Friday, July 24, 2009

Rude Awakening - Planet Water

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Rude Awakening

The Rude Awakening

Vancouver, Canada

Wednesday, July 22, 2009


* Water investing 101: Three key drivers to watch,

* The perils of being overly polite around others' mini-bars,

* Upfront audio access from the investment symposium in Vancouver and more...


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Joel Bowman, reporting from Vancouver, British Colombia...

At least two material observations ought to be clear to you at this, the halfway point of your weekly Rude reading.

The first is that, after two days here in Vancouver, any and all lingering affects of jet lag suffered by your editors should have by now worn off. At this stage, they are simply exacerbated by self- abuse at carefully selected colleagues' mini bars around the city. In other words, we should have been back in the saddle today with a punchy little up front observation. We are only NOT in that position due to the frequency with which last night's host extended her arm and uttered the word, "Cheers!" (We hate to be rude.)

The second observation for Rude readers is that another Chris Mayer column appears today. Does this mean that Chris writes more and better than any investment writer we know? Well, yes. But it also means that Mr. Mayer is the best go-to guy we know; a guy who churns out darned good investment ideas whether the mini bar liquid is a flowin' or not.

And so, unperturbed by the lackluster performance by your routine editors, please enjoy your guest editor's invaluable perspective on the global water industry and send any and all emails about it to the address below...

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Planet Water
By Chris Mayer

I recently picked up Steve Hoffmann's new book, Planet Water: Investing in the World's Most Valuable Resource, which seemed irresistible to a water bug like me. Hoffmann is well-known in water circles. He's the founder of WaterTech Capital, a private group focused on water investing. He's also the creator of the Palisades Water Index, which many water funds use as a benchmark.

His book has some good information and research on water issues, if dryly presented. Still, it's nice to have it all between the covers of one book. There are certainly many opportunities in the water sector for investors. It's one of the most exciting areas of the market to be a part of.

For one thing, it is an incredibly large sector. Water is the third- largest industry in the world, behind only oil and gas and electricity generation. For another, some of the drivers of water use are only getting bigger as this human drama unfolds. Hoffmann points to these three, among others:

Industrialization. As a country develops, its water use expands even faster. As people earn more money, they wear better clothes and buy more consumer products. All of these things have a high water content. Not too many people understand how much water we use to make a pair of bluejeans, for instance. (It's about 5 gallons.) Yet this water use is all too real. Then there is the matter of diet. As people make more money, they shift to eating foods that have a much higher water content or that take more water to produce - fruits and vegetables and meats.

So all of this is a tremendous source of growth for water demand. India, for instance, expects water demand to double between now and 2025 - and industrial water demand to triple.

Urbanization. More and more people around the world live in cities. In 2007, more than half of the world's population lived in cities for the first time in history. Our cities are also bigger than ever. For example, some 9% of the world's population lives in cities of more than 10 million people.

Well, people in cities use more water than those not in cities. To support all that water use requires a lot of pipes, pumps and more. As Hoffmann writes, the infrastructure needed to support urban water use is "staggering."

Globalization. When goods can more easily travel across borders, water use tends to increase. Suddenly, you can build cities in areas where older human societies would never have thought to build a large city. Basically, we've created a sort of virtual water trade.

"Countries with a relative abundance of water," Hoffmann writes, "can grow food and trade it to water-stressed countries." The sheiks in Dubai are grateful, no doubt.

As I've pointed out, water is big business. And Hoffmann goes through a variety of sectors, highlighting the issues facing each and compiling tables of companies in each space. Let's walk through a few of them.

The biggest part of the water industry - and the one everybody thinks of first - is the water utility group. There was a time when I liked the water utilities. Also, I can actually say I've never lost money on a water utility. For years, investing in water utilities was an easy way to beat the market. But things are changing.

I've come to think that the water utilities have to support an enormous investment going forward. And they have to do that in a political environment not favorable to water price increases. As you might imagine, that's a bad mix. Hoffmann agrees. "Public policy will dictate rate increases," he writes, and "water utilities will then [see] increasing pressure on profit margins."

I'd pass on the water utilities.

Water treatment, though, is another matter. As Hoffmann writes: "The fundamentals of the [water] treatment sector… are extremely compelling. Virtually all global water quality issues come down to treatment in one form or another." Water treatment means taking raw water and purifying for some use, either industrial or for human consumption.

Another sector Hoffmann devotes a chapter to is the water infrastructure sector. This is one of my favorites, because it is easy to understand and there are several good ideas in the space. Infrastructure covers all the pipes, pumps and valves and more that make up the physical framework that supports water delivery. As Hoffmann says, the importance of this sector "cannot be overemphasized."

One interesting angle Hoffmann writes about is the cost of water leaks. In the U.S., 15% of the water produced never reaches its destination because it leaks out somewhere along the way. Globally, it's like 20-30%. Even small leaks are incredibly costly. As Hoffmann writes:

A water leak just one-fourth inch in diameter can result in a loss of almost 15,000 gallons per day. If undetected for a month, over a half million gallons can be lost. Even a pinhole leak can mean an average loss of 18,000 gallons of water per quarter, equaling the average demand from a residential consumer.

That is a huge loss on the system, borne by society. And this is just one little slice of the losses poor infrastructure causes. It's why Hoffmann can write, "This under-recognized segment of the water industry is poised for above-average growth" for years to come.

That's just a look at a few sectors. There are many others - analytics, desalination, resource management, irrigation and more. But we'll have to save those discussions for another day...

I'm always alert to good water opportunities, and I expect we'll add another name to our Blue Gold Portfolio before the year is out. Watch this space.

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[Rude Endnote: If you are joining us here in Vancouver this year, please do not hesitate to approach either of your two editors with generous offerings from your own personal mini bar. Otherwise, feel free to send your emails directly to the address below.

We'll be back tomorrow with more Rude views.

Until then...


Joel Bowman

The Rude Awakening
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