Desalination, for a World Short of Water

Nearly half the world's population could soon be at risk. Many companies are poised to supply equipment for massive desalination efforts

With oil over $120 a barrel; prices for corn, wheat, copper, and steel close to record highs; carbon dioxide emissions causing climate change; and the world economy slowing, the last thing anyone needs is another crisis. Yet one is brewing now, in the U.S. and many other countries, where dwindling supplies of the world's most precious commodity—fresh, potable water—threaten the health and welfare of billions of people.

Already, 2.8 billion people—or 44% of the world's population—live in areas of high water stress, according to a March report by the Organization for Economic Cooperation & Development (OECD). This figure is expected to rise to 3.9 billion by 2030 unless major new water-use policies are implemented. Much of the stress will occur in India, China, and other parts of the developing world, but water stress will also rise in more developed nations.

An investment of $10 billion annually is necessary to halve the number of people without adequate access to freshwater and sanitation by 2015, the OECD said. The economic consequences of forgoing that investment could be much greater.

Evaporation or Reverse Osmosis

To create more freshwater, many areas are turning to desalination, in which seawater or brackish groundwater is purified, either through evaporation or by being forced through a filter under high pressure, a process known as reverse osmosis. About 13,000 desalination plants are in operation around the world, mostly in the Middle East, but also in the U.S., Western Europe, and Japan. In addition, many projects are under construction or in planning stages.

Water consultant Global Water Intelligence estimates that worldwide desalination capacity will more than double, from 52 million cubic meters a day in 2008 to about 107 million cubic meters by 2016. At the same time, wastewater purification capacity will triple, to 60 million cubic meters per day. Spending on construction of desalination plants during that period will reach $64 billion, the firm says.

Desalination plants are expensive, create local opposition, and produce a stream of highly concentrated waste that is difficult to dispose of. Still, they offer the ability to produce freshwater where there is none, and water is one of the few items in daily life that has no substitute. An April, 2008, report by the National Academy of Sciences called desalination "a realistic option for increasing water supplies in some parts of the U.S.," which "will probably have a niche in the nation's future water management portfolio." Albuquerque, Las Vegas, Orlando, San Antonio, and San Diego are all currently considering desalination plants.

Worth Their Salt

The desalination market is dominated by a few large industrial conglomerates that either build desalination plants, manufacture the filter membranes that remove impurities from the water, or both.

General Electric (GE) vaulted into the top tier of desalination suppliers in 2004 when it paid $1.1 billion to acquire Ionics, which builds desalination plants and makes filter membranes. Paris-based Veolia Environnement (VE) is a major desalination plant builder and membrane supplier, as well as a water utility operator, getting about 34% of its revenue from water-related businesses. The Hydranautics division of Japanese chemical company Nitto Denko (6988.T) was the world's largest membrane supplier as of the end of 2005, according to Wangnick Consultants, followed by Dow Chemical (DOW), DuPont (DD), and GE.

Among plant builders, Italian construction firm Impreglio (IPGOF) and South Korea's Doosan Heavy Industries & Construction (DOHIF) rank as some of the largest. Suez (SZEZY), Siemens (SI), and Spanish construction companies Acciona (ACXIF) and Abengoa (ABGOF) all have desalination businesses.

There are several other smaller companies with publicly listed shares that focus largely on the desalination market. One is Singapore-listed Hyflux (HYFL), which makes filter membranes used to purify water and builds desalination plants. Hyflux scored a coup when it won the contract for a 500,000-cubic-meter per day desalination plant in Algeria, which, when completed in 2011, will be the world's largest. Hyflux is also building 40 water treatment plants in China, where it gets 81% of its revenue.

Heading for the Desert

Quebec's H2O Innovation (HEO) makes filtration membranes for wastewater treatment. Sales for the company jumped 39% in the six months ended Dec. 31, 2007, and its order backlog rose, though the operating loss widened as well. Christ Water Technology (CRSWF) in Mondsee, Austria, sells desalination and other water purification equipment, getting 41% of sales from its "ultrapure water" division. In August, 2007, Christ Water got its largest order ever, an $84 million desalination plant in the United Arab Emirates that will produce 91,000 cubic meters of water per day beginning in 2010.

In Japan, which has about 10% of the world's desalination capacity, Tokyo's Kurita Water Industries (6370.T) builds desalination plants and sells other water purification equipment, getting all of its 205 billion yen ($2 billion) in revenue from water-related businesses. Sasakura Engineering of Osaka gets about half of its 13.7 billion yen ($118 million) in annual revenue from water-related businesses, including seawater-desalination equipment and evaporation concentrators.

For U.S. investors, two desalination companies recently announced initial public offerings for their shares. German utility RWE (RWE) raised $1.1 billion selling a 36% stake in American Water (AWK), its Voorhees (N.J.) subsidiary, an offer that was previously postponed and fetched a somewhat disappointing price. American Water operates a desalination plant in Tampa, the largest in the U.S. Also, Energy Recovery in San Leandro, Calif., which sets for itself "the goal of making seawater desalination affordable worldwide by dramatically reducing energy costs," filed in April to raise up to $175 million by selling shares to investors.

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