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WATER FUTURE: OPPORTUNITIES GALORE FOR FOREIGN COMPANIES AS DEMAND FOR STRATEGIC RESOURCE ESCALATES IN CHINA

C H I N A   D A I L Y   E U R O P E A N   W E E K L Y
MARCH 9 – 1 5 , 2 0 1 2

By MENG JING
mengjing@chinadaily.com.cn

Water, water, everywhere … but not really in China. Though an important strategic resource, it has always been in short supply and wasted aplenty, without much thought for its conservation. But two recent government announcements may well prove the old adage wrong. A work report submitted to the National People’s Congress, China’s top legislature, indicated that the government is planning to impose strict controls on water resources management to prevent misuse. Last month, the Ministry of Water Resources said it would invest more than 140 billion yuan ($22.2 billion, 16.9 billion euros) on water conservancy projects this year, while the total investment on such projects between 2011 and 2015 is expected to be about 1.8 trillion yuan.

Though China accounts for about 20 percent of the global population, its freshwater resources are just 7 percent. Despite the shortfall, the nation has been able to maintain a bumper harvest for eight consecutive years, something that Chen Lei, minister for water resources, terms as a “China Miracle.” But Chen knows his task is far from over and that the road ahead is a bumpy one. Though the main priority is to conserve water resources, efforts are also on at the ministry to utilize the existing resources fully, without wastage.

Steps to channel more foreign investment to the sector are also being charted and China is hoping to make a lasting impression at the 6th World Water Forum in Marseille, France on March 12. Since 2008, China has added more than 50 million people to its population, while its freshwater resources have fallen by 11.4 percent to 2,402 billion cubic meters, according to the National Bureau of Statistics. The per capita water resources quota in China is 2,100 cubic meters, or 28 percent of the global average.

A study “Charting Our Water Future”, by global consultancy McKinsey and the Water Resources Group, says that by 2030 China could face a gaping water shortage of 201 billion cubic meters, which is about one-third of China’s current annual consumption of 600 billion cubic meters.

Water security has now become an integral issue for the government, says Zhong Lijin, senior associate at the China office of the World Resources Institute, a Washington-based global environmental think tank, referring to the recent “strict water resources management system”. The new guidelines for water management have specific objectives for water consumption, water efficiency and water pollution, including “capping the maximum volume of water consumption at 700 billion cu m by 2030” and “cutting down water consumption per 10,000 yuan worth of industrial value to 40 cu m”. Experts say these are not easy goals to achieve, as water conservation efforts are still at a nascent stage in China. But the government remains confident it will be able to address these issues in the long run.

Deputy Minister for Water Resources Jiao Yong and EU ambassador to China Markus Ederer, along with the Danish and Portuguese ambassadors, have decided to set up a China Europe Water Platform at the 6th World Water Forum to promote policy dialogue between China and Europe on water sector reforms and to encourage capacity building, research and business cooperation.  According to Ederer, water will emerge as the “new gold” and an integral part of future global security, considering there is tremendous pressure on water resources from climate change, urbanization and economic growth. China’s rapidly expanding water sector, valued at $48 billion, is currently the third largest in the world, according to research fi rm GWI Global Water, behind the United States at $110 billion and Japan at $59 billion. Analysts estimate that the industry value may triple to $150 billion over the next five years.

Private equity and venture capital firms have been spearheading the “green gold” rush in China. PE and VC investment in China’s water sector has surged more than nine times to $406 million in 2011 from $44.16 million in 2010, according to consultancy firm China Venture. “In terms of the water sector, China is not one of our company’s priorities in the world. It is our top priority,” says Jorge Mora, Asia CEO of Veolia Environmental Services, a French company. “There is no country in the world that would have sustainable development without water. If you don’t have enough water, it aff ects every aspect of your life. Your GDP growth and your development can be challenged or even stopped due to a severe shortage of water,” Mora says.

Resource: Crucial role for wastewater treatment

The water crisis is certainly a challenge for sustainable development in China. But what makes the country an important market for companies like Veolia is the fact that the daily per capita consumption of water in China is still low and about one-quarter of the global average. In China, people consume about 100 liters of water every day, whereas it is 200 liters in Europe and 700 liters in the US. “It would be a huge disaster if the demand for water goes up among the over 1.3 billion inhabitants in China,” Mora says. But it is something that is bound to happen, say experts, pointing to the rapid urban expansion, growing middle class, sanitation requirements and lifestyle changes as the catalysts for the increased demand. Nowhere is the trend for rising water resources more evident than in Beijing, the capital of China. Though its population has increased by more than 40 percent in the past decade, its annual per capita water availability has dropped significantly from 300 cu m to 100 cu m in the past two to three years, which is nearly one 10th of the internationally reorganized critical level of 1,000 cu m. The deeper pockets of Beijing’s residents have also continued to drive up water consumption in the city’s thousands of spas, bathhouses, car-wash companies and dozens of golf courses.

All of these have forced Beijing to borrow water from neighboring provinces, such as Hebei and Shanxi, which themselves are not rich in water resources. The capital is now pinning its hopes on the South-to-North Water Diversion Project, the largest of its kind in the world, which is expected to bring 1 billion cubic meters of water to Beijing by 2014 and help the city end underground water extraction. Ma Jun, an environmentalist and author of China Water Crisis, says that the government’s goal of using less than 700 billion cu m of water every year by 2030 is daunting and needs to be backed with signifi cant efforts to improve water effi ciency. “China uses around 600 billion cu m of water a year, which was the maximum amount originally set to reach after 2015,” says Ma, director of the Institute for Public and Environmental Affairs and one of  Time magazine’s 100 most influential persons in the world in 2006.

Experts say that with about 70 percent of China’s water resources being used for agriculture purposes, effective irrigation techniques are vital for attaining the conservation goals. Of the 120 million hectares of cultivated land in China, only 53.3 million hectares have basic irrigation measures and facilities. The area equipped with high-efficiency, water-saving irrigation techniques, such as sprinklers and drip irrigation systems, was just 1.3 million hectares by the end of 2011, according to the Ministry of Water Resources. It is also this huge potential that makes the irrigation sector an appealing investment candidate from the perspective of a foreign investor. But what makes it even more attractive is the government’s plan to have a 4 trillion yuan investment in water conservancy projects by 2020. According to the government plan, nearly 20 percent of the 1.8 trillion yuan investment between 2011 and 2015 will go for infrastructure projects related to agriculture, such as irrigation projects. Buoyed by these prospects, Netafim, a global leader in smart drip and micro-irrigation solutions, has already announced plans to invest $10 million on a factory in China to take advantage of the increased business opportunities.

“Government support plays a significant role in developing a water-efficient irrigation industry. With China’s massive investment in water conservation and the lower price due to our local manufacture, there is no doubt that for agriculture irrigation producers, China is the future of Asia,” says Yacov Pedhatzur-Wiedhopf, managing director of Netafi m Asia. The Israeli company, which introduced drip irrigation in China during the early 1990s, has always believed that China is a big potential market due to its huge agriculture base, population and scarce water resources. The company’s irrigation systems are capable of delivering water and fertilizer to the roots of plants and can save 90 percent water and 20 percent fertilizers. But the advanced technology is expensive and despite having no competition, the company has not exactly been able to score a winning run. However, with the planned government investment and a local factory that is scheduled to start operations in early 2013, the company expects to turn the tide and come out with products at more competitive prices. Pedhatzur-Wiedhopf says the company’s revenue from China will jump to $50 million by 2015, from $10 million in 2010.

But the real winners of the water conservation game are not only those who make high-effi ciency water equipment. Though water demand has gone up due to China’s rapid urbanization and industrialization, it has also led to more water pollution due to increased municipal and industrial waste water discharges. According to China’s Ministry of  Water Resources, as many as 300 million people in China’s rural areas lack access to safe drinking  later. Ma Jun, whose environmental organization has been naming and shaming water polluters in China, says that about one-third of the water that is consumed in the urban areas are supplied by impure water sources in China. Ma says the number of companies that illegally emit wastewater in rivers and lakes in China has increased from 2,500 in 2006 to about 60,000.

The most recent case of water pollution: an estimated 20 metric tons of cadmium was discharged by a mining company in the Longjiang River in the Guangxi Zhuang autonomous region on Jan 15, with cadmium content in the water 80 times higher than the prescribed safe limits. Specific targets have been set by the government to make 95 percent of the water in functional water areas reach the qualifi ed standard by 2030, instead of the current 46 percent.

In an aim to achieve the goal, increasing wastewater treatment facilities are also priorities in the environmental protection targets envisaged under the 12th Five-Year Plan (2011-15).  According to the plan, newly added waste water treatment capacity in China is expected to reach 42 million tons a day by 2015. To achieve this, China is also more than doubling its investment in the wastewater sector, and reportedly plans to spend about 300 billion yuan over the next five years. The huge potential for waste water treatment has also prompted global leaders in the sector like Suez Environnement  to hinge their future growth plans on China. The French environmental service provider is primarily focused on water production and distribution in China with about two-thirds of its existing 27 projects in China on the supply and distribution side.

Charles Chaumin, Asia CEO of Suez Environnement, says that with the growing awareness of environmental protection in China, wastewater treatment will play a more important role in future projects. “In our future portfolio of projects, we will see more wastewater treatment facilities, including sludge treatment both for municipalities and industrial parks. In terms of the number of new projects in China, two-thirds will probably be from waste water and industrial sewage in the coming five years,” Chaumin says.

He says the company’s water business in China grew by nearly 15 percent last year due to increased demand for water and wastewater treatment facilities.

“Economic and urban growth are strong drivers for our business. The growing concern for environmental protection will be the real engine that drives our business to the next level,” Chaumin says, adding the ambitious goals and regulations for improving water quality and reducing water pollution from cities and industries augur well for future prospects.

“We expect the revenues from our water and wastewater activities in China to grow by 10 percent average over the next fi ve years, higher than our global business,” he says. The rapid development of wastewater treatment in China has also pushed up the demand for sludge treatment, a by-product of wastewater treatment. According to statistics from a thesis published by Zhang Yun, vice-president of Beijing General Municipal Engineering Design and Research Institute, the production of sludge at wastewater treatment plants is estimated to increase to 2.46 million cu m year-on-year between 2011 and 2015.

Siemens, a relatively new entrant in the water sector, after it acquired US Filter in 2004, is one of the big names that are hoping to make a mark in sludge treatment. The company is providing the world’s largest solution project to a customer in Shenyang, Northeast China’s Liaoning province, with a treatment capacity of 1,000 tons a day. The plant is expected to start operations by September.

“We are closely following up on the sludge treatment market in China, where we have seen clearly the demand for sludge treatment triggered by the government desire for environment protection,” says Alfred Ng, general manager of  Water Technologies with Siemens China. Ng says he has noticed the trend that with China’s economic development reaching a transitional stage, the previous development mode of high consumption of resources and environment pollution has been replaced with one that is aimed at lower consumption of resources and stringent policies and regulations for pollution control.

“The trend is unavoidable, since many developed economies have experienced the same stage, and China now must and should have strict control over its water environment. Thus we are very positive on the potential of China’s water and sludge treatment market,” he says, adding the United States is Siemens Water Technologies’ largest market in the world but China is no doubt one of the countries with the most growth potential.

For Veolia’s Mora, the entire water sector in China is worth investing, and it really does not matter whether it is water production, wastewater treatment or even seawater desalination. What is more important, Mora says, is to seize the moment and ride the boom in China’s water sector. The company, which has not had any major project in China since 2008, due to its cautious approach and the financial diffi culties from the global fi nancial crisis, is now ready to test the waters in China again.

“We are restructuring our group by selling our transportation division, so that we can further grow our essential divisions, such as water. China will be the main destination benefiting from the restructure. With the money, our investment in China will take off later this year,” he says.

Water from the sea

GROWING SCARCITY OF RESOURCE, GOVERNMENT SUPPORT PROVIDE NEW IMPETUS TO DESALINATION INDUSTRY IN CHINA

By HU HAIYAN
huhaiyan@chinadaily.com.cn

Even in his 80s, Samuel Muller has not lost interest in talking about the huge potential of China’s water desalination market.

The vice-president of Brack Capital Infrastructure Development (BCID), an Israeli seawater desalination company, says the Chinese government’s announcement in February planning for a fourfold increase in daily seawater
desalination capacity will make the nation one of the most exciting markets in the world.

Desalination capacity is set to increase from 660,000 cubic meters in 2011 to 2.6 million cubic meters by the end of 2015.

“This marks a milestone for the desalination market in China and its subsequent development. Policy stimulants are always important,” says Muller, who has worked in the desalination industry since the 1970s.

His company is investing heavily in China and is setting up desalination plants in Tangshan, Hebei province, and Tianjin to grab a slice of the huge pie.

You Jinde, general secretary of the Membrane Industry Association of China, says the undervalued desalination industry has got a new impetus following the government move to establish a national desalination industry.

“Even though China started desalination work in the 1960s it was never given the importance accorded to other water projects like the government-financed South-to-North Water Diversion Project, which brings water from the Yangtze River in the south to the north. Desalination needs government support, as the cost price of desalinated water far exceeds the selling price,” You says.

Due to the stimulus policies implemented during the 11th Five-Year Plan (2005-10), China’s desalination capability has made a big stride, with capacity going up to 660,000 cubic meters compared with 50,000 cubic meters a day in 2005.

But it is still far from enough. According to the announcement made by the National Development and Reform Commission, China’s freshwater resources per capita are just 2,100 cubic meters, about 28 percent of the global average. And nearly two-thirds of Chinese cities are facing a shortage of water.

It also states that in the next five years, China will build up a chain of seawater desalination facilities and technologies. Chinese companies are expected to develop nearly 70 percent of the desalination equipment required for these projects. Such moves will automatically enhance the capabilities and strengths of domestic companies, experts say.

Zheng Genjiang, the director of the Hangzhou Development Center of Water Treatment Technology, says that the speed at which China is raising its capability to desalinate seawater and develop its own desalinating equipment or patent desalination technologies, demonstrates its determination to ensure sustainable supplies of fresh water and to protect water resources.

“Some key and sophisticated desalination technologies and equipment like reverse osmosis membranes are completely controlled by foreign companies. It is not prudent for a country like China to be dependent on imported equipment,” Zheng says. Of the more than 660,000 cubic meters of desalinated water produced daily, only 80,000 cubic meters comes from the plants that are fully constructed by Chinese companies.

Though the government is looking to enhance the capabilities of domestic companies, it has not been a deterrent to foreign companies. Fu Kangbo, general manager of Hydranautics China, a subsidiary of Nitto Denko from Japan, says that the bigger size of the pie will more than off set the increased competition from domestic players. “Honestly speaking, it is hard for the Chinese companies to realize the goal of developing over 70 percent of the desalination equipment without any help from their foreign counterparts. Cooperation is the only way forward for the industry,” he says.

Fu says his company will maintain its 40 percent share of the Chinese desalination membrane market even in 2015. “We also expect a fourfold increase in our annual sales by then,” he says.

Fu Kefu, director of US Renewables Group (USRG), Chinese business, says that China is definitely going to be the next big desalination market, and it is sensible for foreign companies to cooperate with Chinese counterparts to gain a win-win result.

It is expected that by 2015 China may invest about 30 billion yuan ($4.8 billion, 3.6 billion euros) in the desalination sector.

The pie is expanding, but some players in this market are not so optimistic in their assessment.

Fan Xiong, chief engineer of China Metallurgical Group Seawater Desalination Investment Co Ltd, says the desalination sector in China is not that profi table, as water tariff s and the demand for desalinated water are low.

“In nations like Israel desalinated water is treated as a commodity, but in China it is considered a public utility and as such the prices cannot reflect the investment and operation costs. On an average it costs 8 yuan to make a ton of desalinated water in China. But the selling price is 4 yuan a ton,” Fan says.

“Now we are also searching for some overseas investment opportunities,” he says.

What seems to back Fan’s view is that none of the companies interviewed could reveal their margins from the desalination business in China.

“Just like a baby starting to grow up, it is not so meaningful to take the current weight into consideration when predicting how much weight he will gain in the future. As long as he is healthy and has got enough favorable conditions to develop, it is enough,” says Guo Huiping, vice-president of China Electronics Engineering Design Institute, affi liated to the State Development & Investment Corp.

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