Dirty Thirsty Wars – Fashion Blindsided

By Debra Tan 17 September, 2014

We review why China's pursuit of water security could pose an existential threat to the fashion industry

During discussions in Stockholm at the World Water Week on “The Next Big Paradigm Shift: From Linear to Circular Economy”, it occurred to me that China is ahead of the curve in this regard. The session started with a thought provoking keynote on why the shift is impending followed by panel discussions on the challenges on getting there. The lack of industry leadership and political will power to support this shift were typically lamented (watch the whole session here).

In China, State Council has already identified nine industries and industrial parks which it wants to see shift from a linear to a circular economy

In China, the central government does not need convincing. State Council has already identified nine industries and industrial parks which it wants to see shift from a linear to a circular economy. Flow charts and plans of how to achieve these have been drawn up in the Circular Economy Development Strategies & Action Plan. The textiles industry is one such industry identified.

The fact that the sector is identified means that it is important to China – that is the good news; but it also means that policy makers want to see the sector insulated from “shocks” from policies put in place to ensure the country’s water, energy and food security. Translation … policies to protect limited water resources will impact the industry.

“Some industries will face minor business disruptions as water enforcement tightens but for the US$1.7 trillion global fashion industry, the country’s lack of clean water poses an existential threat.”

Charles Yonts, Head of Sustainable Research

In the recently published CLSA U® report “Dirty Thirsty Fashion: Blindsided by China’s water wars” (which we co-authored), Charles Yonts, Head of Sustainable Research at CLSA, “some industries will face minor business disruptions as water enforcement tightens but for the US$1.7 trillion global fashion industry, the country’s lack of clean water poses an existential threat.”

The wars to fight pollution, overuse and illegal use of water and the passing of the amendments to the Environmental Protection Law have accelerated the timetable. Since China produces half of the world’s textiles, the dirty and thirsty global fashion industry and its investors along with it could be blindsided.

Here’s why …

Nothing personal … it just makes economic, environmental & strategic sense

If you were going to deliver a win on the war on pollution and water use, it is obvious that the most polluting and most water intensive sectors will be targeted. Textiles rank amongst the top 3 industries for water pollution and water use. In China, the textile industry discharges double the amount of wastewater discharged by the coal industry – China produces almost half of the world’s coal, so you imagine how dirty fashion is under the glam.

In China, the textile industry discharges double the amount of wastewater discharged by the coal industry

When we threw economics into this, it solidifies the argument. As the CLSA report highlights, the sector emits “lots of wastewater for not a lot of money”. This is clear from the chart below which maps out the top 10 polluting industries of China vis-à-vis their industrial output value:

What is also clear from the chart is that all the other industries that are “core industries” to China – food, coal, power, petroleum, are ‘must-haves’. No wonder “Papermaking & Stationary” and “Textile, Apparel & Footwear” are amongst the 16 Most Polluting Industries identified by the MEP and singled out by State Council as the “two key industries” to tackle in water pollution and prevention control. What better to rein in pollution than new standards….

It’s not water price hikes but new leather & textile standards that hurt

Mismatched wastewater discharge pricing and standards have led to a vicious cycle of pollution in the past (discussed in detail by Professor Ma Zhong here).

However, new standards now impose flat discharge limits to circumvent the pollution loop.

The graph which compares the old and new standards for Chemical Oxygen Demand (COD) should give you an idea of the gap that needs to be closed.

Domestically, the industry associations are concerned as to how to make the shift to a circular economy

Unfortunately there is no cheap way to clean up and many smaller factories face difficulties in complying with the new regulations. There are not only significant capital expenditure outlays but also year-on-year operating costs of such equipment which will eat into profit margins. Dr Anthony Ma of the Hong Kong Productivity Council talks about these costs in his interview with us here.

Domestically, the industry associations are concerned as to how to make the shift to a circular economy. Hu Kehua from the China National Textiles & Apparel Council highlights the challenges ahead for factories along the supply chain here. The overall message is clear, fashion brands, local governments could do more to help.

“for global equity investors, the direct impact could be greater as these suppliers are shut down or forced to raise prices”.

CLSA “Dirty Thirsty Fashion: Blindsided by China’s water wars”

There is not much time, compliance deadline is 1 January 2015. With the new law also taking effect in 2015 with criminal punishment and daily uncapped penalties for polluters, there are now more reasons to either invest in cleaning up or exit the industry if you cannot afford it. Since the sector is riddled with SMEs many face shutdown risk and the report warns “for global equity investors, the direct impact could be greater as these suppliers are shut down or forced to raise prices”.

There is no exception for the leather sector either with new leather industry standards.

Leather and Cotton vs. Food

A circular economy in the sector also includes its raw material input. Both cattle and cotton are water intensive (see chart).

With almost half the world’s cotton supplied by India and China, the two most water stressed countries in the world, it is not surprising that a report issued this month by CottonConnect states that brands need to do more to help farmers extract more crop per drop (read their views here).

Not only is cotton a thirsty crop, it is also dirty. According to WWF, cotton accounts for 24% and 11% of the global sales of insecticides and pesticides respectively.

“If push comes to shove, and it could, the argument for choosing cotton over wheat or corn which requires less than one-sixth as much water, will be hard to justify”

CLSA “Dirty Thirsty Fashion: Blindsided by China’s water wars”

China grows a quarter of the world’s cotton and a quarter of this cotton is grown in the North China Plain. Since the North China Plain, China’s agri heartland is water scarce and experiencing severe pollution, cotton vs. food trade-offs become real issues.

Yes, cotton is only accounts for a third of global cotton fibres but when you consider that 59% of yarn production, 40% of chemical fibre production and 47% of cloth production in China comes from the Dry 11, you get the big picture.

No wonder the Chinese government has highlighted recycling clothing waste and reusing of chemical and natural fibres (including cotton) as part of its circular economy plan for the sector.

No choice but to go circular: One day you are in, the next day …

We have been saying that Investors should be beware of “Blackholes and Blacklists” in the textile sector since November 2012 (read here); that the impact of water caps, new standards, tariff hikes and exposure of raw materials to water scarcity should be priced into projections & valuations. The time is now here for both brands and investors to do just that.

“It is not a good time to get on the MEP’s naughty list, with a new environmental law … the toothless ministry has a set of fangs”

CLSA “Dirty Thirsty Fashion: Blindsided by China’s water wars”

Brand reputational risk is also at an all-time high with Chinese NGOs ranking global and local brands – more on this here. The ‘noise-levels’ have definitely increased when the Ministry of Environmental Protection (MEP) is also naming & shaming companies alongside NGOs.

 A circular economy/ closing the loop is not a “nice-to-do” as part of a water corporate stewardship strategy/programme… it is a “must-do” in China.

There has been a shift in regulatory landscape where linear economies will be hit to protect the environment. A circular economy/ closing the loop is not a “nice-to-do” as part of a water corporate stewardship strategy/programme, the government is signaling that it is a “must-do” in China. This is just the beginning; the war on pollution has just started.

How serious is China? China is spending almost US$1tillion to clean and protect its water resources. Economic losses brought on by pollution are estimated at US$498 billion. China makes half the world’s textiles and its textile exports market is worth US$277billion. Global apparel sales are worth US$1.7 trillion. The math is not difficult.

Further Reading
Fashion

• OEM: Stuck in the Middle – China National Textile & Apparel Council’s Hu Kehua on challenges ahead for textile OEMs in meeting the new textile industry standards and brands’ product needs and why joint efforts  all parties along all stages of the supply chain including design are needed to move towards a circular economy
• Cotton Farming: How Deep Is Your Well? – Can cotton flourish in water scarce areas? Cotton Connect’s Lort-Phillips shares key messages from their latest report on how to extract more crop per drop and how brands need to do more than address water at a farm level in China
• The Colour this Season is Green – Trucost’s Jackson on key discussions at the 2014 Copenhagen Fashion Summit & Global Leadership Award in Sustainable Apparel awards. On the agenda: natural capital accounting, water savings & education, all against a backdrop of limited resources & increasing demand
• Fashion Update: Winners & Sinners – With the new Phase III Textiles Investigative Report released by 7 China NGOs through IPE, we look at who has managed to stay on top since the first report published in April 2012
• China NGOs tell Brands to Stop Greenwashing – A follow up on the 49 global brands named using polluting factories in China
• The Environmental Cost of Clothes – With clothing retail prices ever-lower, China Water Risk looks at the environmental cost of our clothes

Water in general

• The War on Water Pollution: Premier Li has just declared war on pollution. Tan expands on the government’s stratagems & offensives and fundamental changes required to shore up the MEP’s arsenal in order to wage a successful war
• The State of China’s Agriculture – China’s limited water and arable land plus rampant water pollution not only exacerbate water scarcity, but also raises concerns over food safety & food security. Get the latest update on agriculture & water and see why these policies matter for global trade
• 2013-2014 Key Water Policies Review Haven’t been following China’s Three Red Lines strategy to protect water? Check out our summary of key water policies from 2013 to 2014
• China Water Risk’s 5 Trends for 2014 With environmental risk cited as one of the top risks most likely to derail economic growth, check out our top 5 trends in water for the year of the Green Horse