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Issue # 018:

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New Water Events

1. Investing in Water: Blue Gold
2. Dirty Water, Clean Profits
3. Fortune Magazine predicts

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1. Investing in Water: Blue Gold
By Chris Mayer

A gallon of crude oil costs $1.45. A gallon of Evian costs $11.91. 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. Investing in Water: An In Demand Resource

For most of the world, clean drinking water is a far more precious commodity than oil.

While water largely covers this hardscrabble little planet of ours, less than 3% of it is fresh water. And the presence of pollution and disease has made much of that water undrinkable. Unlike with oil, no amount of technological wizardry can replace water.

Water resource enthusiasts, such as money manager John Dickerson, know these facts well. He is familiar with all of water's charms — but the biggest is the simple scarcity of clean water.

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.

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. The recent spill in the Songhua River, widely covered in the media, only worsens the problem.

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 are a serious threat to China's booming economy. It costs billions each year in lost output. Plus, water efficiency in China is way behind that of developed countries. As Dickerson says, for an equivalent amount of work, "China uses approximately 7–15 times more water than do developed countries, and with usable water supplies steadily diminishing, will not their competitive position also begin to erode?"

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.

So how to play it?

Investing in Water: Two Companies To Watch

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 (excluding micro-caps).

If you want more concentrated exposure to China's water crisis, it seems impossible at this point. The other problem is that none of these companies strike me as being particularly cheap. Still, they remain interesting companies to watch — we may get a chance to own them at excellent prices down the road. And as the Chinese water crisis unfolds, it may become clearer as to who and where the winners in this struggle will be. One thing seems certain:

Clean drinking water will remain more precious than oil — especially in China.

Chris Mayer, Editor Capital & Crisis
For The Rude Awakening

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2. Dirty Water, Clean Profits

"Unlike other commodities, the demand for water is unwavering and certain. What's more, water does not suffer the threat of the discovery of an 'alternative' source. No 'alternative' water will present itself in the future."

by Eric J. Fry

Dirty water is a worldwide tragedy. Clean water is a worldwide investment opportunity.

http://dailyreckoning.com/Featured/Fry062706.html

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3. Fortune Magazine predicts:

"Water promises to be to the 21st century what oil was to the 20th century: the precious commodity that determines the wealth of nations."

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Thanks for reading! If you have suggestions or ideas for articles send them along.

Lorne Haveruk C.I.D., C.I.C., C.L.I.A
Editor, H20 News
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