Bloomberg News

Water Trumping Carbon Spreads $17 Billion Market

August 23, 2012

Water Trumping Carbon Means $17 Billion for Dow, Hyflux

Operated by Veolia Water, the Kurnell desalination plant is currently Australia's largest operational desalination plant. industry and driving down costs. From France’s Veolia Environnement SA to IDE Technologies Ltd. of Israel and Hyflux Ltd. of Singapore, competition to make money from duplicating the Earth’s water cycle is pushing shares of the companies in the water industry near their 2007 highs. Photographer: Ian Waldie/Bloomberg

Desalination equipment orders are forecast to triple over five years to become a $17 billion business, driven by breakthroughs in energy savings and demand by cities and industry.

Investment in installations that make drinking water from the sea will jump to a record in 2016 from $5 billion last year and $8.9 billion in 2012, according to forecasts by Global Water Intelligence, an industry consultant. While that’s a fraction of spending on carbon-free energy generation, it’s gaining traction among managers of environmental services funds.

“Water right now is a strain on this planet more than carbon,” Dow Chemical Co. (DOW:US) Chief Executive Officer Andrew Liveris said in an interview this month in London. “We mismanage water terribly. It’s going to be a big issue.”

Prompting the boom is technology that uses less energy to create potable water as well as a crush of companies entering an industry and driving down costs. From France’s Veolia Environnement SA (VIE) to IDE Technologies Ltd. of Israel and Hyflux Ltd. (HYF) of Singapore, competition to make money from duplicating the Earth’s water cycle is pushing shares of the companies in the water industry near their 2007 highs.

The S&P Global Water Index (SPGTAQD) of 50 shares has advanced about 13 percent in the past year, about 15 percent short of its record in 2007. In the same period the WilderHill New Energy Index (NEX) of 96 clean-energy stocks fell about 29 percent.

Wind- and solar-power shares were clobbered by Chinese competition, European subsidy cuts, and by U.S. politicians sidestepping the climate debate and rejecting carbon limits.

Carbon Plunge

European permits to release a ton of carbon dioxide, a tool governments use in the European Union use to discourage greenhouse-gas output, fell 47 percent in the past two years.

Most desalination plants have been built in the Middle East, though the technology is spreading, expanding the industry 10 percent to 12 percent a year, according to Bloomberg New Energy Finance. China has 30 plants operating and six announced or under construction, according to the consultant owned by Bloomberg LP. India has eight running, one partly in service, and two on the way.

“Those huge economies will not be able to step forward without a solution to water scarcity, and one of the solutions is going to be desalination,” said Avshalom Felber, chief executive officer of IDE Technologies, an Israeli company that’s the biggest operator of the plants. “Besides China and India, the southern U.S. is going to be a major market for us.”

Freshwater Shortages

Average available freshwater resources per capita will fall by more than 20 percent by 2030, BNEF said, citing United Nations data.

Efforts to make ocean water drinkable date to Greek and Roman times, when sailors boiled seawater. Utility-scale plants that distilled out salt sprung up after World War II. The first major U.S. plant was built by Dow in 1961 in Freeport, Texas.

The modern industry emerged in the 1990s, when reverse osmosis using a porous membrane to filter out salt slashed the energy needed by traditional distillation plants. So-called RO facilities operate for about $1 per cubic meter, half the price of 20 years ago, according to the International Desalination Association, an industry group based near Boston. That’s still about 10 times the cost of traditional water supplies, mainly because desalination requires electricity and heat to work.

‘Huge Growth’

“This is potentially a huge growth area,” said Ian Simm, chief executive officer of Impax Asset Management Group Plc (IPX), a London-based investor with about $2.8 billion in funds. “It’s only viable where the price of water is high and the cost of energy is low.”

Most of the biggest operators are conglomerates spanning other industries, such as Dow, Veolia, General Electric Co. (GE:US) of the U.S., Spain’s Acciona SA (ANA) and France’s Degremont SA.

Smaller rivals include pump-and-valve maker Flowserve Corp. (FLS:US) of Irving, Texas; plant operator Hyflux Ltd. of Singapore; and Energy Recovery Inc. (ERII:US), a maker of units that drive water through desalination membranes that’s based in San Leandro, California.

“Desalination is a technology that makes economic sense for very specific niche situations where there is little or no recurring source of groundwater,” said Philippe Rohner, portfolio manager in Geneva at Pictet Asset Management SA running the $2.8 billion Global Water Fund. “Water re-use or recycling offers more investment opportunities.”

Reverse Osmosis

Reverse osmosis has about 45 percent of the market, with traditional distillation being the main technology used in most of the remainder, New Energy Finance estimates.

A new process called forward osmosis works at lower pressures using less heat and power than so-called RO facilities and may take market share within 10 years, said Robert McGinnis, founder of Oasys Water Inc., a Boston company whose equipment is being used by American oil and gas producers.

Modern Water Plc (MWG), a British purveyor of forward osmosis equipment, estimates the technology could cut the cost of desalinating by as much as 30 percent.

“This is the next big step forward,” said Neil McDougall, chairman of the company, which has built small plants from Gibraltar to Oman. McGinnis of Oasys says the technology will be “hugely transformative.”

“Anyone that was looking with open eyes from that community would see that that was coming,” McGinnis said.

Rival Views

Their competitors aren’t convinced that forward osmosis will take off. GE’s Power & Water unit expects improved membranes and more efficient pumps to reduce desalination costs for RO plants, said Erik Hanson, a manager at the unit.

“There are some new ideas, but they are still in the cradle,” said Julio Zorrilla, director for international construction at Acciona Agua SA, the water arm of the Spanish developer that’s working on four major projects. “We expect that in the next five years the market will double” relying on “mature” RO technology, he said.

Regardless of which method prevails, the boom in desalination stands to ease pressure on the 20-some companies including GE, Dow and Hyflux that supply the industry. They’ve struggled with increasing competition as demand bounced between $5 billion and $9 billion a year since 2006, GWI figures show.

“There’s a fixed amount of fresh water in the world, and there’s growing demand,” said Christopher Gasson, publisher of Global Water Intelligence, which is based in Oxfordshire, England. “The longer term future is extremely strong. The reality at the moment is incredibly tight, with too many companies competing for far too little business.”

To contact the reporter on this story: Josephine Forster in London at jforster13@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net


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