The Rude Awakening
Wall Street, New York
Friday, June 30, 2006 ------------------------- - From a torrential down pour on Wall Street comes the
much anticipated water report,
- "Sparkling, still or tap, sir?" How will you get in
on this exciting investment opportunity?
- Blood red to back in the black balance sheets - the
strongest market rally since 2003 and much more...
------------------------- Eric Fry, reporting from the shadows of the Brooklyn
Bridge... Yesterday evening, your editor and a French friend stepped
out of the sultry heat of summertime Manhattan into the
refreshing chill of an overly air-conditioned restaurant.
After finding our table, a perky waitress appeared and
offered three versions of chilled drinking water. "Would you like sparkling, still or tap water?" she asked.
"Still, please," your editor replied, not daring to order
tap water in the presence of a French citizen. Of course, a tall glass of iced tap water would have been
just as satisfying, if somewhat less fashionable. But why
quench your thirst for free, when you can pay for the
privilege. Here in America, bottled water is a simple
luxury, never an absolute necessity. Even in the decades before the waitresses at Manhattan's
Bridge Café began offering three kinds of water to its
patrons, the establishment never lacked for abundant fresh
water. When the Bridge Café opened its doors in 1794, the nearby
East River provided potable water in abundance. This bounty
did not last, of course, as New York's rapid
industrialization throughout the late 1800s eventually
polluted these waters. But no big deal; Manhattan residents
simply constructed tunnels and aqueducts to tap the
abundant water supplies of the Westchester watershed a few
miles north. The rest of the nation's cities have
constructed similarly complex water-delivery systems...all
to insure that the life-sustaining liquid never fails to
flow from America's taps. Clean drinking water flows so amply through our municipal
water systems that we use the stuff to wash our Ford
Explorers, clean-off our driveways and beautify our golf
courses. We even use clean drinking water quality to cool
our nuclear reactors and to process our timber into paper.
Meanwhile, most of the world's inhabitants lack continuous
access to safe water. Only 20% of the world's population
currently enjoys the benefits of running water. The other
80% has to find it whenever and wherever they can. In some
parts of the world, people spend as much as six hours a day
fetching water. "The failure to provide safe drinking water and adequate
sanitation services to all people is perhaps the greatest
development failure of the 20th century," writes Peter H.
Gleick, author of Dirty Water: Estimated Deaths from Water-
Related Diseases 2000-2020. "The most egregious consequence
of this failure is the high rate of mortality among young
children from preventable water-related diseases...If no
action is taken to address unmet basis human needs for
water, as many as 135 million people will die from these
diseases by 2020." Tragically, the thousands of water-related deaths that
occur every day have inspired very little effort to clean
up the world's water. But now that unclean water has become
a serious ECONOMIC issue, government agencies and private
corporations worldwide are springing into action. China and
India and most other developing nations are realizing that
no economy can flourish for long by polluting the water
that sustains its workforce. That's why countries around
the globe will be spending hundreds of billions of dollars
to clean up their water supplies. The clean water era has begun.
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-------------------------
Blue Gold
By Chris Mayer [A Rude Awakening Classique – A version of this column
originally appeared in the March 1st issue of the Rude
Awakening.] A gallon of crude oil costs $1.50. A gallon of Evian costs
$12.00. This simple observation led one successful investor
to assert that oil is undervalued. We see things a little differently...Oil may be
undervalued, but NOT relative to drinking water. In fact,
the truth is exactly the opposite. For most of the world, clean drinking water is a far more
precious commodity than oil. There are few industrial countries in the world feeling
that scarcity more acutely than China. Its water needs are
more critical than its much ballyhooed power needs. I did
not fully appreciate this until I visited China myself and
talked to Chinese business people. Even Chinese officials -
- prone to covering up or understating the extent of
problems — sound alarmist when it comes to water. Water Scarcity: China's Problem "Serious and Urgent"
One official recently said China's problem is "more serious
and urgent than [in] any other country in the world."
China's rapid industrialization has outpaced its water
infrastructure, which is on the verge of collapse. As
Minister of Water Resources Wang Shucheng noted, "The price
of China's economic boom is being paid in water." Two-
thirds of China's 600 largest cities don't have enough
water; half of these cities have polluted groundwater. Less
than 15% of China's population has safe drinking water from
tap. For further perspective, consider this: China has about as
much water as Canada, but a population 40 times as large.
On a per capita basis, China's water reserves are only
about one-quarter of the global average. Worse, the
distribution of people and water creates its own logistical
obstacles. Nearly half of China's population resides in the
northeastern provinces, where only 14% of the water
resources are located. These facts provide endless challenges for the Chinese.
Water shortages and widespread pollution are serious
threats to China's booming economy. It costs billions each
year in lost output. The World Bank says environmental
damage and health problems cost the Chinese economy more
than $54 billion a year – or almost 20% of its GDP. That's
why China is drastically stepping up its commitment to
water management, particularly wastewater treatment and
recycling. In 2005, the Chinese government pledged a US$30
billion 5-year package to overhaul its wastewater sector.
Municipalities there are now required to treat between 40%
and 60% of their wastewater. The Christian Science Monitor in December 2004 contained a
provocative article suggesting that we could see a cartel
of water-exporting countries emerge over the next decade,
in a style not unlike the Organization of Petroleum
Exporting Countries. "Water is blue gold; it's terribly
precious," Maude Barlow, chairwoman of the Council of
Canadians, told the Monitor, "Not too far in the future,
we're going to see a move to surround and commodify the
world's fresh water. Just as they've divvied up the world's
oil, in the coming century, there's going to be a grab." Whether or not you choose to believe Barlow, it is clear
that the demand for clean water is real. In an attempt to
avert crisis, China plans to build hundreds of new water
treatment plants. But for now, bottled water is the
preferred choice — even among the Chinese, at least among
those who can afford it. When I was in China, bottled water
was nearly everywhere. As the Monitor points out,
consumption of bottled water nearly quadrupled between
1997–2002. Water Scarcity: Veolia Environnement So how to play it? There are several interesting companies
working on the water crisis in China. I'll run through two
of them below. These are not the only companies engaged in
solving China's water resource problems, but they were two
of the more interesting stories I found. The largest water
company in the world is Veolia Environnement, of France,
and, oddly enough, a spinoff of entertainment giant
Vivendi. Veolia has a 20-year deal to provide water to
Tianjin as well as a bundle of other water and waste
management contracts throughout China. Veolia currently
serves over 14 million residents in China. Another company is Watts Water Technologies, which has been
doing business in China since 1995. The company produced
valves used in China's Three Gorges Dam project on the
Yangtze River. In November, the company increased its
commitment to China by acquiring Changsha Valve Works.
According to Watts, Changsha is "a leading manufacturer of
large-diameter hydraulic-actuated butterfly valves for
thermopower and hydropower plants, water distribution
projects and water works projects in China. This
acquisition strengthens Watts' position in the fast-growing
water market." There are two problems here. First, neither company does
all that much business in China. Veolia's contracts bring
in only a small fraction of its more than $30 billion in
sales. Watt's China revenues represent only 3% of sales at
this point. This is a common drawback in looking at
publicly traded water companies. If you want more
concentrated exposure to China's water crisis, you've got
to explore the foreign equity markets. The other problem is
that none of these companies strike me as being
particularly cheap. Still, they remain interesting
companies to watch. One thing seems certain: Clean drinking water will remain
more precious than oil — especially in China. [Joel's Note: By now you have heard all about the unique
investment opportunity that investing in water affords you.
You know that the global crisis is imminent, that the
resource itself is irreplaceable and horrendously
mismanaged and that the problem is escalating. You have
read about population growth, about century old
infrastructure, about emerging economies, pollution and the
peaking interest in the world's single most valuable
resource. All there is left to do now is to expose your
portfolio to some of these exciting opportunities.
Remember, water investments have crushed every major index
over the past twenty years. Don't dally around any
longer... Read on for the much anticipated Water Report and learn how
you can be part of the largest investment of the century.
It's all right here: Blue Gold: The Water Report
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