It seems like there is more chatter about coal lately. Perhaps it is the unrelenting smog in the capital that has brought the issue to the forefront. But now, coal might not only be blamed for the country’s deteriorating air quality, it could also be sucking grasslands dry. The focus is shifting from the detection of heavy metals in PM2.5, to concern over water for used for coal.
“is increasingly recognised for its contribution to the country’s environmental ruin. Most of the focus has been on coal burning. While this will continue, we expect to see more scrutiny on extraction, especially around water.”
Charles Yonts, CLSA, Head of Sustainable Research
We have been writing about this since April 2012 (read here) and then in August 2012, Greenpeace came out with Thirsty Coal: A Water Crisis Exacerbated followed by The Myth of China’s Endless Coal Demand this year. Most recently, CLSA U® published Water for Coal: Thirsty miners will feel the pain which we guest authored. It looks like water risks are not going away. For CLSA’s Head of Sustainable Research, Charles Yonts, coal “is increasingly recognised for its contribution to the country’s environmental ruin. Most of the focus has been on coal burning. While this will continue, we expect to see more scrutiny on extraction, especially around water.”
Water for coal – what’s the big deal?
Extraction & production of coal is water intensive. In China, there is lots of coal and water – but just not where we want it. What makes this worse is that water resources have been falling over the last ten years. It is this shift in the water landscape as well as a rise in the demand of coal that is causing concern.
Three maps and some bathtubs explain this better than many words …
53% of ensured coal reserves lie in regions with similar water to the Middle East
The waterscape is changing: it looks more worrying now…
Up to 24 bathtubs of water to extract & produce 1 tonne of washed coal
Miners & investors in mining beware!
In fact up to 83% of China’s coal lies in water scarce and water stressed regions. 24 bathtubs are required to produce one tonne of coal yet China’s top four mining provinces only have 4.8 – 23.2 bathtubs per person per day. These four provinces produce 2.6 billion tonnes or 70% of coal production in 2011. (Check out our graphics on this in our updated Metals & Mining section in Big Picture)
But this is now. By 2015, the government plans to ramp up production to 4 billion tonnes. Is there enough water for this? If not, what does this mean for the coal industry? The CLSA Report warns that this might not just be a problem for China’s coal but also for Mongolian coal washed in Inner Mongolia.
But it is more than coal! It’s power, cement, steel, coal-to-liquid, coal-to-chemical…
China Water Risk estimates that currently more than 50% of industrial water is used in coal and coal-related industries. The CLSA report cautions that industries relying on coal as a raw material input could be impacted by water risks including power generation, coke production and hence the cement and steel industries. Touted new growth industries such as coal-to-chemicals could also take a hit as they are all water intensive over and on top of coal production and extraction. Indeed, the fact that new coal chemical industries are on the government watchlist in the recent 12th Five-Year Plan on Prevention and Control of Environmental Risks of Chemicals where they also officially recognised the existence of “cancer villages” does not bode well for the industry. (see Cancer Villages: Toxic Tipping Point)
“new coal chemical industries are on the government watchlist in the recent 12th Five-Year Plan on Prevention and Control of Environmental Risks of Chemicals where “cancer villages” are also recognised”
With power, we had been discussing this back in April 2012, culminating in a report for HSBC called “No Water, No Power” (see here) but it is always nice to see Bloomberg New Energy Finance (BNEF) shares the same view, having recently published a report on water & the power sector. Just to give you an idea of the size of capital involved, they believe that US$20billion will need to be spent on making existing power plants in water scarce regions more water efficient AND this doesn’t include the 1.5TW China is intending to add by 2030. According to BNEF’s Nathaniel Bullard, ““business as usual” scenario, the country will see 25% of its water going solely to power plants by 2030.” More on why BNEF think Chinese power utilities are in hot water here.
Coal & Groundwater – inextricably linked and made worse by the North-South Divide
“Nothing in life is fair” is one of those truisms used in consolation that is especially irritating. But it does explain things perfectly. Here is why nothing is fair for water & coal:
- 85% of coal reserves lie in the North which only has 23% of the country’s water resources
- 64% of farming land also lie in the North. Since we can neither move mines nor farmland, which is more important – food or energy?
- 95% of China’s coal is mined underground and coal extraction and production is water intensive
- North is 5x more reliant on groundwater than the South and experiencing groundwater depletion stress;
- Subsidence threats to 170,000 km2 of land linked to excessive annual withdrawal of 4 billion m3 of groundwater in Northern China. (Chinese Academy of Geological Sciences, 2012) (more on groundwater woes here)
- Ministry of Land and Resources survey made public in February showed that the North China Plain suffers from severe groundwater pollution with over 70% of overall groundwater quality classified as Grade IV+, in other words, unfit for human touch (more here)
Since groundwater is the only source of water for many cities in China, it is not surprising that the government is directing focus to groundwater protection. Also, public anger & concerns over contamination brought on by unsubstantiated accusations in February by micro-blogger of chemical plants and paper mills in Shandong using high pressure pumps to dump their hazardous chemical waste underground may have also something to do with it notwithstanding the official recognition of “cancer villages”.
Too much public focus on pollution makes for new canaries in the coalmine
Yes, bad air, dirty water, chromium rice, dead pigs, cancer villages do not help. The people are worried. The government is reacting with Li Keqiang acknowledging that “we shouldn’t pursue economic growth at the expense of the environment. Such growth won’t satisfy the people” and promising to “show even greater resolve and take more vigorous efforts” in tackling pollution. The public participation in cleaning China’s water, soil and air are also encouraged.
“we shouldn’t pursue economic growth at the expense of the environment. Such growth won’t satisfy the people”
At the same time, the government is moving ahead with protecting groundwater. The State Council approved on March 8th the North China Plain Groundwater Pollution Prevention and Control Work Program which was jointly prepared by the Ministry of Environmental Protection, Ministry of Land and Resources, Ministry of Water Resources, and Ministry of Housing and Urban-Rural Development. The first phase will involve groundwater quality & pollution sources monitoring network to be established by 2015 to identify key sources of pollution. It is envisioned that by 2020, a comprehensive monitoring of groundwater environmental quality and pollution situation in the North China Plain will be in operation for effective management of groundwater pollution risk. More smoke? Maybe not, judging from the number of ministries involved and the RMB34.66 billion set aside for this.
Is this bad news for coal? Could China’s coal industry face a “Peru Water Wall”? Earlier this year the Peru Water Authority rejected a permit for Newmont Mining to extend its Yanacocha gold mine on the grounds that it would pollute the Rio Grande river, which supplies water to 70% of the region’s residents. Although Newmont is trying to make amends with the local communities, building reservoirs and other water projects, according to Forbes, their statement in their 2012 annual report may give an indication that it is looking for an exit strategy: “while it remain committed to the US$4.8billion project for the time being, continued opposition may force it to divert investments elsewhere.” This brings about the question – how do you value ensured reserves in water scarce regions?
“Perhaps investors should take a closer look at company violations to gauge risk so as not to be blindsided when permits are suspend or revoked.”
CLSA Water for Coal Report, April 2013
It is more than reputation at stake here, shut-down risk is real and billions may have to be written off. The CLSA report looks at the IPE pollution database to see if historic pollution incidents can help signal a potential “Peru Water Wall”. Most listed coal companies have single or multiple violations across years and the report warns “perhaps investors should take a closer look at company violations to gauge risk so as not to be blindsided when permits are suspend or revoked.”
Investing our way out of dangerous waters
Decisions on water for government are complex. Water, energy, food, economic growth and social stability are all linked (more on this here). The government is already reducing reliance on coal with aggressive renewable energy expansion plans but coal is still expected to be the vanguard. With 65% of the coal production driven by State Owned Enterprises, strategic decisions in line with national interest will have to be balanced with external stakeholder interest. Some choices are:
- Consolidation of Town Village Enterprises (generally less water efficient and more polluting),
- Import more coal
- Go abroad and “coalmine grab”
- Improve water efficiency, introduce wastewater recycling and water reuse
”the three majors, China Coal, Shenhua Energy and Yanzhou Coal spend less than 0.5% of their total revenue on environmental protection. Chinese companies are only at the very start of their journey.”
CLSA Water for Coal Report, April 2013
Either way, all four options will raise costs or need capital. Chinese coal companies are “under-invested” at the moment. According the CLSA report,”the three majors, China Coal, Shenhua Energy and Yanzhou Coal spend less than 0.5% of their total revenue on environmental protection. Chinese companies are only at the very start of their journey.” Perhaps they should follow the government and start investing in protecting water groundwater sources. Extracting groundwater and cleaning it for villages may be good but are you encouraging depletion at an unsustainable rate? Only time will tell, and by that time, it may be too late.
- Cancer Villages: Toxic Tipping Point? Cancer villages are not new in China but with official recognition in 2013, we reviewed 255 media reports of such villages to look at their spread, what this means for farming and industries that may be responsible. Is this the start of a long costly road to clean up?
- Chinese Utilities in Hot Water BNEF’s Nathaniel Bullard shares key findings of their report including the exposure of China’s Big 5 power companies to water risk. Can China afford to see 25% of her water going sole to power plants by 2030? Or should she prioritise agriculture or cities?
- Water in Mining: Disclosure Overview The international mining sector leads the way in water disclosure, but with massive regional variations in the level of reporting and poor current reporting frameworks are investors getting the full picture?
- New Guard: New Hope for Pollution? March ushers in the official all change of the old guard. Will the new guard bring new hope for pollution control? China Water Risk takes a closer look at the events leading up to this week’s National People’s Congress meetings
- 2011-2013 Water Policies Review Don’t know what China’s been up to on the waterfront? Check out our summary of key water policies between 2011-2013
- Intelligence by Sector: Metals & Mining