Desalination: Solution To Global Water Shortages?
Monty Guild | Apr 19, 2015 03:43AM ET
Living in southern California, we at GIM are acutely conscious of the ongoing drought in the western U.S. and its economic impacts. The issue is a widespread one, with arid and water-stressed areas worldwide on a path to host rapidly growing populations over the next several decades:
While the OECD’s water demands will actually shrink, there will be outsized increases in water demand in Brazil, India, Indonesia, and China.
Water scarcity is a better subject for policy debate among friends than for investment advice; it’s a significant theme, but one that’s been so long-term as to be essentially uninvestable. Investment approaches to the theme are basically limited either to large utilities such as France’s Veolia Environnement (Paris: PARIS:VIE), large engineering firms such as Spain’s Acciona SA (Madrid: ANA), and global technology leaders such as Germany’s Siemens AG (XETRA:SIEGn) (Paris: SIE). (All of these companies have performed well year-to-date, and may continue to do so due to Eurozone QE, strong earnings outside the Eurozone, and the falling Euro currency -- but that won’t be primarily because of their leadership in smart water technology.)
An obvious solution for many cities is desalination. Outside the Middle East, desalination has not yet been widely adopted; but that’s changing. China is building a billion-dollar plant and pipeline to bring desalinated seawater to Beijing, and San Diego will see its own billion-dollar desalination plant, the largest in the western hemisphere, come online in 2016. Desalination technology is not just for seawater: many communities have access to brackish groundwater, which doesn’t have the salt level of seawater but still isn’t potable.
What has stopped desalination so far is simply the energy cost. That hasn’t been a problem for energy-rich desert countries in the Middle East, but it is more problematic elsewhere:
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The chart above doesn’t include the cost of transportation, which will be significant for the Beijing project. Pro- ducing drinking water through desalination is still on average more than ten times as costly as taking water from a lake or reservoir -- although that’s small comfort when reservoirs and aquifers are being depleted.
We believe desalination will continue to rise in significance, especially as technological improvements in reverse osmosis membranes continue to improve. We recently read in the MIT Technology Review about the development of molecule-thick membranes that would reduce energy consumption for desalination by half. However, these technologies are likely still a long way from commercial scalability. We remind readers of the old investors’ adage, “Being too early is the same as being wrong.”
Investment implications: Global population in water-stressed regions will continue to rise, as will global demand for drinking and agricultural water. The primary beneficiaries from this theme will be major environmental and engineering firms who can provide technologies to reduce consumption and increase the efficiency of water treatment. As investors examine companies in these sectors as possible investments on the basis of company and macroeconomic fundamentals, we advise them to be aware of the rising significance of water-related technologies.
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