Water: An Ocean of Opportunity

The Dow is bouncing up and down like a yo-yo. Every chart looks like a ski slope. A few investors are profiting from these wild market mood swings, while others are seeking refuge in industries that feature non-discretionary items, like water.

Approximately 40% of the world population lacks adequate fresh water. In the next decade an estimated $800 billion is going to be spent globally to bring fresh water to those who don’t have it. With that kind of money flowing into a sector, you can bet now is the time to start paying attention to water.

Water stress is severe in China, India, and Africa, and it’s also rising in developed nations. Sure there are infrastructure issues, but one of the biggest problems is simply a lack of water. Most of the earth’s surface is water, but less than 3% is drinkable.

The world’s freshwater resources are not sufficient to keep up with demand. As the world population grows and water tables decline, a solution has to be developed. Right now, that solution is desalination.

Desalination (removing the salt from ocean water) is a technology that is gaining momentum as a practical solution to the global water shortage.

This isn’t some hippy green-energy pipe dream that’s 20 years away from having a meaningful impact on the world. The National Academy of Sciences declared, “Desalination is a realistic option for increasing water supplies.”

Desalination is viable. In fact, there are currently more than 1,200 desalination plants separating salt and water in the world. Many of them are in the Middle East, but they are also in Europe and Japan. There are even a few in the United States. Las Vegas and San Diego are preparing for an inevitable water shortage and are already considering building desalination plants.

Right now, about 99% of fresh water comes from rivers, lakes, and reservoirs. The other 1% comes from desalination. Desalination creates 11 billion gallons of drinkable water per day. That’s enough to fill 18,000 Olympic-sized swimming pools, but it’s still only 1% of water used in the world.

That’s all starting to change. The beauty of desalination is that there will never be any shortage of raw product. So expansion is only limited to the amount of infrastructure. There is currently a 45% increase in desalination capacity set to come on line in the next seven years. That’s an addition of five billion gallons per day.

With something as important as water and hundreds of billions of dollars up for grabs, you can bet a lot of big companies are chasing after it. In the past few years most of the companies developing desalination technology have been gobbled up by big conglomerates, but not all of them.

For instance, General Electric (GE) is heavily involved in desalination technology. In the last eight years, the conglomerate bought out many of the smaller players. GE has bought an expertise by picking up smaller players like membrane builder, Zenon Environmental. Other big companies like Veolia (VE), Dow Chemical (DOW) and DuPont (DD) have also been moving into desalination.

There a number of construction companies who have created a healthy niche building desalination plants. These include Spanish companies, Acciona (ACXIF.PK) and Abengoa (ABGOF.PK), Italian builders Impreglio (IPGOF.PK) and a South Korean company called Doosan (DOHIF.PK).

Although U.S.-based “pure plays” are not easy to find, there are some companies poised to do well from the desalination boom.

Energy Recovery (ERII) is a good example. It makes seawater desalination products. Energy Recovery is exploiting one of the major drawbacks of the desalination process, energy consumption. Its leading product is the PX Pressure Exchanger which is a specialized pump that recovers energy from the desalination processes.

Energy Recovery did $45 million in sales last year. It has a very healthy operating margin for a manufacturing company of 26% and its revenues are growing at a triple-digit rate. Most encouragingly, the company just signed a contract with China’s largest desalination plant, the Tianjin Dagang Plant. Tianjin Dagang will produce about 26 million gallons of water a day.

China is expected to spend about $200 billion on water infrastructure in the next decade. You can bet there will be plenty more desalination plants like Tianjin popping up.

Energy Recovery is proving to be a great example for the rest of us. It sees where the action is and has already started to make its move into one of the highest growth markets for water infrastructure in the world.

In sum, the world needs more drinkable water. China has $200 billion earmarked for it. The rest of the world has an additional $600 billion set aside to build the systems necessary to get water to consumers. Global spending on desalination is set to more than double in four years.

Most importantly and what has attracted our attention at the Prosperity Dispatch, more water is a need. Traders and pundits can speculate all day which bank the Fed will bail out next, but they’ll never know for sure. When it comes to water, we pretty much know governments will spend any amount necessary.

Disclosure: No position in companies mentioned.

Comments

[Michael D.:]

So I'm curious: 'There will never be a shortage of raw product' is true, but what happens when the industry is on such a grand scale that salt becomes the waste product, impossible to store, you can't dump it into the ocean, bury it, etc.

2008 Sep 16 08:53 AM

[mdmrjsds:]

It won't ever happen. A desalination plant only takes a percentage of the water out of salt water. It is too expensive to remove all the water and leave only salt. I believe you are thinking of evaporation, while most of these use reverse osmosis through a membrane via pressure. They have limits on the concentration of salt in the water they will work against.

The concentrated salt water is put back in the ocean 'downstream' of your plant intake. And the water you extract eventually makes its way back to the ocean through evaporation and rain, or sewage treatment, or groundwater, etc. So you are only temporarily separating it, not permanently.

What the article only brushes on and is the main drawback of desalination is the expense. It takes a lot of energy to run the process as you are putting back or reversing the energy of solution. It has been a while since I looked into it, but from memory I think it cost 5 to 10 cents a gallon for treatment when I did. Typical freshwater rates are in the sub 1 cent per gallon range. This water is more like bottled water, used only for drinking, unless you have no other choice. Watering a lawn would be very expensive. In a climate like California or Nevada, it might cost you $500/month for water during the summer using this method if you are a homeowner with a swimming pool and landscape plants. Obviously not feasible for third world countries where that might be yearly earnings.

The true solution to the water crisis (and so many others) is fewer people. Cheaper too. But what are the odds of that? :-(

2008 Sep 16 05:03 PM

[Dave H:]

mdm above has a good grasp. A little cheaper now than when he last looked. What makes ERII interesting is the huge amount of energy that their product recovers from what otherwise would be absolute waste. The only drawback is that their product never wears out and doesn't require any maintenance. Large moat. DISCLOSURE: I currently have a long position in ERII.

2008 Sep 16 08:46 PM

[KReefrSingP:]

Great post mdmrjsds but I offer this comment on price. While potable water varies in cost and availability around the world, $4.00 /thousand gallons ($1.05 /M3), or 0.4 cents per gallon is a good round number for what folks in the first world pay for treated fresh water. Desalination costs have declined steadily for 15 years or so as membrane technology (flux, membrane life, salt splitting etc.) has improved that the cost of desalinated water is converging on the cost of treated fresh water.

Desalinated water cost is also variable but a good round number for that supply at retail is $6.00 /thousand gallons ($1.58 /M3) or about 0.6 cents per gallon. If you consider a typical, wasteful, first world consumption rate of 100 gallons per day per person the average family of 4 would pay an additional $24 /month. ...at that price delta desalination starts looking reasonable in many parts of the world even without reuse, gray water recycle etc.

2008 Sep 16 08:57 PM

[RickG:]

Salt is a product. Sea salt is the source of several products and the basis of several processes. The trick is to establish related industries together (and perhaps get them to share the capex). Most Desal projects are pitched to governments that do not have such a holistic view. Which, in turn, makes the Desal business unstable and politically vulnerable.

2008 Sep 17 08:08 AM

[cliffman:]

WWAT (Worldwater and Solar Power Corp) has a unit for purifying water and it is run with solar power.

2008 Sep 17 08:38 AM

[jarber:]

You want a superb water play you need to look at Hyflux, Ltd on the Singapore. Can't believe it was overlooked in the above article.

2008 Sep 17 09:31 AM

[Wateruser:]

You can take a horse to water, but can you make a horse drink.


Water Desalination International, Inc. soon to unveil a desalination process the Passarell V.E.S. This process separates potable water from the elements in seawater, using the gravitational influence in an ambient vapor field. The extraction of drinking water, leaves a wet crystallized salt eliminating waste brine from being returned to the sea and thus preserving the environment. Crucial environmental enforcement is necessary to preserve the environment. Therefore, WDI has developed a multiple pod technique for subsurface ( below the seafloor) retrieval of seawater to retrieve the seawater for the Passarell VES process. The desalination processing of seawater into drinking water is costly with the processes we are now using, but now with the V.E.S process, WDI has broken the high price of drinking water from the sea the price as low as one third Reverse Osmosis processing. Extra income benefits are obtained from the crystallized salt through the commercial marketing, lowering the cost of drinking water. Soon-to-be operating in Saudi Arabia.

2008 Sep 27 01:31 PM

[You're Kidding:]

ggh

2008 Nov 13 12:34 AM

[adam/adam:]

Interesting that GE is cited as being intensely involved in desalination efforts, spending, R&D etc. Because our company has elicited responses from some of the key industry players - but not GE. Despite repeated attempts.

We own a technology which obviates the need for membrane cleaning, and shows 0% reduced flux year on year, and like ERI, virtually no maintenance and own time. In orde to provide a contact for me without embarrassing GE, I will provide a personal email address here, and any interested parties are welcome to contact me. Thanks.
[e-mail]

2008 Dec 04 12:25 AM