Water XXXXXXXXXXXX Simon Powell Head of Sustainable Research [email protected] (852) 26008626 Jonathan Galligan (852) 26008888 Alasdair King (X) 2600888 13 January 2010 Asia Sustainable XXXXXXXXX XXXX (xxxx) XXXX (xxxx) XXXX (xxxx) XXXX (xxxx) www.clsa.com Find CLSA research on Bloomberg (CLSA <go>), Thomson First Call, Reuters Knowledge - and profit from our powerful CLSA evalu@tor® database at clsa.com Prepared for: [email protected] Thirsty Asia 2 Simon Powell Contents Head of Sustainable Research [email protected] (852) 26008626 Executive summary ............................................................................ 3 Jonathan Galligan (852) 26008605 Peak water is with us ......................................................................... 5 Alasdair King (852) 26008888 China - Tariffs to double ................................................................... 11 Lack of water means less food ......................................................... 18 Industry - Disclose and reduce......................................................... 29 Dying for the toilet ........................................................................... 35 Western trickle versus eastern torrent............................................. 40 Investing in the space ...................................................................... 48 All prices quoted herein are as at close of business 13 January 2010, unless otherwise stated Tapping related research 2 [email protected] 18 January 2010 Prepared for: [email protected] Executive summary Thirsty Asia 2 Thirsty Asia 2 China and India face the Water stress is increasingly prevalent in Asia, due mainly to increasing biggest issues demand from agriculture, industry and higher populations. China and India are under the greatest stress because of underground-aquifer overpumping, heavy reliance upon irrigation and accelerated melting of the glaciers that feed Asia’s major rivers. We believe that change in agricultural practices are overdue and are an emerging area that investors should look at closely. The world has already hit Any further decline in freshwater availability could have serious consequences “peak water” for food security, industrial growth and environmental sustainability. A recent study by Mckinsey highlighted that the world used 4.0tn m³ of freshwater in 1995, estimating this to increase to 4.5tn m³ in 2010. An ongoing 2% Cagr assumption to 2030, based on current population growth, would result in demand of 6.9tn m³ (assuming no efficiency gains). With current reliable accessible supply at 4.2tn m³, the world has already hit “peak water”. Major issue is population The highest forecast increase in water usage is in agriculture. Water for growth driving food growing food makes up more than 70% of global use at 3.1tn m³. Mckinsey demand and the need for forecasts this to rise by 45% to 4.5tn m³ by 2030. So in a constrained world, more irrigated land a major issue is one of population growth driving food demand and thus the need for more irrigated land. Nowhere is this more prevalent than in Asia - specifically China and India. China can’t hold back Asia used more than 2.8tn m³ of freshwater in 2009, and this should increase the effects of climate by 1,800bn m³ by 2030. For India, agriculture in the northern region is highly change forever vulnerable to a change in river flow resulting from glacial melt. In China, the effects have included, among others, shrinkage of lakes and rivers, the retreat of glaciers and declining grassland and desertification. While China achieved a good wheat and rice harvest despite extreme drought in 2009/10, it cannot hold back the effects of climate change forever. Significant shortfall in Global water demand and supply 2010 versus 2030 supply by 2030 8,000 (bn m3) Municipal & Domestic Industry Agriculture 7,000 6,000 2,800 5,000 4,500 4,000 700 Groundwater 3,000 3,100 2,000 1,500 3,500 Surface water 1,000 800 600 900 0 Existing 2030 Shortfall Existing accessible, withdrawals withdrawals reliable, sustainable supply Source: Mckinsey, 2030 Water Resources Global Water Supply and Demand Model Hot themes for water This report identifies “hot” investment areas in the sector. These focus on conservation and efficiency - especially in the context of agriculture, which accounts for 70% of water use. Recycling and reuse, sewage treatment and potable water, along with tapwater quality are the hottest themes. However, as in every trade, there are also challenges for investors. The industry has been heavily consolidated and lies mostly in the public sector. Listed 18 January 2010 [email protected] 3 Prepared for: [email protected] Executive summary Thirsty Asia 2 private-sector companies are typically small caps. In addition, the sector tends to attract competition in terms of new infrastructure development. Pure water plays are also hard to find with many companies engaged in other activities such as property development. Water efficiency in With up to 70% of global consumption from agricultural usage, the issue of agriculture water and “peak water” is linked to food and food demand. As peak water is reached in key countries such as India and China, it is new approaches to food production that can yield the greatest efficiency gains at the lowest cost. We like drip-film These feature the familiar technologies of better water application, such as irrigation increased drip-film and sprinkler irrigation. Crop-productivity measures include, among others, nontill farming and improved drainage, utilisation of the best available germplasm or seed development, optimising fertiliser use, and crop-stress management, applying improved practices (such as integrated pest management) and innovative crop-protection technologies. Sewage treatment, water Some of the forecast deficit in available water could be met through increased recycling and reuse levels of water reuse. Cleaning up wastewater to a level where it is suitable for agriculture could go a long way to meeting global shortfalls. In Asia, we see the greatest uplift in wastewater-treatment investment in China and India. Beijing has assigned more than Rmb75bn in the soon-to-be-announced 12th five-year plan for 2011 to 2015 to build sewage-treatment plants to improve the treatment rate. We estimate that less than 60% of sewage is treated before being discharged into rivers or waterways in China. As treatment rates rise, sewage-plant operators will be able to sell “grey water” back to industry, delivering new revenue streams. Investors should focus on the following when picking stocks in this space: Government spending in China and India will be significant Tariffs will rise faster for sewage operators than potable-water operators Revenue collection for sewage is more difficult than for potable water Additional earnings upside is likely to come from selling treated water Desalination Despite being one of the most expensive supply-side solutions, we continue to expect new desalination projects in Asia. China is planning more, including one of the world’s largest plants, at Tianjin (1,000 m³/day). While the cost per cubic metre is very high relative to water tariffs in Asia, we believe that governments will continue to invest in the technology as a way to supplement water sources. According to the National Sea Water Utilization Special Program, China’s need for desalinated water will almost triple over the next 10 years. Pipelines and Asian water lags other key infrastructure in capacity and coverage. Pipelines infrastructure are in big demand for both new projects and to replace ageing ones. With new capacity and connections needed across the region there will be extensive investment in water-treatment plants, sewage-treatment plants and pipeline networks. We expect increased spending on water storage as traditional sources such as rivers and aquifers show signs of stress. Bottled water After many years of strong growth in demand for bottled water, developed- market demand has stalled and is now contracting. In sharp contrast developing markets are still growing fast. Concerns over water quality will continue to drive strong demand for bottled water across the developing markets of China and India. 4 [email protected] 18 January 2010 Prepared for: [email protected] Section 1: Peak water is with us Thirsty Asia 2 Peak water is with us Losing supplies As we highlighted back in our 2007 report ‘Thirsty Asia’ the world has a finite through pollution of supply of available freshwater, and growth in demand coupled with existing sources destruction of resources through pollution and climate change means that peak water has already been reached. The US Geological Survey estimates that more than two-thirds of the earth’s surface is covered with water, yet less than 1% is fresh and easily accessible. Figure 1 Lots of water - but only 1% is on the surface and fresh Rivers 2% Swamps Ground water 11% 30.1% Other Saline Fresh water 0.9% (oceans) 3% Surface water 97% Icecaps 0.3% Lakes 68.7% 87% Source: US Geological Survey Fixed supply + growing In total, 69% of the world’s freshwater is inaccessible, frozen in earth’s ice demand x pollution caps, glaciers and permafrost. Of the 10.7m km³ that is accessible, the vast = shortage majority (10.5m km³) is underground. The remaining 135,000km³ flows above ground in rivers, lakes and wetlands. These accessible freshwater resources are distributed unevenly around the world, aggravating water- supply pressure. About one third of world’s