmb5.5bn in building a project to transfer freshwater from the Taihu Lake, which will be put into operation in 2010. However, Taihu Lake itself is one of the most polluted water bodies in China. In June, a proliferation of cyanobacteria, mainly due to high organic pollution, in the north part of the lake triggered a water-supply crisis in Wuxi, which lies some 100 kilometres north of Jiaxing in Jiangsu province. Official data released by local governments in provinces bordering the lake reveals that only 18.8% of water in Taihu Lake is suitable for drinking.
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Figure 12
Tariffs raised in high Residential tariffs up 250% in 15 years demand cities 4.5 (Rmb/tonne) 1995 2000 2004 2005 4.0 2006 2009 10CL 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Hefei Jinan Tianjin Jiaxing Wuhan Urumqi Nanjing Liuzhou Taiyuan Lanzhou Shaoxing Yancheng Shenyang Chongqing Shijiazhuang
Figure 13 Industrial users paying Industrial tariffs up 190% in 15 years more than residential to promote conservation 8 (Rmb/tonne) 1995 2000 2004 2005 2006 2009 10CL 7 6 5 4 3 2 1 0 Hefei Jinan Tianjin Jiaxing Wuhan Urumqi Nanjing Liuzhou Taiyuan Lanzhou Shaoxing Yancheng Shenyang Chongqing Shijiazhuang
Source: CRR
Significant increases in the treatment of wastewater Sewage treatment levels The survey reveals increasing levels of wastewater treatment with some the are rising sharply biggest step ups in treatment levels taking place between 2006 and 2009.
Back in 2006 we found local authorities were taking an increasingly serious attitude towards water pollution. The average industrial wastewater- treatment ratio in the 13 cities had risen from 82.9% in 2004 to 90.4% in 2006, and the average from our most recent survey saw 92% of industrial wastewater being treated.
The average residential wastewater-treatment ratio in these cities had increased from 44.4% in 2004 to 65.4% in 2006, and is now at 79%.
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Figure 14 Figure 15
CRR asked consumers if increasing water tariffs would Sewage treatment levels up sharply significantly impact their cost of living?
(%) Industrial Residential Yes 100 13% 90
80
70
60
No 50 87%
40 2004 2005 2006 2009
Figure 16 Residential sewage- Residential sewage treatment levels treatment levels rising sharply 100 (%) 2004 2005 2006 2009 90 80 70 60 50 40 30 20 10 0 Hefei Jinan Tianjin Jiaxing Wuhan Urumqi Nanjing Liuzhou Taiyuan Lanzhou Shaoxing Yancheng Shenyang Chongqing Shijiazhuang
Figure 17 Sewage treatment levels Industrial sewage treatment levels exceeded our 2007 expectation (%) 2004 2005 2006 2009 100 90 80 70 60 50 40 30 20 10 0 Hefei Jinan Tianjin Jiaxing Wuhan Urumqi Nanjing Liuzhou Taiyuan Lanzhou Shaoxing Yancheng Shenyang Chongqing Shijiazhuang
Source: CRR
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Figure 18
The cities are spread geographically across China
Urumuqi
Shenyang
Shijiazhuang Tianjin Taiyuan Jinan
Lanzhou Yancheng
Nanjing Hefei Wuhan Jiaxing Shaoxing Chongqing
Liuzhou
Hong Kong
Source: CLSA Asia-Pacific Markets China’s 12th five-year plan - focuses on the environment China will increase its spending on environmental protection in the 12th five- year plan, and the total investment is expected to reach Rmb3.1tn during the period from 2011 to 2015, according the Ministry of Environmental Protection.
Investment in Investment in the construction of pollution-control facilities will amount to construction of pollution Rmb1tn, resulting in China’s environmental investment exceeding that of the control facilities will USA and Japan. amount to Rmb1tn Industries related to the environmental protection will maintain average annual growth of 15% to 20%, and the combined output value will reach Rmb4.92tn.
Figure 19 Total spending on environmental protection 9th five-year plan 1996 - 2000 US$43bn 10th five-year plan 2001 - 2005 US$84bn 11th five-year plan 2006 - 2010 US$157bn 12th five-year plan 2011 - 2015 Est US$455bn¹ Note: ¹12th five-year plan is still being drafted. Source: CLSA Asia-Pacific Markets
The various industrial pollution incidents observed over the past year are also increasing regulatory pressure, especially where water supplies have been shut down due to industrial discharges.
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Lack of water means less food Food production is where A worrying side-effect of declining water tables is lower food security. Water some of the first effects of tables are falling in countries that hold more than half the world’s population. peak water are felt With more than 70% of global-water usage coming from agriculture, ongoing population growth requires even more food. It is in the area of food production that some of the first effects of peak water are being felt.
Irrigation water is in big demand - as food demand has tripled so too has the requirement for irrigation water. Much of this has come from underground sources so rapid depletion is not always visible.
Figure 20 China - Water resources per hectare of cultivated land
Heilongjiang
Jilin
Liaoning Xinjiang
Inner Mongolia Beijing
Tianjin Hebei Shanxi Ningxia Shandong Qinghai Gansu Jiangsu Shaanxi Henan Xizang (Tibet) Shanghai Anhui
Sichuan Hubei
Chongqing Zhejiang
Hunan Jiangxi Guizhou Fujian 0-5k cu.m/hectare
5k-15k- cu.m/hectare Yunnan Guangxi Guangdong 15k-30k- cu.m/hectare
30k+ cu.m/hectare Hong Kong
Hainan
Source: China Yearbook, CLSA Asia-Pacific Markets
China’s water resources are overwhelmingly concentrated in southern China, while northern China, the area north of the Yangtze River Basin, has one- fourth the per capita water endowment of the south and one-tenth of the world average according to the Ministry of Water Resources.
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More than 65% of China’s The lower rainfall levels in northern China are also much more seasonal than cultivated land is in in the south, with more than 70% of rain falling between June and northern China September. Northern China, however, remains an important agricultural region and the site of much of China’s industrial production. Although it has only 24% of the nation’s water resources, it contains more than 65% of its cultivated land. The region produces roughly half of the nation’s grain (and nearly all its wheat and maize) and more than 45% of GDP.
Figure 21 China’s total water resources
Heilongjiang
Jilin
Liaoning Xinjiang
Inner Mongolia Beijing
Tianjin Hebei Shanxi Ningxia Shandong Qinghai Gansu Jiangsu Shaanxi Henan Xizang (Tibet) Shanghai Anhui
Sichuan Hubei
Chongqing Zhejiang
Hunan Jiangxi Guizhou Fujian 0-10k million cu.m
10k-50k- million cu.m Yunnan Guangxi Guangdong 50k-100k- million cu.m
100k+ million cu.m Hong Kong
Hainan
Source: China Yearbook, CLSA Asia-Pacific Markets
Desertification issues China is starting to see the long-term effects of excessive water exploitation showing up in the north and is facing water-scarcity problems that might reach crisis levels in the near and west future unless policies are adopted and institutions emerge to avert such an event. Although water scarcity in northern China has been building for decades, it has only recently begun to affect the livelihoods of people and threaten the profitability of economic activity. In response, China has begun to address these problems at nearly all levels, from national to village and farm levels. In some cases, progress is difficult to detect, but, given the length of time it took to create these problems, it is reasonable to assume that the solutions will also be difficult to implement and progress will be slow.
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Remaining self-sufficient in grain production? Still self sufficient for now Water is a critical factor for agricultural production in China. Without the expansion of irrigated agriculture in the North China Plain, China could not meet its grain self-sufficiency goals.
The changes that China’s leaders, water managers and farmers need to make to maintain sufficient water resources for agriculture and increase the productivity of water use in the sector will change the way water is allocated to agriculture in many ways. Delivering water to farmers in a more reliable and timely manner and implementing water-price reforms so that water use in agriculture more closely reflects its opportunity costs will enable China to adjust to limited water resources for agriculture. This will greatly enhance the value of water to agricultural users, but, in return, agricultural users will likely have to either pay more for the water or accept cutbacks in their overall water allocations.
Shifting farming patterns Adapting to higher priced water or smaller allocations of water (or both), will from higher-priced water result in farmers shifting production patterns. One of the most likely shifts in and/or smaller allocation production is in the common practice of wheat/corn double-cropping in northern China. Currently, farmers plant winter wheat in November and harvest it in June, then plant corn in June and harvest it in September or October. During the corn-growing season, rainfall is sufficient and irrigation is not usually needed (but is sometimes used to supplement rainfall and increase yields). However, during the winter wheat season, rainfall is scarce and the crops rely heavily on irrigation. Thus, if water prices increase or deliveries are reduced, many farmers may move out of irrigated wheat production, decreasing yields substantially. As China’s farmers move out of irrigated wheat production, production of other crops will probably increase. Farmers may choose to maintain wheat-sown area but forgo irrigation. This would result in lower wheat yields but not much change in other crop yields. Alternatively, farmers may switch to other crops. In the past, farmers switched to water-saving crops, such as millet, as water became scarcer. On the aggregate level, however, such changes will be limited by the demand for such alternative crops. Farmers could also abandon irrigated wheat production and concentrate on a single crop of corn, which, with a longer growing season, could show significantly higher yields.
India’s two growing seasons The Kharif season is during the south- (sown during April to July, and harvested by west monsoon (July-October). During October). The most important Kharif crop is paddy- this season, agricultural activities take grown rice. Rabi crops are generally sown between place both in rain-fed areas and October and February and harvested by June. The irrigated areas. The Rabi season is most important Rabi crop is wheat. With the during the winter months, when expansion of irrigation and the “green revolution”, agricultural activities take place only in traditional patterns of cultivation in India have been the irrigated areas. changing. Still paddy and wheat remain the major Kharif and Rabi crops, respectively. Other Kharif Bhavtosh Vajpayee Kharif (variously spelt including as crops include sugarcane, groundnuts, maize and a Regional Head of Khariff) season would generally variety of pulses. Other Rabi crops include barley and Technology (852) 26008388 cover months of summer and rains a variety of oil seeds.
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Figure 22 Figure 23
Headroom for yield rises Rice yields - China versus India Rice production - China versus India
8 (tonnes/hectare) China India 250,000 (m tonnes) China India 7 200,000 6 5 150,000 4 3 100,000 2 50,000 1 0 0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009F 2009F
Source: US department of Agriculture
Figure 24 Figure 25 Increasingly a summer India - Yields have doubled India - Summer versus winter yields story 135 Hectare (m) (Kg per Hectare) 2,000 3,000 (kg per Hectare) Kharif - Summer sowing 130 Rabi - Winter sowing 1,500 2,500 125 2,000 120 1,000 1,500 115 Total area sown 500 1,000 110 Yield (RHS) 105 0 500 1966-67 1970-71 1974-75 1978-79 1982-83 1986-87 1990-91 1994-95 1998-99 2002-03 2006-07 1966-67 1970-71 1974-75 1978-79 1982-83 1986-87 1990-91 1994-95 1998-99 2002-03 2006-07
Source: Ministry of Agriculture
Melting heart - the demise of the reservoirs in the sky The “third pole” Rising temperatures in central Asia are contributing to an accelerated melting is melting of the Himalayan glaciers. Average temperatures across Nepal have risen 1.6 degrees Celsius in 50 years - twice the global average. In the higher reaches of the region, in what is called the “third pole”, temperatures are already nearly four degrees Celsius above normal and on track to rise by as much as eight degrees Celsius by 2050. The rapid melt has resulted in the formation of moraine dams and large lakes that, if they were to burst, could cause significant flooding downstream. In a recent report published by Nepal’s International Center for Integrated Mountain Development as many as 26 of these lakes pose a real danger of a glacial lake outburst flood (GLOF) similar to those witnessed in 1985 and 1994.
Figure 26 If these glacial lakes were Size changes in potentially dangerous lakes in Nepal to burst? Glacial Lake Lower Barun Imja Tsho Rolpa Thulagi Location 10km south 9km south 46km west- 10km southwest of Mt. Makalu of Mt. Everest southwest of of Mt. Manaslu Mt. Everest Altitude (above sea level) (m) 4,570 5,000 4,580 4,146 (Observation Years) 1992 2007 1992 2007 1992 2007 1992 2007 Width (km) 0.6 0.6 0.6 0.06 0.06 0.06 0.4 Length (km) 1.2 2.0 1.5 1.7-2.4 3.2 3.4 2.0 2.4 Area (km2) 0.75 1.09 0.69 0.93 1.49 1.52 0.76 0.93 Increase in lake size (%) 45 35 2 22 Source: Japan Aerospace Exploration Agency, University of Maryland, USA.
Rivers will eventually The International Commission for Snow and Ice stated in a report that diminish, resulting in glaciers in the Himalayas are receding faster than in any other part of the widespread water world and, if the present rate continues, the likelihood of them disappearing shortages by the year 2035 is very high. Even if they do not completely disappear it seems evident that the flow of Himalayan rivers will eventually diminish, resulting in widespread water shortages.
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Figure 27
Glaciers continue to Glaciers in high Asia - Growing or shrinking shrink Period Total statistical Retreating Advancing Stationary glaciers assessed glaciers % glaciers % glaciers % 1950-1970 116 53 30 16 1970-1980 224 44 26 30 1980-1990 612 90 10 0 1990 to present 612 95 5 0 Source: WWF, Yao Tandong, CLSA Asia-Pacific Markets
More than 900 million In the context of India and China, where more than 900 million people live in people would be affected the Yellow River, Yangtze, Indus, Ganges and Brahmaputra river basins, and by less flow in key rivers rely on the perennial supply of meltwater from the Himalayas, the impact is significant. With increasing domestic, agricultural and industrial demand from a growing population, the problem of water stress is already evident. A further reduction in the availability of freshwater could have serious consequences for the economy, the environment and the daily lives of many millions of people within the affected basins and beyond.
Yangtze cities account for According to Chinese government statistics the total GDP of all the cities much of China’s GDP along the Yangtze is more than 40% of national GDP.
India is highly dependant upon extracting water from its key rivers with the Brahmaputra and the Ganga together representing more than 75% of total water source.
Figure 28 India’s current water withdrawal per annum from key rivers and basins
Brahmaputra & Barak River
Ganga River
West flowing rivers from Tadri to Kanyakumari
Godavari
West flowing rivers from Tapi to Tadri
Krishna River
Indus River (up to border)
Mahanadi
Narmada
Minor river basins draining into Bangladesh & Burma
Brahmani & Baitarni
East flowing rivers between Mahanadi & Pennar
Cauvery
East flowing rivers between Pennar and Kanyakumari
West flowing rivers of Kutch, Sabarmati including Luni
Tapi
Subernarekha
Mahi
Pennar (km3/year) Sabarmati
0 50 100 150 200 250 300 350 400 450 500 550 600
Source: Ministry of Water Resources, CLSA Asia-Pacific Markets
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More than 50% of global With China’s wheat harvest nearly twice that of the USA, and rice production food grown relies in some in China and India relying on water from rivers fed by the “high Asian” way on water from rivers glaciers, predictions that most will disappear by the end of the century points fed by Asian glaciers to an ecological and human catastrophe. More than half the food grown in the world relies in some small way on either water from rivers fed by high Asian glaciers or by the resulting monsoons that are influenced by those glaciers.
Figure 29 China's yields higher China and USA wheat production through irrigation 130,000 ('000 tonne) China wheat production USA wheat production 120,000
110,000
100,000
90,000
80,000
70,000
60,000
50,000
40,000 2004 2005 2006 2007 2008
Source: US department of Agriculture, China Statistics Year book, CLSA Asia-Pacific Markets
Are claims of an impending catastrophe overdone? Many analysts and commentators have been flagging that the ongoing impact of climate change on the large crop producing areas of Asia is likely to result in yields and production peaking out and ultimately declining. Many are pointing to China eventually becoming a net importer of grain and rice. Lester Brown and the World Resources Institute stated in our Politics of Scarcity research in 2008: ‘China and India are the world’s leading wheat producers, and they are far and away the world’s leading rice producers. So anything that shrinks their harvest, and the melting of these glaciers clearly would do that on a large scale, affects not only their food security but world food security. And if there is any government in the world that’s sensitive to the food security issue, it is the Chinese government, simply because all the leaders in Beijing today are survivors of the great famine of 1959- 61 when, according to official numbers, at least 30 million people starved to death. In China, where the wheat harvest peaked in 1997 at 123 million tonnes and has since dropped to 106 million tonnes, which is what it was last year. That 14% decline is largely the result of wells going dry as a result of aquifer depletion and to some degree to water, irrigation water being diverted to cities to satisfy their fast growing needs. In India, the situation may be even more precarious. Because of the amount of overpumping in the country, water tables are falling now in almost every state. A World Bank report that came out in 2005 on the water situation in India pointed out that 15 percent of India’s grain harvest is produced by overpumping, which by definition is a short- term phenomenon.’
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However recent jumps in grain stocks suggest that there China still has significant headroom to improve crop yields.
Figure 30 Figure 31 China has room to China’s wheat production Wheat yields - China versus USA improve crop yields
70,000 (m m³) (Mt/ha) 6 12 (m tonne/hectare)
60,000 5 10 50,000 4 8 40,000 3 6 Corn yield 30,000 Irrigation Wheat yield Fertiliser (RHS) 2 4 20,000 Yield (RHS) 10,000 1 2 0 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: US department of Agriculture, CLSA Asia-Pacific Markets
China delivered a record rice and grain harvest in 2009, despite one of the worst droughts ever. So what was going on? The drought was in danger of killing the crop but China did what it does so well in these instances - it mobilised millions of people to hand-water the crops - in many cases quite literally pouring on buckets of water.
Figure 32 Figure 33 Analysts’ projections that China total wheat production China’s stockpile of wheat China peaked in 1997 look to have been overdone 140,000 ('000 tonnes) 120,000 ('000 tonnes)
120,000 100,000 100,000 80,000 80,000 60,000 60,000 40,000 40,000 20,000 20,000 0 0 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Source: US department of Agriculture
A comment from Lester Brown We asked Lester Brown for an update than normal, yes, it is good. What we have is a on food and water in China. bubble economy in grain production bolstered both by the accelerated melting of glaciers (in the short For more than a decade now, ever run) and the depletion of aquifers. We estimate that since Who Will Feed China? was some 130 million Chinese are being fed by published in 1995, China has been overpumping. The comparable figure, incidentally, investing heavily in agricultural for India as developed by the World Bank is 175 research, has raised the support price million people. for grain rather dramatically and has doubled the availability of farm credit, among other things. In effort to be self-sufficient in grain, China has become heavily dependent on soybeans, importing Is warming good for China? In the sense that the 41 million tonnes of the 55 million tonnes it melting glaciers could provide more irrigation water consumed this year.
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Record harvests in a drought year China’s 2009/10 winter-wheat miracle? Is it sustainable? Analysts predicted China In January 2009, various analysts said that a drought, described as the worst would need significant since 1951 in some areas, could cause wheat production for 2009 to 2010 to imports drop by as much as 20% from the previous year, requiring imports to make up the deficit. However, on 5 March 2009 the State Grain Administration reported that the crop had largely escaped damage from the drought and was growing well. A huge difference, but what was behind the miracle turnaround?
China’s 2009 to 2010 winter wheat crop was planted in October 2008. It was concentrated in five provinces located on the North China Plain. Henan is the most important province, accounting for about 25% of total wheat output, followed by Shandong, Hebei, Anhui and Jiangsu provinces.
At planting the conditions looked favourable (timely rain and mild temperatures in September and October) and the crop went into dormancy in good condition. The weather at the start of 2009 was typically cold and dry across the region, however, drought conditions developed quickly over the next two months. At its peak in February, almost 11 million hectares of wheat in northern China were affected by drought. There had been only a dusting of snow over the winter in the northernmost areas of Shandong, Hebei, Shanxi, and Xinjiang. This was in sharp contrast to the extraordinarily snow and ice storms that hit China in January 2008.
In Henan farmers The Chinese government at all levels employed aggressive measures to fight irrigated nearly 95% of the drought, enlisting millions of people to irrigate the dry fields in areas wheat crop, some by hand where water was available and average temperatures were above freezing. with buckets Officials sent experts and technical personnel to fight the drought, trained 20 million farmers on drought-resisting technology and mobilised more than 30 million people including the People’s Liberation Army (PLA). Within weeks they had irrigated an estimated 10 million hectares of wheat fields (about 84% of the drought-affected area and more than 40% of the total wheat- sown area). In Henan, China’s most important wheat province, farmers irrigated nearly 95% of the wheat crop, some by hand.
Figure 34 Figure 35
11m ha watered by Irrigation in eastern Anhui Y-7 ready for cloud seeding extreme measures
Source: Xinhua
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A record harvest started Moderate to heavy precipitation from mid February through March ended the in May drought. The wheat crop finished in good condition and a record harvest started in May, resulting in an estimated 114.5 million tonnes, up from the previous year’s 112.5 million tonnes.
Total wheat production in 2008/09 is estimated at 114.5 million tonnes from 24.0 million hectares, with winter wheat accounting for more than 90%.
Can China hold back the effects of climate change for a while? So the conclusion is that when it sets its significant human resources to work, China is able to maintain its food production at levels that meet demand. While this form of crop production is not sustainable in the long term, it is clear that China is “different” in its approach to combating the longer-term effects of climate change on food production.
We believe that the peak-water forecasts are correct, it is just a question of timing. This leads to two important investor questions:
1) How long can China and India continue to deliver good food production growth?
2) When will governments and central planners make significant changes in regulation to prevent catastrophe?
Forecasts of impending In addressing question one, it is becoming clear that forecasts of the collapse of harvests are impending collapse of harvests caused by increasing occurrence of climate- probably too early change-induced drought may have been too early, with evidence of substantial headroom for yield improvement through moving from small subsistence-sized plots to larger industrial-sized farming. So there may be another 10 to 20 years of crop-production growth in China and India, which for many investors looking to play the theme through soft commodities is too long a timeframe.
Food output will hold up So considering the points made in attempting to address question one leads but regulations will start to some answers to question two. Agricultural planners and government to change quickly agencies may be able to help save harvests by mobilising people and hand irrigating, but over the longer term they will realise (if they have not already) that the current approach is unsustainable. This, we believe leads to step changes in regulation that effectively forces change before a tipping point is reached. The bottomline is that China and India look like they can keep going on the current path and even attempt to hold back the effects of climate change for longer than many investors may think possible, but changes will happen quicker through changes in policy.
Price water appropriately - water will no longer be free
Ban unsustainable extraction of ground water - huge impact on India
End the practice of free electricity for the pumping of aquifers
Ramp up use of drip irrigation as opposed to open channel
Optimise the use of fertilisers
Adopt new germplasm or other seed development
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Figure 36
Agricultural technology to improve yields and reduce water requirements Technology Details Benefits Issues
Non-tillage Tilling is a process of ploughing land to Water saving - generally tilled soils Pollution of rivers - in no-till farming remove weeds and remove crop residues. result in a loss of nutrients as well as farming weeds are a problem No-till farming means that the soil is left in erosion, when it rains the nutrient so herbicides may runoff into a natural state; through not ploughing. rich topsoil gets washed away which waterways. makes the ground more susceptible Water when applied to the land will not be It is less profitable than tillage to gully erosion and will lead to a loss farming in the first few years; able to seep very far into the ground and in productivity. It also means that a will not be wasted. however, it can be much more lot more water is needed for growth, profitable reducing cost and However, farmers like to till as it aerates as the water seeps deep into the increasing productivity. the soil, which in turn penetrates deeper ground and will be wasted on deeper roots as well as mixing the nutrients evenly root plants. throughout the soil.
Improved Improved drainage increases yield enabling It increases the temperature of the High cost for installation, loss drainage the farmer to control the moisture content soil, improves aeration and nitrogen of wetlands. of the soil. content, removes toxics, eliminates planting delays and reduces soil erosion through creation of a better root system.
Germplasm selection Germplasm is the genetic information in a The farmer can select a seed with There is some opposition to and other seed seed that influences the growth and characteristics that decreases water gm crops. development development of the plant. usage. The creators of gm crops are Genetically improving the traits in contesting ownership to various crops has been achieved in intellectual property. various plants and crops to minimise It may infect other crops so water use. no ‘normal’ strain left.
Optimising fertiliser To optimise yield, fertiliser selection for soil Fertiliser use can increase yields as it Can result in the loss of use type is important, to decrease water usage replaces lacking nutrients and habitat if applied by spraying. the quantity of fertiliser applied can increase supplies valuable nitrates to the soil. yield as well as save water.
Crop stress Crops undergo stress in unfavourable Crop stress management means Increases the cost by management conditions, such as drought, cold and heat ensuring that crops are held at increasing supervision and etc. Plants have mechanisms preventing favourable conditions so that they do might increase other costs them from dying that reduce growth and not have to initiate survival while trying to create the increases activity in the plant, which mechanisms and increase water use. perfect environment. increases water use.
Source: CLSA Asia-Pacific Markets
The government’s response Plans to cut water use on As rivers run dry and desertification continues, China recently announced a water-per-unit of GDP significant plans to cut water use by industry and agriculture. Water resources basis minister Chen Lei said it would cut the amount of water needed to produce each US dollar of GDP by 60% by 2020. With the economy on course to grow by 60% by then, that effectively means China is planning to maintain water usage at current absolute levels. This target suggest that it aims to achieve 60bn m³ annual water-saving capacity by 2020 and water-saving irrigation areas should take up more than 80% of the country's total effective irrigation acreage, up from less than 20% currently.
The government The announcement suggests that the government has finally decided that it recognises importance of cannot rely solely on “supply-side” solutions to water shortages, such as the agriculture in terms of SNWD scheme or desalination. It also means that the government recognises water stress that the biggest cause and potential solution to water stress lies with agriculture. It comes after China’s worst drought in half a century, as well as increased water shortages caused by industrial pollution that makes river water unfit for drinking, even after treatment.
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Figure 37
Pharma and food the big Water needed to produce key items in Hebei (m³) users 1 tonne of penicillin 9,800.0 1 tonne of toilet paper 340.0 1 tonne of sausage 193.0 1 tonne of packaging paper 100.0 1 family sized car 100.0 1 tonne of auto tyre 88.0 1 tonne of aluminium 63.0 1 tonne of paint 30.0 1 personal computer 24.0 1 tonne of TNT 17.0 1 tonne of flat steel 17.0 1 tonne of milk 15.0 1 km of cotton 15.0 1 tonne of beer 14.0 1,000 tonnes of pens 8.0 1 tonne crude steel 7.5 1 tonne of carbamide fertiliser 6.8 1 tonne of glass 6.3 1 tonne of biscuit 5.0 1 tonne of concrete 3.5 1 tonne of gasoline 2.7 1,000 tubes of toothpaste 2.5 1 refrigerator 2.0 1 tonne of raw coal 1.0 1 m² of house construction 1.0 1 tonne of crude oil 0.9 1 pig (to rear) 0.5 1 unit of furniture 0.2 1 TV 0.1 1 tonne of rice 0.1 Source: WWF, CLSA Asia-Pacific Markets
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Industry - Disclose and reduce Copenhagen seemed to Adapting to climate change is, to a large extent, adapting to too much or too ignore the linkages little water. We believe that water is one of the key ways through which between climate change climate change impact will be felt by both people and the environment. and water Changes in water availability and predictability of weather systems has put water at the heart of future development decision-making, yet, water was barely mentioned in the final text at the recent talks in Copenhagen.
It appears individuals and It seems many countries seem to view water as a separate issue, but it needs corporations have to be integrated into climate-change strategies. Despite intergovernmental recognised the issue talks such as COP15 failing to recognise water, individuals and corporations appear to behave acknowledged the issue and are focusing attention.
Companies and the water they use There are very few corporations that do not use water as well as discharge wastewater.
The Global Reporting Initiative (GRI) is an NGO that is pioneering a global sustainability reporting framework.
Water beginning to report Many companies use or draw on the GRI reporting guidelines as a framework on the water they use for their sustainability reporting. This framework sets out the principles, standard disclosures and indicators that organisations can use to measure and report their economic, environmental, and social performance. Within the environmental indicators, there are four water-related metrics. These are: EN8 - Total water withdrawn by source EN9 - Water sources significantly affected by the withdrawal of water EN10 - Percentage and total volume of water recycled and reused EN21 - Total water discharge by quality and destination
Their G3 guidelines have a number of water-related metrics that companies can, and do, use to manage their water-related impacts.
GRI water metrics provide The GRI metrics on water provide companies with an effective management companies with effective tool that can be used to respond to the global water crisis and assist with management tools companies’ own internal management of this essential resource. By disclosing information on these metrics as well as other indicators in the GRI framework, companies can benchmark their organisational performance with respect to laws, norms, codes, performance standards and voluntary initiatives; demonstrate organisational commitment to sustainable development; and compare their organisational performance over time.
Wal-Mart - Largest global reporting initiative The world’s largest retailer by revenue, once disparaged by environmental groups, announced in 2009 an initiative to build a comprehensive sustainability index that measures the environmental impact of each product Wal-Mart sells. They have rolled out a 15-question assessment, with details about their carbon footprint, resource use and ethical business practices to each of their 100,000-plus suppliers. The company says it will use the responses to pilot and roll out a form of sustainable labelling. Eventually, through product labels, the experiment will test the hypothesis that consumers will pay more for environmentally superior products.
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In terms of Asia - this effort will have a significant impact. We believe that as many as half of Wal-Marts 100,000 suppliers are based in Asia - the bulk in China. So once completed, we believe that a significant number of Chinese factories will have a much better understanding of their water use.
Figure 38 The 15 questions Wal-Mart asks its 100,000 suppliers with aim of producing a green index for Wal-Mart sold goods Energy and climate: Reducing 1. Have you measured your corporate greenhouse gas emissions? energy costs and greenhouse 2. Have you opted to report your greenhouse gas emissions to the Carbon Disclosure gas emissions Project (CDP)? 3. What is your total annual greenhouse gas emissions reported in the most recent year measured? 4. Have you set publicly available greenhouse gas reduction targets? If yes, what are those targets?
Material efficiency: Reducing 1. If measured, please report the total amount of solid waste generated from the facilities waste and enhancing quality that produce your product(s) for Wal-Mart for the most recent year measured. 2. Have you set publicly available solid waste reduction targets? If yes, what are those targets? 3. If measured, please report total water use from facilities that produce your product(s) for Wal-Mart for the most recent year measured. 4. Have you set publicly available water use reduction targets? If yes, what are those targets?
Natural resources: Producing 1. Have you established publicly available sustainability purchasing guidelines for your high quality, responsibly direct suppliers that address issues such as environmental compliance, employment sourced raw materials practices and product/ingredient safety? 2. Have you obtained third-party certifications for any of the products that you sell to Wal- Mart?
People and community: 1. Do you know the location of 100% of the facilities that produce your product(s)? Ensuring responsible and 2. Before beginning a business relationship with a manufacturing facility, do you evaluate ethical production the quality of, and capacity for, production? 3. Do you have a process for managing social compliance at the manufacturing level? 4. Do you work with your supply base to resolve issues found during social compliance evaluations and also document specific corrections and improvements? 5. Do you invest in community development activities in the markets you source from and/or operate within?
Source: Wal-Mart, CLSA Asia-Pacific Markets
Results will start to flow in to Wal-Mart in 2010, but in the meantime there will be a surge in consulting assignments for auditors and engineers to help companies capture data and complete the form.
Figure 39 Figure 40
Swire group - Water usage Swire group wastewater usage
600 ('000 tonnes) Potable water used for properties and landscaping 400 ('000 tonnes) Waste potable water reused for flushing Potable water used for cooling Seawater reused for flushing 350 500 300 400 250
300 200
150 200 100 100 50
0 0 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008
Source: Swire CSR report
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An interview with Peter Gleick We spoke to Peter Gleick - the President of the Pacific Institute for studies in Development, Environment and Security in Oakland California and author of the biennially produced ‘The Worlds Water’ - about his views on the state of the world’s water. Peter has helped author research with CLSA, including CLSA U document ‘Remaining drops’.
Water infrastructure in many areas and many countries is old and inefficient, why is it that investment has been low? And when do you think this will change? There are many countries where we originally spent money to build water infrastructure where we are now failing to spend enough to maintain and especially upgrade that infrastructure. The United States is a good example but, almost all developed countries are not adequately maintaining and upgrading water-related infrastructure. The reason? - I guess part of it is that we always find it easier to spend money on something new rather than on maintenance. And that that is certainly the case here. We are spending money on maintaining and upgrading facilities, but just not enough, and so we are falling behind. Countries have competing needs for infrastructure, energy, transportation, telecommunications etc, and water is just one competing demand and it is just not getting its share.
Growing awareness and When will it change? I do think there is more awareness now than there spend but still not enough was ten years ago on the need for maintaining and expanding water-related infrastructure. So I do think there is a growing expenditure now for water, but it is still not likely to be enough. We are still not spending enough. And I think part of the tipping point that we ought to look for is, first of all, public opinion.
The two big concerns are Asia and Africa. And I actually think there has been an expansion of infrastructure investment in Asia in the last decade, a fairly significant expansion, especially in China. And so the gap is being reduced in Asia, but there is still substantial underinvestment throughout the region, in both water supply and especially in sanitation. I think India is way behind the curve.
The millennium development goals for water were quite ambitious for 2015, what sort of progress has been made toward those goals? Goals of reducing the Well, first of all, some would argue that the millennium development goals number of people without (MDGs) were not adequately ambitious, that they were too low. What they access to water and called for was to cut by half by 2015 the number of people on the planet sanitation without access to safe water and sanitation. Not the number, the proportion. And as population grows, that means, basically, even if we meet them by 2015, there will still be hundreds and hundreds of millions of people without access to safe water and billions without access to sanitation. And the truth is we are not going to meet the MDGs. So others believe they were too ambitious. It is just that I would have liked to have seen the number of people without safe water and sanitation go to zero, and it is not going to come close to zero by 2015. Having said that, I think there is a chance that we will meet the targets for water supply. I don’t think there is a chance we will meet them for sanitation. And even if we do meet them for water supply, there will be probably still be 600-700 million people without access to safe drinking water.
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In terms of sanitation is there somewhat of a gap between how underserviced these sectors are in Asia? China making steps in I would say there has been a bit of a change. The investment in sanitation sanitation really means two things: collection of sewerage and treatment of sewerage. In a number of places where we already see collection of sewerage, but no real treatment, there has been an expansion of treatment. That’s what we are seeing in China where there may be collection, but then, simply, first order of treatment, primary treatment. We are beginning to see some secondary and tertiary wastewater treatment.
Could you update us on how government policy and spending is developing across some different regions? China beginning to The biggest problem really is policy in the sense that if governments do not respond in terms of choose to spend money on water, then we are not going to see big changes in spending wastewater treatment or safe water provision. There has been more of a change, in the US and Europe than in other places, although China is beginning to respond to growing demands for safe water and sanitation.
But, really, there is still a fundamental need for changing government priorities for water supply and sanitation. We need to see strong standards and we need to see strong government investment
What are the necessary pre-conditions to effectively force governments into implementing strong standards? Indian government does That is a hard question to answer. Governments are sometimes sensitive to not appear to be public opinion, and when the public feels very strongly that the services they are adequately addressing getting need to be improved, you tend to see government respond. I think that water issues is what is happening in China and the United States. I think the Indian government at the national level is not adequately addressing water issues. Part of the problem is that many water policies are set at the state level rather than the national level. There are contradictory policies from state to state, and there has been inadequate financial resources made available to address water policy.
On the irrigation side in particular, there is a contradiction in wanting to use water efficiently and wanting to keep water prices low. So, one of the big problems with India is that water prices are too low. It is partly a question of energy pricing. As long as the energy is cheap (or in many cases free) for groundwater pumping, too much water will be pumped from groundwater aquifers. We are going to see more and more groundwater overdraft and it is going to become harder and harder to find enough groundwater.
Due to global warming glacial melt in the Himalayas is increasing. Could you comment? Rapid glacial melt will There is a growing understanding that climate change is going to effect water radically change the resources throughout the world, and especially in Asia. We are going to see water situation in Asia changes in storm and monsoon patterns, which are going to be critical for water resources. We are already seeing very rapid changes in glacial melt from the Himalayas, changes in the volume of water and the timing of runoff in the major rivers that originate in the mountains. So, in the short run, what that means is we are going to see changes in timing of water availability and in the long run, it means we are going to see changes in the quantity of water that is available. As we lose the glaciers, I think we are going to see a decrease in water availability overall. And water managers are not prepared for those kinds of changes. There are things that water managers ought to be doing in terms of storing water, recharging groundwater and improving the efficiency of water use that will help reduce the risk of climate change.
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In the short run, increased glacial melt may mean an increase in hydropower, but when the glaciers are gone, that energy is also going to be gone and we’ll see a decrease in hydropower generation.
Is water too cheap? Users need to pay the Well, water is an economic good and it is also a public good. And so, the first true economic cost of thing that we need to do is make sure that the poorest populations are water protected from exorbitant water-pricing policies. They need to be assured that their minimum needs are met at affordable costs, and if that means subsidising basic human needs for water, then governments have to be prepared to do that. But, beyond that, large water users need to pay the true costs of water. Big agricultural users, big industrial users need to pay the economic cost of providing those water services.
Maybe it should be clear that you don’t charge for water; instead you charge for water services.
Increasingly in the United States, we are seeing urban water agencies with “tiered pricing structures” where the lowest-volume users pay very little for their water, but the higher volume users pay more and more per unit water, that there is an increase in block-rate structure.
Also we are increasingly seeing different rate structures for agricultural users and we are seeing price increases in rural China, as well in the urban sectors in China. Prices have been going up in recent years to reflect, to some degree, the true value of water. I think there is a lot more room for increasing block rate structures throughout Asia, but we are beginning to see that those kinds of rate structures be put in place. China has already taken some important steps towards increasing municipal water prices. I think there is a lot more room for improvement, both in the absolute prices offered, but also in the design of the rate structures to encourage increasing block rates, for example, to make sure that the largest users are paying the largest rates for water.
I also think there is room on the wastewater side for both substantially increasing the water costs and then enforcing wastewater standards. I think that has proven to be a very effective way of improving water quality. There is a big opportunity for that in China. I think they are moving slowly in that direction and could move faster, but frankly they are moving faster than many other countries in Asia, like India, or Vietnam, or Cambodia, or Indonesia, or the Philippines. I think throughout Asia there is an opportunity for smarter use of economics.
Which industries and in which regions do you see the greatest risk, the greatest threat of operations from insufficient water supplies? Heavy users are obviously Obviously, those industries that demand a lot of water are going to be at at greatest risk greatest risk from scarcity: pulp and paper, chemical, petroleum refining, mining. The heavy-water using industries traditionally are increasingly threatened by water scarcity. Those same industries are often responsible for serious water contamination problems. And as governments start to put in place water quality standards, those industries are going to see higher costs for wastewater treatment.
Where water is already contaminated, I think we are going to see risks for companies in sectors that need high-quality water, like the pharmaceutical sector or the semiconductor sector, where poor quality input of water makes
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them spend more money on upfront treatment and pretreatment costs. And, again, we are already seeing the pharmaceutical industry and the computer and semiconductor industries spending more and more money to treat water upfront.
Which countries will face the most pressure and soonest from useable water supply shortages, either foreign industry or for public consumption? Northern China already I think northern China is already seeing constraints on the kinds of industries constrained that it can have. It is increasingly reluctant to issue licences to operate water- intensive industries. And I think we are going to see the same thing in parts of India where water scarcity is a growing challenge. We are already seeing pressure on beverage companies to either reduce their local impact, or to actually shut down because of concerns of water scarcity.
The same is true for water quality. I think serious water quality problems in China and India are being felt - are causing impacts on certain industrial sectors.
Where do you see the big opportunities in water investments? Water quality I think there are big opportunities in a number of different sectors. Water improvements are a big quality treatment is a huge potential market, both for wastewater treatment area for investment and for pretreatment. I think we are going to see billions and billions of dollars worth of investment in both of those areas. In addition there is enormous investment potential in distribution systems, both for water-supply distribution and wastewater collection systems, especially in urban (rapidly) growing urban areas.
Is there any core technology that is in the hands of only a few companies? Water purification an Well, we are seeing more and more emphasis on new purification systems like emerging technology ozonation and ultraviolet purification. I think there is going to be growth in those markets. I think there could be growth in markets for natural purification systems, but they are less capital intensive than some of the other ones.
Which area of water policy or the water business is the least understood? Water management in I think agricultural water management is the least understood. It is in some agriculture is not well ways the most important because it is the vast majority of the water that is understood consumed. It is responsible for almost 80% of the human use of water, and it is the most mismanaged because there are enormous political complications. In addition it is mixed up with urban development policies, agricultural policies and rural development policies. And so one of the most important things, frankly, that I think countries need to do is develop more sustainable agricultural water practises. That is the first one.
I would then say that my second biggest concern is over municipal water management and figuring out how to ensure safe water and sanitation systems for very rapidly growing cities. We are not very good at that. And as populations grow in the coming years, we are going to have to get much better at it.
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Dying for the toilet Water and sewage and a Diarrhoeal diseases are the biggest single killer of children under five in poor major human catastrophe countries. The World Health Organisation reports that a child dies every 15 seconds from diarrhoea, caused largely by poor sanitation and water supply.
One of the most under-reported parts of the whole water crisis is the issue of sewage. When the UN set its MDGs in 2000 with the aim to reduce by 50% the number of people without access to clean drinking water the issue of sewage and treatment came a poor second. Recent moves to bring sanitation to the forefront include the 2008 International Year of Sanitation.
Life expectancy was The key issue highlighted by the UN in 2006 when it reported that the 1.8 to increased 20 years by 2.0 million child deaths each year related to poor sanitation dwarfed the installing sanitation casualties from violent conflict. UNICEF outline that diarrhoea in children from developing countries is a bigger problem than HIV, malaria and tuberculosis. By example, when London made the big leap forward from the poor sanitation of the nineteenth century to an era of toilets, soap and sanitation, child mortality fell significantly. Life expectancy increased by 20 years. The UN estimates that four out of 10 people on the planet today have no access to anything that could be described as sanitation (toilet, latrine, toilet bucket or a box). Instead they defecate in bags, the street, the fields, anywhere they can. The impact is devastating on human health.
Figure 41 Almost two million Annual child diarrhoeal deaths of differing trends in access to basic sanitation children per year die from 2.2 (Child deaths pa from diarrhoeal) lack of access to clean water and sanitation 2.0 1.8 1.6 1.4 1.2
1.0 Expected child deaths at current trend 0.8 Child deaths if on tract to meet MDG 0.6 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026
Source: Water Aid, CLSA
Dirtier than you think Just one gram of human faeces can contain as much as Two composting toilet solutions 10 million viruses, one million bacteria, and 100 worm eggs. Faecal matter when not properly treated can contaminate food, and water. It is carried into people’s houses on their feet, clothes and by insects. Some estimates suggest that people living in areas with no sanitation and open defecation may ingest up to five grams of faecal matter per day. There are up to fifty infections that human faeces can transmit. These include salmonella, schistosomiassis, cholera, cryptosporidiosis campylobacter, hook worms, giardia, meningitis, roundworms, tapeworms, dengue fever, hepatitis A, typhoid, scabies and botulism. Source: Wikipedia
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If rises in sanitation coverage remain as low as between 1990 and 2002, the world will fall short of it MDG by over half a billion people by 2015. In 2002, 2.6 billion people - roughly 42% of the world’s population - had no access to improved sanitation facilities. An additional 1.8 billion people need to be provided with improved sanitation from 2002 to 2015 to achieve the MDG to halve the proportion unserved in 1990. Even if that target is achieved, 1.8 billion people will still lack adequate sanitation in 2015 due to popula tion increase. In developing countries, rural communities have less than half the sanitation coverage (37%) of urban areas (81%). Sanitation coverage levels are lowest in the sub-Saharan Africa (36%) and South Asia (37%).
Straight into the river About 90% of sewage and 70% of industrial waste in developing countries is discharged into water courses without treatment, often polluting the usable water supply.
Figure 42 UN has being trying to History of the UN’s MDGs - Water sanitation related address this issue for Details Outcomes more than 30 years International drinking 1981-1990 Conceived by the UN in 1977 The quantitative goals were water and safe with the goal of provide every not achieved sanitation decade person with access to water of safe quality and adequate quantity, along with basic sanitary facilities, by 1990 The third water Extended to Due to failure to realise key goals The quantitative goals were decade end of 1990s the UN elected to continue the not achieved decade to the end of the 90s Water for all decade 2005-2015 Set up to advance the MDG to Still ongoing but the UN reduce by half the proportion of report that its goals are not people without access to safe being met drinking water by 2015 and to stop unsustainable exploitation of water resources International Year of 2008 To put the spotlight on sanitation Investing in school sanitation Sanitation the UN General Assembly and hygiene education is an declared 2008 the International investment in the future. It Year of Sanitation. The goal was promotes effective learning, to raise awareness and to increases enrolment of girls, accelerate progress towards the reduces incidence of disease, MDG to reduce by half the promotes environmental proportion of the 2.6 billion cleanliness and supports people without access to basic children’s rights sanitation by 2015 Source: UN, CLSA Asia-Pacific Markets
Why is the MDG sanitation target currently so off track? Lack of government coordination - many countries have no single institution that is responsible for sanitation. Lack of a national budget dedicated to sanitation - many developing countries have not set up budgets for improving sanitation. They lack central planning and reporting systems including a dedicated sanitation budget. Despite sanitation having played a major role in reducing mortality in their own countries, aid donors too do not prioritise sanitation for spending in today’s developing countries.
Spending on sanitation is As a result, even though more than twice as many people lack sanitation as lack a fraction of spending on safe drinking water, spending on sanitation is only a fraction of spending on water. potable water Global spending on sanitation is as little as one-eighth of spending on water while the Global Water Partnership estimated in 2000 that only US$1bn was being spent in developing countries on sanitation, compared with US$13bn on water.
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Flush or dry composting Using water to transport For many in the developed world the accepted method of removing human waste only to remove the faeces involves flushing and an extensive network of sewage pipelines and a water later is a sewage treatment plant. While this system has made significant changes to questionable solution health and life expectancy (increased by approximately 20 years once sanitation and sewers were built in London), and is probably the only scalable solution in large cities, it is not the only way to deal with the issue.
“Civilised people should be able to dispose of sewage in a better way than by putting it into the drinking water” Teddy Roosevelt (1910). If increases in sanitation coverage stay as low as between 1990 and 2002, the world will fall short of its MDG by over half a billion people by 2015. In developing countries rural communities have less than half the sanitation coverage (37%) of urban areas (81%). Sanitation coverage levels are lowest in the sub-Saharan Africa (36 per cent) and South Asia (37%). About 90% of sewage and 70% of industrial waste in developing countries is discharged into water courses without treatment, often polluting the usable water supply.
What will work in Asia? 1. Most donated toilets are not maintained or are not used because they are donor/consultancy driven rather than demand driven. Many toilets are used for nontoileting purposes. 2. Feedback at Stockholm Water Week 2009 was that We spoke to Jack Sim of the World waiting for the whole world to be “sewered” will take Toilet Organisation: 200 hundred years at today’s speed. Only an estimated 20% of places have sewage treatment plants. Most are Which country in Asia has the most pressing piped to sea and rivers/lakes or open dumps. problem in terms of public health? Even then, the flush water solutions will also be The most pressing country is India, both because of the unsustainable. It makes no sense to add plenty of large population without access to proper sanitation but water to 200gm of faeces, transport it 50 kilometres also in its culture of high tolerance for dirt and filth. It is away just to remove it later. natural for humans to shun bad smells, dirt, pathogens as a self-defence mechanism but once a culture is not Most money should be invested in building the market vigilant towards this aspect, you have a dangerous infrastructure and in integrating sanitation technologies to situation. Two clues are significant: productisation and services, in building distribution systems, sensitising and driving demand, building efficient Most of India’s surface water is contaminated by supply/demand/price/competition/innovation mechanism, sewage and solid-waste disposal capitalising on economies of scale by the sheer volume of Five-star hotels accept slums with filth in the streets needs, and making toilets, sanitation and hygiene a on their immediate doorsteps lifestyle of the poor (and anyone for that matter). Will the best solutions for Asia be in water-bourn Where does most money need to be invested? technology or some other solution eg composting? Current mindsets offer two solutions: The best technology depends on the context. There are Charity donating toilets many solutions available such as pour flush twin pit systems. Water seal pans, bio-gas plants, urine diversion Waiting for big sewerage systems to be built dry toilets, anaerobic baffles reactor, are most popular but we need to adjust the designs to price affordability and Both are not going to solve the sanitation issue on the social behaviours (anal wipers, washers, demographics, scale needed. affluent levels, current solutions, etc).
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Big steps in sanitation in China A large proportion of China with a population of more than 1.2 billion has achieved a marked China's rural households improvement in the health and sanitation status of its people during the past have unsanitary solutions 15-20 years, especially with reference to infectious diseases. Through the 1980’s and 1990’s significant health problems were encountered due mainly to the traditional practice of spreading human waste on crops, often with no prior treatment. Despite 90% of rural households having some kind of latrine most are rudimentary and are not classified at sanitary.
The government has made a concerted effort to promote good health-related behaviour. In most rural areas, a network of National Patriotic Health Campaign Committee (NPHCC) workers, the All-China Women’s Federation, and schools have led health education campaigns encouraging a wide array of hygienic behaviour.
Due to rapid industrial growth, 50% of the country’s wastewater was released into rivers and seas without treatment, causing ecological problems and substantial loss for fisheries.
According to SEPA, 62% of the water flows from the seven major river basins is nonpotable.
Over 50% of China’s water resources are considered grade four or above, ie, non-drinkable.
According to WHO and SEPA, water pollution may cost China up to Rmb199bn per year.
The World Bank and SEPA estimate that water shortage, insufficient water usage and pollution can cost 8-10% of the nation’s GDP.
China’s latrine revolution in Henan province Conviction that latrines A toilet revolution in China’s Henan province has been an outstanding had made villages richer example of political commitment and strong local leadership. One of the evident eight years after most densely populated parts of the country, Henan launched its campaign the ‘revolution’ began in 1989 with full support of the provincial governor. By 1995, nine out of the 10 most advanced latrine coverage counties in China were in Henan province. Latrines were started in 1987 only in a few villages in Yucheng County because of the efforts of Dr Song Lexin (nicknamed Mr Latrine). Travelling from village to village on a bicycle, he would discuss the benefits of his latrine with the villagers. Using a demonstration latrine with the villagers, they gradually saw that the manure from this latrine made their crops grow larger and sweeter. Conviction that the latrines had made their villages richer was evident even eight years after the ‘revolution’ began. Most of the latrines were still found to be kept very clean, thanks to the efforts of the village women. In most cases, the communities themselves paid 90% of the total cost of their improved latrines. Efforts were underway to develop a revolving fund and other credit options to help spread latrine improvement to poorer villages in the province.
India drowning in human waste Half a million children In contrast India’s sanitation situation is at critical levels. Infected water dying each year from lack causes an estimated 80% of disease in India, according to the WHO, making of clean water poor sanitation and inadequate sewage disposal the nation’s biggest public and sanitation health problems.
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About half the world’s reported cases of polio, a disease virtually wiped out in developed countries, occur in India.
Each year, diarrhoea (something viewed as a minor ailment in the West) kills more than half a million Indian children.
Fewer than 30% of India’s 950 million people have bathrooms in their homes or easy access to public toilets. The rest routinely relieve themselves in the open - along roadsides, on farmland or in municipal parks.
No more than 250 of the country’s 4,000 cities and towns have sewage systems, and many of those systems do not have treatment plants. The bulk of municipal sewage flows untreated into rivers, lakes or the sea.
The problems that India faces have been building steadily for many decades. Mahatma Gandhi is quoted as saying “sanitation is more important than independence”.
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Western trickle versus eastern torrent In Europe and the USA Global demand for bottled water has risen 150% since 1997. From 1992 to consumers are 2002 consumption per capita in the USA more than doubled, but recently increasingly turning away demand in Europe and the USA stalled with consumers starting to shun the from bottled water product due to environmental concerns. In 2008 the USA experienced its first ever decline in demand with a contraction in still bottled-water volume of 1% and imported bottles of 10%. In sharp contrast emerging markets such as China are still delivering significant growth and are continuing to ramp.
Figure 43 Figure 44 USA – the first decline in USA - Bottled water sales USA - Sparkling and imported 16 years 45,000 (m litres) 1,200 (m litres) Domestic sparkling Imports 40,000 First decline in 16 years 1,100 35,000 1,000 30,000 900 25,000 800 20,000 15,000 700 10,000 600 5,000 500 1992 1994 1996 1998 2000 2002 2004 2006 2008 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Beverage Marketing Corporation, CLSA Asia-Pacific Markets
At the same time the west is starting to feel sated emerging markets in Asia and South America are ramping their consumption.
Figure 45 Contraction in the Consumption of bottled water (Cagr) developed markets, growth in the developing USA +6.7% Mexico
China +15.6% Brazil Italy 2003 Indonesia +9.6% 2008 Germany
France -1.28% Thailand
Spain -0.8% (m litres)
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
Figure 46 Figure 47
Spain and France decline, Per capita consumption bottled water China and India a long way to go China and India grow 350 (litres per capita per year) 16 (litres per capita per year) Mexico Italy 14 300 China France Spain 12 250 India USA 10 200 8 6 150 4 100 2 50 0 2002 2003 2008 2002 2003 2008
Source: Beverage Marketing Corporation; CLSA Asia-Pacific Markets
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So why is the West starting to loose its bottle? Environmental backlash It is hard to pinpoint the exact drivers behind falling bottled-water sales. Is it or increasing thrift? fashion or is it rising awareness of the bottle’s environmental toll that is driving the backlash? Perhaps fashion drove a certain segment of society to embrace bottled water in the first place and fashion may drive that same segment to reject it. The trend seemed to have started earliest in Europe with concerns being voiced over the environmental impact of so many plastic bottles becoming waste. It then spread to the USA with a reported backlash in some restaurants and communities. A number of NGO’s have been waging significant campaigns voicing concerns over the environment, with some almost going as far as to condemn bottled water as the moral equivalent of driving a Hummer, producing tonnes of plastic bottles, racking up huge transportation fees and leaving behind a significant carbon footprint. In addition there have been some much published disputes in middle America between local communities and bottling plants over rights to extract water.
Figure 48 Is bottled water the new Banning bottled water - Some recent examples smoking - banned in Location Details offices? London Municipal Council - Canada Phased in ban at offices where there are water fountains Vancouver Canada Considering a ban in government offices Toronto Canada Ban on bottled water in government offices - phased in over four years Bundanoon Australia Banned bottled water from being sold in the town - believed to be the worlds first Timberland Banned bottled water from their global offices Source: CLSA Asia-Pacific Markets
Regardless of the reasons investors need to recognise that western markets are cooling fast, and the momentum in bottled-water demand is now firmly focused in the dynamic Asian markets.
Figure 49 Bottled water demand is Bottled water forecast by region now firmly focused in the Total consumption (m litres) 2007 2012F % growth dynamic Asian markets Western Europe 57,506 65,045 13 Asia-Pacific 44,264 67,023 51 Latin America 40,902 61,610 51 North America 32,627 41,627 28 Eastern Europe 12,835 18,572 45 Middle East & Africa 11,218 16,965 51 Australasia 571 819 43 Source: Euromonitor
The effect has been worrying for the world’s majors - Nestle SA is the world’s largest food company and owns Perrier and San Pellegrino. Bottled water accounts for 10% of earnings but it reported a 9M09 2.2% decline in revenue on the back of lower bottled-water demand and a weaker Euro versus the Swiss Franc.
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But at the same time companies focused on emerging markets such as China Water and Drinks now owned by the Heckman Group (HEK - US - NR), which markets its products under the brand “Darcunk”, and supplies purified water to both local and international beverage brands such as Coca- Cola and Uni-President is seeing significant growth. Incidentally China Water and Drinks provides private-label bottled water for companies such as Sands Casino, Macau.
Fiji Water - the world’s first carbon negative product? Some of the negativity around bottled water seems to have stemmed from the dislike of bottled at source companies such as the increasingly popular Fiji brand. It is bottled in Fiji and shipped around the world (approximately 130 million litres in 2008), and claims to be the USA’s number two imported brand. Until very recently NGO’s and environmentalists were hurling acquisitions of poor working practices, such as bottling plants powered by diesel generators, local communities without adequate clean water and bloated carbon footprints. Then in a remarkable turnaround the company announced that it would go beyond carbon neutral to become carbon negative pledging to offset 120% of its carbon footprint by buying credits or planting trees. The implication is that the more consumers drink the water the more CO² is offset. So the debate is still raging but it is unlikely that we will be able to verify the carbon negative claims until further disclosure is forthcoming.
Asian demand growth Growth on concerns over Demand for bottled water in China is growing significantly driven by the tap water quality and following: middle class spending A recent UN survey of 11 provinces found that over half of all water samples contained unacceptable high levels of bacteria
McKinsey research highlights a growing middle class with improved living standards (forecast of more than 350 million people by 2011)
Increasing water shortages
Judging by issued licences there are more than 2,000 bottled-water producers in India. Recent industry figures from India indicate that sales of bottled water grew from US$189m in 2003 to US$599m in 2008. With this figure projected to double in the next five years, India is being touted as one of the fastest growing bottled-water markets in the world. The growth of the Indian market is being attributed to people having more disposable income coupled with poor public-water infrastructure.
Despite the large number of small producers, this industry is dominated by the big players - Parle Bisleri, Coca-Cola, PepsiCo, Parle Agro, Mohan Meakins, and SKN Breweries. Parle was the first major Indian company to enter the bottled- water market when it introduced Bisleri in India 25 years ago.
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Figure 50
Multinationals versus Indian bottled - water market share locals
Others 28%
Parle Bisleri 40%
Aquafina (Pepsi) 10%
Kinley (Coca Cola) 22%
Source: Indian Centre for Science and Environment, CLSA Asia-Pacific Markets
PepsiCo announced that it would double investments in its Indian beverage business in early 2009. The company’s Indian beverage investments will now total US$220m.
Coca Cola's new bottle Plastic bottles that aren’t entirely made of plastic technology A great deal of the concern that seems to have driven sales of bottled water down in developed markets seems to be around the issue of the packaging. PET (Polyethylene terephthalate) is the key compound in plastic bottles and more than 30% of global production ends up in bottles. So Coca-Cola just announced that it plans to role out a new plastic bottle made partially from waste-plant material - called the PlantBottle™. Coke has set a target of producing two billion of the special PET plastic bottles by the end of 2010. Initial data suggest that they plan to replace up to 30% of the existing PET in their bottles with the compound that will come from waste-sugar cane and molasses - perhaps we will start to hear people comment that as well as the drink being more than 30% sugar so is the bottle.
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Figure 51 Valuation table Name Code Water-related business class Approx % Country Year Last Mkt cap 3m avg PE (x) ROE (%) EV/Ebitda (x) EV/Ebit Rec sales from end price (US$m) daily (x) water related (US$m) 2010 2011 2010 2011 2010 2011 2011 Mitsui & Co Ltd 8031 JP Construction, management of plants na Japan 03/2009 1,442.0 28,841.3 141.8 17.2 10.7 7.9 11.4 14.2 10.2 31.7 O-PF Marubeni Corp 8002 JP Construction, management of plants na Japan 03/2009 548.0 10,421.2 64.6 10.7 8.3 14.0 15.4 12.3 10.3 19.2 U-PF Sumitomo Corp 8053 JP Construction, management of plants na Japan 03/2009 1,048.0 14,341.1 51.2 10.8 7.9 8.3 10.1 14.1 11.6 37.8 Mitsubishi Corp 8058 JP Construction, management of plants na Japan 03/2009 2,436.0 45,213.9 217.1 16.5 12.0 9.4 11.9 17.1 12.2 20.7 Buy Puncak Niaga Holdings Bhd PNH MK Construction, management of plants 100 Malaysia 12/2008 2.9 362.2 0.2 6.7 5.9 10.7 12.4 4.1 3.8 7.7 Salcon Bhd SALC MK Construction, management of plants 83 Malaysia 12/2008 0.8 105.1 0.7 13.9 10.6 4.0 4.0 6.4 6.1 12.5 Gamuda Bhd GAM MK Construction, management of plants 4 Malaysia 07/2009 2.8 1,716.3 6.3 18.0 14.6 9.6 11.8 17.8 13.6 31.1 U-PF Taliworks Corp Bhd CI MK Construction, management of plants 94 Malaysia 12/2008 1.7 186.2 0.0 18.1 9.0 10.1 Average - - - 14.0 10.0 9.1 11.0 12.3 9.7 21.4 Nanhai Development Co Ltd-A 600323 CH Up/mid/downstream water supplier 100 China 12/2008 11.7 462.6 15.4 26.1 23.5 9.8 10.8 21.2 15.9 24.9 Wuhan Sanzhen Industry Ho-A 600168 CH Up/mid/downstream water supplier 72 China 12/2008 8.1 522.1 11.2 64.6 47.5 Eguard Resources Developme-A 000826 CH Up/mid/downstream water supplier 17 China 12/2008 16.2 980.2 21.1 30.7 26.1 16.0 16.5 37.2 Shanghai Chengtou Holding-A 600649 CH Up/mid/downstream water supplier 28 China 12/2008 12.6 4,227.8 34.7 25.6 22.7 23.1 22.7 42.6 Jiangxi Hongcheng Waterwor-A 600461 CH Up/mid/downstream water supplier 100 China 12/2008 11.0 225.0 7.3 44.8 49.9 34.6 Guangdong Golden Dragon De-A 000712 CH Up/mid/downstream water supplier 79 China 12/2008 20.9 930.3 23.7 21.7 16.7 26.3 22.8 23.3 21.8 Qianjiang Water Resources-A 600283 CH Up/mid/downstream water supplier 75 China 12/2008 10.9 454.3 16.4 51.8 44.4 42.5 China Water Affairs Group 855 HK Up/mid/downstream water supplier 90 Hong Kong 03/2009 3.1 525.5 2.4 17.6 14.3 12.6 13.5 14.8 23.0 Buy Guangdong Investment Ltd 270 HK Up/mid/downstream water supplier 45 Hong Kong 12/2008 4.4 3,525.0 4.2 11.7 10.8 13.1 13.0 7.3 6.8 9.0 O-PF China Water Industry Group L 1129 HK Up/mid/downstream water supplier 100 Hong Kong 12/2008 0.2 82.0 1.4 Beijing Enterprises Water Gr 371 HK Up/mid/downstream water supplier 100 Hong Kong 06/2008 2.7 1,216.8 4.4 30.1 16.9 12.2 18.9 21.8 11.2 102.3 PBA Holdings Bhd PBAH MK Up/mid/downstream water supplier 100 Malaysia 12/2008 0.9 89.8 0.0 17.4 2.3 18.8 Manila Water Company MWC PM Up/mid/downstream water supplier 100 Philippines 12/2008 15.5 679.3 1.2 10.5 9.4 17.4 17.0 5.2 4.7 8.5 U-PF Thai Tap Water Supply Pcl TTW TB Up/mid/downstream water supplier 100 Thailand 12/2008 4.5 548.8 2.2 9.6 8.8 19.5 19.9 8.2 8.0 11.3 Average - - - 27.9 24.3 14.4 16.6 15.6 13.0 32.3 G.U.D. Holdings Limited GUD AU Water pumps 30 Australia 06/2009 9.4 525.6 1.6 13.6 12.9 30.2 30.7 8.6 8.2 10.6 Crane Group Limited CRG AU PVC pipes and plumbing supplies 91 Australia 06/2009 10.0 719.8 3.6 19.0 13.7 6.6 8.9 8.8 7.4 Duoyuan Global Water Inc-Adr DGW US water treatment equipment na China 12/2008 35.8 794.4 8.4 24.0 19.8 16.4 14.6 11.0 Sasakura Engineering Co Ltd 6303 JP Equipment and plants 63 Japan 03/2009 584.0 112.8 0.0 3.5 Organo Corp 6368 JP Treatment plants, filters and chem. 100 Japan 03/2009 650.0 412.2 0.8 13.1 Hitachi Zosen Corp 7004 JP Equipment and plants na Japan 03/2009 140.0 1,219.5 6.0 10.7 10.4 14.3 Ebara Corp 6361 JP Equipment and plants 60 Japan 03/2009 415.0 1,919.6 20.0 40.8 24.9 2.8 5.6 10.9 9.2 43.4 NGK Insulators Ltd 5333 JP Equipment and plants na Japan 03/2009 2,129.0 7,863.7 34.0 54.2 31.6 4.4 8.3 18.3 12.8 71.1 U-PF Kubota Corp 6326 JP Equipment and plants na Japan 03/2009 922.0 12,973.2 64.9 28.3 21.2 6.9 9.2 15.0 12.3 23.1 Buy Engtex Group Bhd ENGT MK manufactures pipes na Malaysia 12/2008 1.1 64.1 0.2 7.2 6.8 11.8 11.7 6.4 6.0 11.3 Eastern Water Resources Dev EASTW TB Pipelines and construction 100 Thailand 09/2008 4.5 226.8 0.1 9.0 8.0 13.4 13.4 5.6 9.6 Average - - - 23.0 16.6 11.6 12.5 11.0 9.6 22.2 Eurodrip Sa EDRIP GA Irrigation system 100 Greece 12/2008 0.8 49.9 0.0 12.5 Xinjiang Tianye Water Savi-H 840 HK Irrigation system 100 China 12/2008 1.1 73.0 0.2 7.3 Jain Irrigation Systems Ltd JI IN Irrigation system 100 India 03/2009 837.6 1,391.2 3.1 24.2 18.3 24.1 24.5 12.6 10.2 18.8 O-PF Average - - - 24.2 18.3 24.1 24.5 12.6 10.2 12.9 Continued on the next page
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Figure 51 Valuation table (Cont’d) Name Code Water-related business class Approx % Country Year Last Mkt cap 3m avg PE (x) ROE (%) EV/Ebitda (x) EV/Ebit Rec sales from end price (US$m) daily (x) water related (US$m) 2010 2011 2010 2011 2010 2011 2011 Toyobo Co Ltd 3101 JP Membranes 8 Japan 03/2009 151.0 1,240.0 2.4 53.9 24.7 1.6 4.6 10.2 9.1 66.0 Nitto Denko Corp 6988 JP Membranes na Japan 03/2009 3,780.0 7,186.9 48.4 18.5 17.2 8.6 8.5 6.4 6.1 44.4 Buy Asahi Kasei Corp 3407 JP Membranes na Japan 03/2009 490.0 7,520.3 24.0 35.8 20.2 3.3 5.5 6.7 6.2 72.5 Toray Industries Inc 3402 JP Membranes na Japan 03/2009 526.0 8,066.3 26.2 944.3 50.2 0.2 3.6 14.3 12.5 124.6 U-PF Sinomem Technology Ltd SINO SP Membranes na Singapore 12/2008 0.6 219.6 2.9 10.1 8.3 12.3 14.3 8.7 6.8 21.2 Average - - - 212.5 24.1 5.2 7.3 9.3 8.1 65.7 Beijing Capital Co Ltd-A 600008 CH Conglo-water 73 China 12/2008 7.1 2,275.0 23.4 40.8 39.2 5.3 5.6 23.4 21.0 52.3 Tianjin Capital Environ-A 600874 CH Waste water treatment 97 China 12/2008 7.5 1,337.7 21.2 37.7 34.5 8.7 8.9 14.1 13.1 Tianjin Capital Environ-H 1065 HK Water treatment technology 97 China 12/2008 3.2 1,337.7 1.9 20.2 20.8 5.4 5.0 15.0 15.1 Asia Environment Hldgs Ltd AENV SP Turnkey and BOT projects on water treatment 75 China 12/2008 0.3 105.0 0.2 39.8 38.9 9.6 8.9 7.1 6.4 10.2 Bio-Treat Technology Ltd BIOT SP Water treatment technology 100 China 06/2009 0.1 89.3 0.1 1,044.6 Epure International Limited EPUR SP Water treatment technology 100 China 12/2008 0.9 813.8 2.3 16.4 14.7 19.9 19.5 11.5 10.4 17.8 China Everbright Intl Ltd 257 HK Waste to energy & sewage treatment 48 Hong Kong 12/2008 4.3 2,017.8 4.9 27.2 24.4 12.9 12.8 18.5 15.9 30.3 U-PF Sino-Environment Tech Group SINE SP Waste water treatment 8 Singapore 12/2008 - Average - - - 30.3 28.8 10.3 10.1 14.9 13.7 231.0 Kurita Water Industries Ltd 6370 JP Water treatment related equip for waste 100 Japan 03/2009 2,946.0 4,280.9 19.5 23.3 20.8 9.1 9.9 8.7 7.8 13.1 water or desalination Torishima Pump Mfg Co Ltd 6363 JP Pumps for Desal and wastewater na Japan 03/2009 2,171.0 710.0 4.0 24.0 24.5 9.0 8.6 16.5 15.0 22.8 Doosan Heavy Industries 034020 KS Desalination na South Korea 12/2008 84,200.0 7,937.9 55.5 22.4 Hyflux Ltd HYF SP Desalination, raw and wastewater na Singapore 12/2008 3.6 1,365.1 2.4 23.2 19.5 19.5 20.5 18.6 14.7 31.1 Average - - - 23.5 21.6 12.5 13.0 14.6 12.5 22.3 Veolia Environnement VIE FP Conglo-water 35 France 12/2008 25.1 18,013.9 59.7 18.0 14.6 9.0 11.2 7.9 7.3 19.9 Suez Sa - Fractional SZE FP Conglo-water 25 France 12/2008 30.9 58,700.1 0.1 12.0 Beijing Enterprises Hldgs 392 HK Conglo-water 2 Hong Kong 12/2008 55.7 8,161.1 9.7 21.4 19.5 9.3 9.4 13.8 12.4 31.3 Buy Hong Kong & China Gas 3 HK Conglo-water 13 Hong Kong 12/2008 18.9 15,945.2 12.8 26.3 24.9 13.8 14.1 24.0 22.4 34.1 NWS Holdings Ltd 659 HK Conglo-water na Hong Kong 06/2009 14.1 3,776.4 1.6 11.2 11.8 12.6 10.0 29.9 25.1 46.8 O-PF Shanghai Industrial Hldg Ltd 363 HK Conglo-water na Hong Kong 12/2008 39.4 5,478.4 10.5 10.6 10.5 12.9 11.8 8.2 6.7 18.1 O-PF YTL Power International Bhd YTLP MK Conglo-water 55 Malaysia 06/2009 2.2 4,436.0 1.9 13.8 13.3 17.0 16.8 10.3 9.9 14.6 O-PF Dmci Holdings Inc DMC PM Conglo-water na Philippines 12/2008 9.8 568.9 0.3 5.7 7.2 20.0 18.7 4.4 3.8 12.9 O-PF Average - - - 15.3 14.5 13.5 13.1 14.1 12.5 23.7 Coca-Cola Amatil Ltd CCL AU Food and Beverage 10 Australia 12/2008 11.2 7,772.8 22.2 16.9 15.5 30.5 29.8 9.9 9.1 13.8 Danone BN FP Water and Beverage 30 France 12/2008 43.1 40,482.3 130.0 16.2 14.6 12.0 12.4 11.6 10.8 15.2 Tingyi (Cayman Isln) Hldg Co 322 HK Food and Beverage 10-15 China 12/2008 18.3 13,153.5 11.7 27.7 23.1 28.7 29.7 12.6 10.6 21.5 O-PF Mount Everest Mineral Water MEM IN Bottled Water 90 India 03/2009 69.8 52.2 0.2 Akasha Wira International Tb ADES IJ Bottled Water 90 Indonesia 12/2008 620.0 39.9 0.0 Just Water International Ltd JWI NZ Bottled Water 100 New Zealand 06/2009 0.3 21.8 0.0 11.9 Heckmann Corp HEK US Bottled Water 100 United states 12/2008 5.3 572.0 2.3 Coca-Cola Co/The KO US Food and Beverage 10 United states 12/2008 57.0 132,148.9 492.0 16.6 15.4 33.8 34.4 12.1 11.3 16.7 Buy Pepsico Inc PEP US Food and Beverage 5-7 United states 12/2008 62.1 96,825.6 422.4 14.8 13.3 46.7 46.4 9.5 8.9 14.1 U-PF Average - - - 18.4 16.4 30.3 30.5 11.1 10.1 15.5 Sadbhav Engineering Ltd SADE IN Constructs irrigation and dams na India 03/2009 1,264.4 347.7 0.4 22.9 17.1 17.5 19.1 19.0 19.2 22.5 Hyflux Water Trust HYFT SP Water investment trust 90 Singapore 12/2008 0.7 152.9 0.1 26.1 19.6 3.5 4.9 14.4 12.4 25.5 Source: Bloomberg, CLSA Asia-Pacific Markets
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Investing in the space Manila Water and Tianye Our screen of Asian equities reveals 80 investable equities that are Water stand out as related to water investments from construction and management of value plays plants to water supply, sewage treatment, membrane technologies, desalination and irrigation systems. Within the basket, 19 stocks are under our coverage regionally. Manila Water and Thai Tap Water look like some of the more attractive in terms of valuations trading at 9.3x and 9.1x FY10 PE, respectively.
Overall, our CLSA Asian Water Index has tracked MSCI AC Asia with 4% outperformance since 1 January 2005 – what is more interesting is the outperformance that occurred during the 2004 - mid 2007 level.
Figure 52 Asian Water stocks Water versus MSCI Asia x J tracking MSCI Asia 300 (rebased to 100) S&P Asia Water Index S&P World Water Index MSCI Asia x J 250
200
150
100
50 Jan 04 Dec 04 Oct 05 Aug 06 Jun 07 Apr 08 Feb 09 Jan 10
Source: CLSA Asia-Pacific Markets, Bloomberg
Investors must cherry With the water sector still in its early stages of development and an immature pick stocks with regulatory structure in place in developing countries, (China in particular,) the good management sector brings a relatively high risk and investors will have to cherry pick the and strategies stocks with good management and strategies that allow for sustainable earnings growth.
On value it is the listed plays in Malaysia, Thailand, Singapore and the Philippines that have the lowest PE multiples on a 2011 basis, while still maintaining relatively high ROEs.
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Figure 53
Companies with exposure Comparison of PE multiples (2010 Bloomberg) to Asian Water Wuhan Sanzhen Industry Ho-A Qianjiang Water Resources-A Beijing Capital Co Ltd-A Asia Environment Hldgs Ltd Tianjin Capital Environ-A Ngk Insulators Ltd Eguard Resources Developme-A Hong Kong & China Gas China Everbright Intl Ltd Nanhai Development Co Ltd-A Ebara Corp Torishima Pump Mfg Co Ltd Tingyi (Cayman Isln) Hldg Co Toyobo Co Ltd Shanghai Chengtou Holding-A Kurita Water Industries Ltd Duoyuan Global Water Inc-Adr Hyflux Ltd Beijing Enterprises Hldgs Kubota Corp Hyflux Water Trust Asahi Kasei Corp Jain Irrigation Systems Ltd Tianjin Capital Environ-H Guangdong Golden Dragon De-A Sadbhav Engineering Ltd Doosan Heavy Industries Nitto Denko Corp Coca-Cola Amatil Ltd Coca-Cola Co/the Epure International Limited Gamuda Bhd Danone Veolia Environnement Crane Group Limited YTL Power International Bhd Pepsico Inc G.U.D. Holdings Limited Mitsubishi Corp NWS Holdings Ltd Guangdong Investment Ltd Shanghai Industrial Hldg Ltd Salcon bhd Mitsui & Co Ltd Hitachi Zosen Corp Manila Water Company Sinomem Technology Ltd Thai Tap water SUPPLY Pcl Eastern Water Resources Dev Marubeni Corp Sumitomo Corp Dmci Holdings Inc Engtex Group Bhd (x) Puncak Niaga Holdings Bhd
0 1020304050
Source: Bloomberg, CLSA Asia-Pacific Markets
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Figure 54
Companies with exposure Comparison of ROE (2011 Bloomberg) to Asian Water Coca-Cola Amatil Ltd Tingyi (Cayman Isln) Hldg Co Jain Irrigation Systems Ltd Guangdong Golden Dragon De-A Hyflux Ltd Thai Tap Water Supply PCL Sadbhav Engineering Ltd Dmci Holdings Inc Epure International Limited Manila Water Company YTL power International Bhd Eguard Resources Developme-A Marubeni Corp Doosan Heavy Industries Sinomem Technology Ltd Hong Kong & China Gas Eastern Water Resources Dev China Everbright Intl Ltd Guangdong Investment Ltd Puncak Niaga Holdings Bhd Danone Gamuda Bhd Engtex Group Bhd Mitsubishi Corp Shanghai Industrial Hldg Ltd Mitsui & Co Ltd Nanhai Development Co Ltd-A Veolia Environnement Sumitomo Corp Kurita Water Industries Ltd Beijing Enterprises Hldgs Nws Holdings Ltd Kubota Corp Tianjin Capital Environ-A Asia Environment Hldgs Ltd Crane Group Limited Torishima Pump Mfg Co Ltd Nitto Denko Corp Ngk Insulators Ltd Tianjin Capital Environ-H Ebara Corp Beijing Capital Co Ltd-A Asahi Kasei Corp Hyflux Water Trust Toyobo Co Ltd Salcon Bhd (x) Toray Industries Inc
0 5 10 15 20 25 30
Source: Bloomberg, CLSA Asia-Pacific Markets
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Companies to follow We spent some time looking at some of the more liquid equities on the list and highlight the following names:
Beijing Enterprises Beijing Enterprises Water Group Beijing Ent Water (371 HK) has Water Group established a reasonable sized business on the mainland. It appears to be focusing its acquisitions efforts towards sewage treatment - it has six water- supply plants and 24 water-sewage treatment plants located in various provinces and cities, such as Beijing, Guangdong, Zhejiang, Shandong, Hunan, Sichuan, Guangxi, Hainan and Guizhou. It has an aggregate water treatment capacity of 4.8m m³ per day (waste-water capacity of 3.5m m³ per day and water-supply capacity of 1.3m m³ per day).
The parent company is the established red chip gas and utility company - Beijing Enterprises (392 HK), which holds 65%, so management quality is high. Valuations (based on only one analyst) have it trading on 18x June 11CL earnings, so plenty of growth is priced in.
Shanghai Municipal Shanghai Municipal Raw Water (600649 CH). The company is state owned Raw Water with 46% held by Shanghai Chengtou. Its main water business is the extraction of raw water from the Huangpu River. Through asset swaps it has moved into the potable water and wastewater business and it now provides water to the south and north parts of Shanghai, as well as the fast growing Pudong district.
Valuations are not cheap for what we believe will grow to become a major player in the Chinese water and wastewater space. Its strong parent controls up to 80% of the solid waste-treatment industry in Shanghai and is expanding its environmental business to include wind.
Thai Tap Water Thai Tap Water (TTW TB) is Thailand’s largest listed water play, supplying water to the provinces of Nakorn Pathom and Samut Songkram. The business operates outside of Bangkok under a 30-year built-operate-transfer (BOT) contract to the Provincial Water Authority (PWA). It supplies 300,000 m³ per day of tap water. Outlook for 2010 looks brighter as demand rebounds from the 2009 pullback and potential for 4-5% tariff increases. Investors should look out for expansion plans that could include other projects in Asia. It has always traded at a lower PE multiple to its Asian peers, and at 9x 11F it is certainly cheaper than its Malaysian, Filipino and Chinese peers.
Manila Water Manila Water (MWC PM) runs the water concession in the east of Manila. It has met and exceeded the performance targets set out in the concession agreement. It is guaranteed a 9.3% real rate of return on investment.
The company has just raised tariffs by P1.16/m³ (5%). The rate hike was expected and is already in the price but investors should expect another adjustment in 2011. We expect billed volume growth to also pick up in 2010 on a rebound in economic growth. We have an Outperform rating on the stock with a target price of P18.25.
Duoyuan Global Water Duoyuan Global Water (DGW US) is a China-based domestic water treatment equipment supplier. The company is involved in the water- treatment process, such as filtration, water softening, water sediment separation, aeration, disinfection and reverse osmosis. Products include circulating water-treatment equipment, water purification equipment and
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wastewater treatment equipment. Its IPO was in 2009 and is up more than 80% in six months. It appears to have little or no competitive advantage - we could not find any unique equipment in its product range but that does not mean there is none there. Its gross margin remains high at more than 40%, with sufficient being invested into R&D to keep its range relevant. With the continued growth in potable water and wastewater treatment in China, as well as tighter standards for drinking water, we see this company as well positioned. The stock has good liquidity for a sub-US$1bn market cap, with consensus valuations not too stretched considering the growth potential and good ROE. Certainly a “picks and shovels” play on the growth in China.
Epure International Epure International Limited (EPUR SP) provides building services on Limited water- and wastewater-treatment plants in China. It is primarily an engineering procurement and construction (EPC) company but has recently expanded into a plant operator, including BOT contracts in Xi’an and Guangxi. To date, it has been involved in more than 500 water and wastewater projects on the mainland. Recent news on a proposed dual listing into Hong Kong has pushed the stock higher. Despite the recent jump, valuations still appear attractive at 15x 11F.
China water Affairs China Water Affairs (855 HK) now owns and operates more than 29 JVs on the mainland. Its focus has always been in the potable water space, with only three sewage-treatment projects in its portfolio. Interestingly its cashflow issues, which caused us to downgrade the stock in 2007 and 2008, now appear to have passed with recent news of a Rmb3bn loan from China Everbright Bank removing the overhang of large convertible bonds repayable in 2011. Its focus on “third-” and even “fourth-tier” Chinese cities has been interesting and it now looks like tariffs are finally moving north off a low base. This combined with growth in water as these cities expand through rapid urbanisation makes it an interesting play. One thing that differentiates this company is that the majority of its projects are outright ownership as opposed to BOT contracts. As a result, the company has built up a significant landbank. What is not clear is just how much the six million square metres of land it has is worth or how quickly it could monetise it, but it looks to us as though this is not in the price so we expect some upside.
Guangdong Investment Guangdong Investment Limited (270 HK), through its subsidiaries, Limited operates water-supply, power and electricity, and infrastructure businesses. It has an 89% share of the Dongshen Water Supply project, which supplies raw water to Hong Kong, Shenzhen and Dongguan over a 30-year concession that was re-signed in August 2000. Volume is approximately 2.4tn m³. Investors should recognise that there is little or no growth in this contract and treat it simply as a yield play. The water business is 50% of GDI’s group revenue but 96% of its operating profit. We continue to like the stock for its free cashflow and dividend yield. The question for investors is where and what is the growth. It is continuing to expand its power business and recently told the market that it has no plans to spin off the power business.
Heckmann Corporation Heckmann Corporation (HEK US) through its subsidiary, produces and distributes bottled water in China. It purchased China Water and Drinks in 2008 with cash and stock (US$168m cash and US$455m in stock). Dick Heckmann is famous for a couple of big buy, grow and flip deals, specifically: he purchased US Filter (a water treatment company) for US$1.6m in 1990, grew it through acquisitions and sold it for a punchy US$8.1bn in 1999 to Vivendi. Rescued K2 (a ski and sports-brand company) in 2000 for US$25m, grew it and sold it in 2007 to Jarden for US$1.2bn.
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The key water assets in China are six bottled water-production plants with a capacity of 1.2bn bottles per year, with plants-under-construction that would add a further one billion bottles a year sells as Darcunk “Absolutely pure” as its own brand (70%) of revenue and the rest to Coca Cola, Uni President, Great Nature, JianLiBao and Sands Casino via original equipment manufacturer (OEM) contracts.
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Notes
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© 2010 CLSA Asia-Pacific Markets ("CLSA"). Key to CLSA investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local market by 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%. Performance is defined as 12-month total return (including dividends). 15/01/2010
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