Global water resources pushed to the brink
Reaching a global population of seven billion people could push water resources to the brink, unless agriculture and industry act fast to cut demand.
Water use could reach 8,680,000,000,000 cubic metres next year. A study warned in 2009 that global water requirements would grow to 6,900 billion m3 by 2030, and that this would be 40% above current accessible and reliable supplies by 2030. It looks like we're already set to overshoot readily available freshwater supplies.
Water use has risen at more than twice the rate of population growth in the last century, according to the World Resources Institute (WRI). Water use is expected to increase by 50% between 2007 and 2025 in developing counties and 18% in developed ones, with most demand growth coming from the urbanisation in the poorest countries. The risk of peak water becoming the "new oil" is putting water scarcity on the agendas of many companies.
Currently, only 8% of the planet's fresh water supply goes to domestic use, about 70% is used for irrigation and 22% by industry. Droughts, low rainfall, floods and contamination contribute to water risk. Australia's Murray-Darling basin; the Colorado River basin in the Southwestern United States and the Yangtze and Yellow river basins in China are among high-risk areas. Water scarcity and water stress - when demand exceeds supply or poor quality restricts use - has already hit water-intensive companies and supply chains in these areas indirectly, as crop price volatility.
China, for example, produces about 25% of global cotton production, with more than half of its cotton grown in 56% the high-water risk areas of the Yangtze and Yellow river basins. Cotton contributes 90% of natural fibres used in the global textile industry, so water risk in China's cotton-producing regions increases price volatility in the supply chains of many textile companies. China's worst-ever winter drought drove up cotton prices this year.
Cotton farming contributes most to supply chain water consumption (22%) across 30 Apparel Retailers in Trucost's database. Retailers with the largest exposure include Kohl's Corp., Inditex S.A, H&M Hennes & Mauritz AB and Gap Inc. High cotton prices contributed to profits at H&M Hennes & Mauritz AB falling 20% over the nine months to August 2011. Meanwhile, drought in Texas destroyed much of the year's cotton crop, causing Gap to cut its profit forecast by 22%.
Chart 1: Water consumption in the supply chain of Apparel Retailers
The WRI is calling calls for integrated water management that takes water needs into account, as well as where and how to use resources more efficiently. To do this, companies need to quantify the water they are using directly and indirectly, and to understand risks to supplies of raw materials in water scarce regions. So companies such H&M Hennes & Mauritz AB, Inditex S.A are starting to look at hot spots of water risk. Some are doing so in partnership of the Better Cotton Initiative, which promotes more sustainable practices. A trial in Pakistan using Better Cotton farming methods saw pesticide and water use fall by 32% on average, with profits up 69%.
Although cotton prices have fallen in the past month, volatility will continue as weather-related supply risks increase with climate change impacts. In sectors such as Apparel Retailers and Home & Furnishing, firms that understand supply chain water risks before competitors will be more resilient as pressure mounts on resources.