China's Water Crisis Is an Investment Opportunity

“Water, water, everywhere, but not a drop to drink.”

In 1789, English poet Samuel Taylor Coleridge penned this famous line in The Rime of the Ancient Mariner, a poem that describes the deathly journey of a mariner’s ship. After being cursed for shooting an albatross, the mariner sees his crew slowly die of dehydration, only to be redeemed at the end of the poem for realizing the sins he has committed.

China, interestingly enough, is in this same precarious situation: it has been inadvertently cursed by the fruits of quick economic growth and urbanization. As a result of its explosive growth and recent droughts, China’s water supply is increasingly in danger. This threatens to choke China’s industrial and population growth. It also provides a valuable investment opportunity.

As China’s water problem deepens, it will be forced to invest in new water treatment and irrigation technologies, unlocking a 1 trillion RMB market with plenty of opportunity.

China’s Water Crisis

China is home to 270,550 sq km of water. Unfortunately, this water is heavily polluted, threatened by drought, or being overused. According to a March 2009 study by China Research and Intelligence, over 70% of Chinese rivers, lakes, and seashores, and 90% of its underground water supply in urban areas are polluted.

The main cause of this pollution is China’s unbridled economic growth. Much like during the United States’ own industrial revolution, Chinese firms dump their waste products into the water without regard for the environment, which makes the water unusable. Additionally, spills and accidents like the one at the Jilin chemical plant in 2005 exacerbate this cycle.

Another threat to the Chinese water supply is drought. In early February this year, China declared a drought emergency in the Hebei, Shanxi, Anhui, Jiangsu, Henan, Shandong, Shaanxi and Gansu provinces, which are provinces in central and northern China, China’s breadbasket region. For the past few years, the water table in northern China has been falling roughly five feet a year. These droughts, currently, show no signs of abating and are exerting extreme pressure on China’s water supply.

The final major threat to China’s water supply is overuse. China is an agricultural powerhouse, which poses a particular threat to its water supply due to excess irrigation. According to a Swiss Re focus report on water availability, between 1850 and 1980, China lost 543 medium to large sized lakes from irrigation. Today, as the result of excess irrigation, the Yellow river no longer reaches the sea.

Moreover, demographic changes will increase China’s water use to unsustainable levels. China’s population is projected to rise from roughly 1.3 billion today to 8.5 billion by 2025. Assuming current water use per-capita remains constant, China’s withdrawal of freshwater supplies will increase from 549.76 cu km/yr to 3527 cu km/yr, a 541% increase.

Additionally, China’s changing diet will pressure water supplies even more. The Chinese consume a primarily vegetarian diet; however, westernization has shifted her diet from being vegetable based to meat based. To put this into perspective, it takes roughly 1000 liters of water to grow a bushel wheat, but 15,000 liters of water to produce a kg of beef. Clearly, this trend will pressure China’s already dwindling water supplies even more.

Investment Opportunities in the Crisis

The Chinese government has recognized this water crisis. In its 11th five-year plan, the government allocated 1 trillion RMB for investments in the water sector. These projects range from a series of canals connecting the water rich Yangtze River of the south and the water deprived Yellow River of the north to desalinization and water reclamation projects. While projects like the Yangtze River-Yellow River canals are ambitious, they are not the future. Merely moving water around China will not be able to supply her with the water she needs in the future, the future for water in China is water reclamation, water treatment, and desalinization.

There are multiple firms that are well positioned to take advantage of this future trend. The first, and the best positioned, is Hyflux (SIN:600). Hyflux is a Singaporean company that specializes in water purification, treatment, and desalinization. They possess a proprietary membrane technology that can be applied on large scales in municipal settings. With fifteen wastewater treatment plants already constructed in China, the company has strong China exposure. Because of its advanced and unique technology, Hyflux is the leading firm to take advantage of this crisis.

A second well-positioned firm is Duoyuan Global Water (NYSE:DGW). Duoyuan Global Water has heavy China exposure and provides water treatment, purification, and wastewater treatment services. It has over 80 distributors in 28 provinces, with a quarter of those distributors in the drought-ridden north. While Duoyuan does not possess the same membrane technology as Hyflux, it provides the same range of services as Hyflux and has larger China exposure. For an American investor, Duoyuan could be a better choice if they cannot trade Singaporean stocks.

Other firms that are positioned to profit are Veolia Environment (NYSE:VE), China Water Affairs Group (HKG:0855), and Insituform Technologies (NASDAQ:INSU). These firms deal more in water transportation and infrastructure, and less in water purification and treatment. They do, however, have China exposure and should benefit from Beijing’s attempts to bring cleaner water throughout China.

Disclosure: No Positions.

Comments

[Hepeoc:]

8.5 BN inhabitants in 2025? Well maybe if everybody on the planet has moved to china by then....

Jun 30 07:18 AM

[Davewmart:]

'China’s population is projected to rise from roughly 1.3 billion today to 8.5 billion by 2025. Assuming current water use per-capita remains constant, China’s withdrawal of freshwater supplies will increase from 549.76 cu km/yr to 3527 cu km/yr, a 541% increase.'

What in the world are you talking about?
Nonsense.
You have confounded world population with that of China.
The correct data from the UN 2007data Sheet
are:
China 1,318millions in 2007
Rising to 1,476millions in 2025
Before falling to 1,437millions in 2050

So your over-precise 549.76cu km rounded to 550cu km becomes 616 cu km, or a roughly 12% increase as against your 541% increase.

A good tip is to check your figures to see if they are common-sense before using them - how in the world do you imagine that the population could multiply by 5 times in the 14 years to 2025?
That is pretty heroic breeding! - around 11 children per woman, by my reckoning.
With egregious errors like that, it is difficult to see that anyone will take the rest of your analysis seriously, although the basic idea that China will be investing heavily in water is correct.

Jun 30 09:32 AM

[Alphameister:]

Unfortunate that a very helpful article on playing the boom in China is flawed by such an awful statistical mistake, but the value of the article is not dependent on extraordinary population growth in China and I thank you for bringing these opportunities to my attention.

Jun 30 12:43 PM

[The Geoffster:]

Does anyone recommend PHO as a water play?

Jun 30 01:00 PM

[Mad Hedge F...:]

You made the connection. If you think that the upcoming energy shortage is going to be bad, it will pale in comparison to the next water crisis, so investment in fresh water infrastructure is going to be a recurring long term investment theme. (See my earlier efforts to get you into the water space at www.madhedgefundtrader...). One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights. Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world’s population, up to 90% of the fresh water is already polluted, some irretrievably so. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years. Aquifers in the US, which took nature millennia to create, are approaching exhaustion. While membrane osmosis technologies exist to convert sea water into fresh, they use ten times more energy than current treatment processes, a real problem if you don’t have any, and will easily double the end cost to consumers. While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the US stimulus package will be similarly spent. It says a lot that when I went to the UC Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds! At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which has appreciated by 32% since I first brought it up. You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR). Who has the world’s greatest per capita water resources? Siberia, which could become a major exporter to China in the decades to come.

Jun 30 01:37 PM

[Richard Graham:]

Davewmart,

You are correct that I made a statistical error. China's population is not projected to be 8.5 billion but will be closer to 1.48 billion people. Instead of there being a 541% increase in water use, there will be a 12% increase, a very large gap and discrepancy. I believe, however, that this does not erode my argument. In the status quo, without population growth, China's water supplies are already being pressured by overuse and pollution. Population growth, along with the dietary changes I also highlighted, will only exacerbate this pressure.

I would tend to agree with the post below by Alphameister.


On Jun 30 09:32 AM Davewmart wrote:

> 'China’s population is projected to rise from roughly 1.3 billion
> today to 8.5 billion by 2025. Assuming current water use per-capita
> remains constant, China’s withdrawal of freshwater supplies will
> increase from 549.76 cu km/yr to 3527 cu km/yr, a 541% increase.'
>
>
> What in the world are you talking about?
> Nonsense.
> You have confounded world population with that of China.
> The correct data from the UN 2007data Sheet
> are:
> China 1,318millions in 2007
> Rising to 1,476millions in 2025
> Before falling to 1,437millions in 2050
>
> So your over-precise 549.76cu km rounded to 550cu km becomes 616
> cu km, or a roughly 12% increase as against your 541% increase.<br/>
>
> A good tip is to check your figures to see if they are common-sense
> before using them - how in the world do you imagine that the population
> could multiply by 5 times in the 14 years to 2025?
> That is pretty heroic breeding! - around 11 children per woman, by
> my reckoning.
> With egregious errors like that, it is difficult to see that anyone
> will take the rest of your analysis seriously, although the basic
> idea that China will be investing heavily in water is correct.

Jun 30 06:47 PM

[The Honest ...:]

Video on DGW (Duoyuan Global Water Inc.)
Here's a video from thestreet.com that has a guy on who says DGW could go to $30. That is my initial target here then maybe $32 which would make a round 100% gain from the IPO price.

thehonesttrader.blogsp...

Jun 30 08:07 PM

[Davewmart:]

Richard, it is because I thought that the basic idea of water stress in China was correct that I felt it a pity that you messed up the supporting argument.
You might be talking of around 50% increased demand by 2015 given rising living standards.
A factor you did not mention is that the ice pack in in Tibet seems to be melting, and that this and climate change may grievously affect water supplies to both China and India.
A weakening monsoon really does not bear thinking about.

Jul 01 04:21 PM