Abstract
China needs more water. Everybody knows it. But two great unknowns remain:
which solutions will be favoured by Chinese authorities to address this
problem and to what extent the supply gap will be filed. Demand projections
are one thing, and closing actual deals another entirely. If future demand was
all that mattered then Britain would be a huge market for transport projects.
Still, new road and rail projects are few and far between in the UK. In China,
the market for desalination projects and technologies is brand new and, on
paper, offers immense opportunities. But how much desalination capacity will
really be built in China, where and by whom? How are decisions taken on
project planning and who are the key individuals influencing them? How much of
the desalination market will be captured by local Chinese companies? When will
Chinese desalination companies be in a position to bring ‘the China
Price’ to your doorstep and make a dent in your domestic market?
GWI’s latest report “Market Access: Desalination in China”,
the first of a new series of market intelligence reports, is the best attempt
so far at answering these questions and many more. Its Authors, Olivia Jensen
& Frederic Blanc-Brude unveil a couple of its secrets.
The fundamentals are in place
In some parts of China, the absence of conventional water solutions has made
desalination a necessary choice. Big coastal cities are increasingly suffering
because of water shortages. China’s industry lost RMB200bn (US$24.7bn)
in output value annually from 2001 to 2005 due to water shortages, according
to the statistics released by the State Flood Control and Drought Relief
Centre in 2006 (Some Chinese officials put the figure at RMB300bn).
The north of China is the most affected. Four coastal provinces in particular
are expected to have a combined demand gap of 16.6 to 25.5 billion cubic
metres a year by 2010. These four provinces represent 25 percent of
China’s GDP.
In this context, desalination has recently received increased political
support. In July 2005, the State Oceanic Administration, the State Development
and Reform Commission and the Ministry of Finance issued a “special plan
for the use of water”, affirming full central government support for the
development of desalination as a national high-tech industry. A year earlier,
the Energy Reform Commission and the SDRC had issued directive 864
[2004], which requires that coal-fired power plants being built or
planned in water-deficient areas be prohibited from accessing groundwater,
that their use of surface water be strictly controlled and that, in coastal
areas, combined power and desalination systems be preferred. And this trend is
also spreading to other industries as water supply solutions are increasingly
being tied with industrial development planning. For chemical and
petrochemical zones, the government sets limits on the abstraction of surface
and groundwater, and developers must present a water source development plan
as a condition for project approval.
Such developments suggest that the future of the desalination sector in China
will be, in part, driven by large industrial projects for chemicals and oil &
gas industries and power plants, including several planned nuclear plants
which will have integrated desalination facilities. A further boost to
desalination demand is coming from the relocation of heavy industry from
Beijing and other inland facilities to designated new development zones on the
coast.
Finally, municipal water tariff reform is ongoing in coastal areas and a
convergence between water tariffs and the cost of desalination is expected by
2010-2015, according to Chinese officials and informed observers. The
development programme sponsored by SDRC envisions three to four
“industrial bases” for the desalination industry, and three to
five “pilot cities” situated along the north-eastern coastline and
where new desalination projects will be encouraged and supported.
According to our research, in 2006, online installed capacity in China
(including HK and Macau) was 380,000m3/d. The forecast desalination capacity
for 2012-15 is 2.5Mm3/d.
The size of the desalination project market (capex) was US$55-70m in 2006 and
should reach US$600-860m in 2012-15.
The next opportunities will be captured by the informed few
The Chinese desalination market is, for now, a small world. Most aspects of
the sector, from engineering research to project approval and advising the
central government are monopolised by a small group of individuals. In a
typically Chinese fashion, local competition originates in the research and
academic sector. A couple of dedicated research institutes have been working
on desalination for several decades and a handful of active individuals, which
we call the “professor-entrepreneurs”, have set up corporate
entities attached to these research institutes that compete with foreign
companies for project development contracts and the supply of membranes and
other equipment. In 2007, the professor-entrepreneurs are a dominant force in
the Chinese desalination market.
These individuals have also been instrumental in the successful market entry
of a number of foreign equipment makers, who managed to have key products
featured in the kind of ‘pilot’ or ‘model’ projects of
which Chinese government officials are so fond.
At the moment, such good connections are essential to do business in this
market. In certain segments, like energy recovery, they explain most of the
difference between profitable and loss-making Chinese ventures. “GWI
Market Access: Desalination in China” draws on interviews carried out in
China with all the key actors and contacts in this market and brings you their
views and details, down to their mobile phone number.
Understanding the market structure is essential
The use of desalination processes in China is different from world averages.
China is a young desalination market and there is wider use (and planned use)
of MED, while most of the small number of MSF facilities have been
decommissioned.
RO is the dominant technology in terms of number of projects but the planned
capacity for the power and petrochemical sectors will mostly use MED. Nuclear
desalination should play an important role in China beyond 2010. The municipal
and industrial markets for desalination are also not evolving at the same
pace. Industrial solutions have so far dominated the market in terms of
installed capacity, and will continue to do so.
Water tariff reform in cities is ongoing and average tariff levels will not
reach sufficient levels for another 5 years at least, holding back the
municipal market in a number of cities. In a selected number of cities
however, municipal governments have already reached the level of development
and wealth to be planning desalination projects. Other proposed plants are
mostly linked to nuclear power stations and other very large projects. Thus,
it will be essential to be chasing the right projects at the right time and in
the right place.
Indeed, the first attempts at service contracts/BOT-type desalination projects
have had a difficult time taking off. “Desalination in China”
brings you the inside story on the SWRO BOOs that never seem to close in
northern China and the institutional and political pitfalls that project
developers have to navigate.
Ignoring the Chinese desalination market would be a mistake
The desalination equipment market is split between what Chinese suppliers can
already provide and the products that only foreign companies can provide.
Chinese makers are catching up fast. Most foreign equipment makers reckon that
they will face direct Chinese competition within five years if they do not
develop a new generation of systems.
GWI’s latest market intelligence report examines the state of Chinese
desalination R&D and what Chinese engineers can do to compete with foreign
equipment makers. It surveys the Chinese SWRO membrane market and the four
Chinese companies that can now make SWRO membranes. The report also reviews
the state of local competition in several key segments (energy recovery,
pressure vessels, pumps, etc.).
Equipment makers now have to become involved and develop their brand name
early on (the professor-entrepreneurs can be very helpful for this). This
turns out to be the best way to secure orders when the larger projects come to
market.
Some patience is, however, required. The risks are significant (especially
copycats) but the alternative (waiting for the Chinese desalination market to
develop) is a non-starter. If you do not gradually give away your products to
the Chinese market, your competitors will and before you know it, Chinese
makers will be competing against you at home!
Over the next five years, the desalination sector will come of age as an
industrial sector in China. Sector growth will then accelerate; larger
projects and service contracts will become viable and the continued industrial
development of China will drive a significant share of the demand for
desalination capacity. Likewise, tariff reform and the entry of desalination
into the mainstream of municipal infrastructure procurement will generate
increasingly important demand for projects. By 2015, full made-in-China
desalination solutions will be exported worldwide and capture a significant
market share in the Middle East and in Europe.
To benefit from these opportunities, gaining a foothold and securing a
reputation in today’s desalination sector in China is pivotal.
Establishing a long term relationship with some of the most influential
Chinese individuals involved in the sector will bring sustained rewards, as
will finding the right Chinese partner to distribute and even manufacture in
China.
“GWI Market Access: Desalination in China” is the first step on
this journey.
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