Thursday, May 26, 2011

Drought poses major risks to companies in China

Robert Kimball at the World Resources Institute website spells out the business implications of the drought along the Yangtze River in China: For the last five months, a severe drought in central China has brought water levels in the Yangtze River to near-record lows. The drought’s impacts – from threatened drinking water supplies to disruptions in manufacturing – have rippled through the population and economy of China. They are a reminder of the diverse and complicated ways in which water, or the lack thereof, can pose risks for companies, investors and policy makers.

Although companies and investors are becoming increasingly aware of the importance of water in the 21st century economy, many still struggle to evaluate where and how their assets, suppliers or product markets can be impacted by water risks. Something as simple as a prolonged lack of precipitation and resulting low river flows has exposed businesses in China to a variety of tangible financial risks, including:

Loss of shipping capability, leaving supply chains high and dry: Reduced water levels in the Yangtze have left parts of the river impassible to the ships that transport over one billion tons of cargo along the river every year.

Electricity shortages threatening production: A lack of water to run hydroelectric dams, including the 18,000 megawatt Three Gorges dam, has cut hydroelectric power production in China by as much as 20%. As a result, some manufacturers have had to ration their power use, and China may be forced to burn 1 million more metric tons of coal per week to cover the gap.

Disruptions to agriculture affecting production and prices: The drought has forced farmers in China to delay planting spring crops such as grain and cotton. The potential loss of cotton output has already driven up the price on global commodities markets.

Map showing location of the Three Gorges Dam, created by Rolfmueller, Wikimedia Commons, under the Creative Commons Attribution-Share Alike 3.0 Unported license

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