Clean Water Crisis
The Daily Reckoning PRESENTS: Most of us turn on the faucet for your morning shower without really thinking twice about the clean water filling our tubs. Well, in many parts of the world, acquiring clean water has become a major problem. Chris Mayer explains how something we take for granted is becoming a grave resource problem for the global economy…
CLEAN WATER CRISIS
Clean water is quietly becoming one of the most critical resource issues in the world economy…
Researchers at the Center for Strategic and International Studies predict that by 2025 water will be the most grave resource problem in the global economy. In many parts of the world, it is already an undeniable problem of growing importance.
First, there is the issue of polluted water. This is already the biggest cause of sickness and death in the world. Second, there is the problem of getting it where it needs to be. Population growth has not followed the location of water resources. The most obvious example is China, which has more than 20% of the world’s population and only 7% of its water. And a good chunk of China’s population is in the dry northern regions.
China is not alone in this. India is no better off. The southern city of Chennai (once known as Madras) is a typical example. Technology companies are setting up shop here and money is flowing in from abroad. This rapid growth hides a festering problem below the surface prosperity. As the Financial Times reports:
“Anyone who stands at the edge of Marina Beach and watches the stinking, black and lifeless water of the Cooum River befoul the blue-green sea at the river mouth can hardly fail to notice that Chennai has a problem with its water.
“Only a third of the city’s waste is treated. The rest flows into the rivers and to the sea. These polluted waters pose enormous health risks. And Chennai is typical of Indian cities, and of cities in other emerging markets.”
The World Bank’s recent report on India warned, “Unless dramatic changes are made – and made soon – India will not have the cash to maintain and build new infrastructure, nor the water required for the economy and its people.”
Today, we’ll take a look at blue gold and the mounting crisis in water resources, and specifically at what’s happening in Peru. In miniature, Peru shows all the growing pains of emerging markets. These are problems confronted on a much bigger scale in China and India.
The ruins and relics of ancient civilizations riddle the lands of Peru, once the heart of the magnificent Inca Empire. After the fall of the empire, the country endured the heel of Spanish conquistadors and centuries of Spanish rule. Since 1821, Peru has been an independent country. Its abundant material riches, the goods of the earth, are what sustained the Incas and attracted the Spaniards. Yet this mostly poor country has never seemed able to harvest these bounties into a consistent prosperity.
Peru is best thought of in three pieces. There are the dry coastal plains in the west, providing a plentiful fishing area with the vast South Pacific Ocean at its doorstep. Then there is the middle part of the country – the jagged, ice-capped Andes, chockablock with minerals and metals. Finally, there are the lush Amazonian lowland jungles in the east – filled with copious amounts of fresh water.
And here is the problem. More than 70% of Peru’s 28 million people live on the narrow coastal plains in the west, the busy hub of Peru’s industry and its export agriculture. The watershed flows east, where the Andes mountains divert all rivers toward the Atlantic. (The growth of human populations does not always follow Mother Nature’s markers. And while nature is kind in some ways, she is difficult in others. Earthquakes, floods, landslides, occasional tsunamis and even mild volcanic activity rack Peru.)
Nonetheless, the water issue seems to be nothing more than an engineering problem. Simply move water from the wet east to the drier west. Yet political toxins – namely, populist politics – poison the easy solutions. The state owns and runs most of Peru’s water system. Government investment has severely lagged the growing and pressing need for water.
Lima, the capital city, is often threatened with water shortages and rationing. About one-quarter of all Peruvians have no access to piped water. About half have no access to sewage. These numbers are the worst in Latin America – save for Bolivia.
The crisis here, as in many parts of the world, is reaching a breakpoint. They need the investments in water infrastructure now. Estimates for Peru range north of $4.5 billion. And that would bring it only to regional standards.
It won’t be easy in Peru. One reason is the hostile political climate. It is election season. A controversial challenger has scored an early season victory, ensuring a place in the runoff election in late May. His name is Ollanta Humala, a 42-year-old former army officer. He is a populist rabble-rouser in the spirit of the region’s best rabble-rousers, like Hugo Chavez of Venezuela and Evo Morales of Bolivia.
Humala’s solutions are the same tired ones tried by dictator wannabes over the years. Raise taxes – particularly on foreign mining and oil companies. Nix existing trade pacts with the United States. Legalize coca, used in the production of cocaine. Give the government greater reigns over business. Haven’t we seen this movie before?
Humala casts himself as a Robin Hood. His flag-waiving rhetoric has rallied impoverished Peruvians to his cause. If Humala wins, then Peru too falls to populist politics – joining Venezuela and Bolivia. Indeed, much of South America can’t seem to shake its neo-Marxist ghosts.
Heavy-handed policies in these countries could easily quell any economic rebirth of South America. Investors will need to keep a close eye on these developments.
These populists do not come out of the ground from nowhere. They grow in seedbeds of frustration and poverty. Unfortunately, poverty is still widespread in South America. Peru is no exception. For many, life is hard there. Polls indicate 75% of Peruvians between the ages of 15-29 want to emigrate – with popular choices being the United States, Chile and Spain.
This despite brisk economic growth in the last four years – better than 6% by most estimates in 2005. Yet prosperity does not fall equally on the shoulders of all people. And success by some Peruvians creates widening gaps of wealth with others, cracking open fissures between the haves and have-nots. The escaping gases of envy and resentment seep into the political discourse.
Amid this political swirl, private companies are working on solving the problems. Some places have already made great strides. Ten years ago, in Colombia’s two principal cities, for example, more than 1 million people had no water access and most had only intermittent access. Today, 98% have running water and 90% have sewage lines.
What happened? The government essentially hired private companies to run the service. Yet it maintained a controlling stake in the business. This brought world-class water technologies and managerial talent to Colombia’s water systems. The result paid off. The system ran efficiently. As Luis Alberto Moreno, president of the Inter-American Development Bank, reports, “The company now collects payment on 92% of its billings (up from 45% in 1995).” The system pays its own way.
Moreno also writes of “numerous instances of private ventures that are successfully meeting people’s drinking water and sanitation needs. In Brazil, 63 concessions serve 7 million people in medium and small municipalities.” Other large cities in Honduras and Ecuador “rely on private water providers under a variety of contract and concession models.”
This is the same way many airports, marine ports and toll roads operate. Perhaps a similar system of concessions will play a role in Peru. According to The Economist: “The government wants to offer private investors long-term contracts, known as concessions, to operate some of the country’s 45 water and sewerage companies.” The problem is that such an idea is a hard sell politically.
The outcome of the Peruvian elections will surely have some impact on the debate. Then again, the crisis is becoming so acute that Peru, as with most governments, won’t have a choice.
Getting clean water to growing populations – that is the nut that has to be cracked. Whether you’re building a new suburb in the States or piping water through the Andes, there is a tremendous amount of build-out required.
The construction of these waste and water systems means that companies providing the tools and building blocks have a long bull market ahead of them. The wind is fully in their sails. One interesting sector to look at is the pump industry.
There are more ways to use these pumps than there are ways of eating an Oreo cookie. In fact, there are so many applications it is hard to give them justice in a small amount of space. Critically, water systems all use these pumps. Pumping stations and a variety of aboveground and belowground systems use them to provide water services.
The pump market is a $27 billion industry, expected to grow to $31 billion by 2007. As Stephen Hoffmann of U.S. Water News, says: “While these estimates include a number of other industrial applications within the chemical and energy industries, for example, it is safe to say that the market for the enormous range of pumps in the water industry is at least a multibillion-dollar market and growing.”
The industry is highly fragmented, filled with lots of little and big fish. The defining trend lately has been for the big fish to swallow up the little ones.
The boom in infrastructure has set off something of a scramble for companies with product and know-how in this business. There is a big need for global and full-service providers, which is driving the industry to consolidate around fewer – but larger and more capable – companies.
Beyond the drive for building water infrastructure, a number of other factors also propel the industry. For example, new regulations require landfills process leachtate – the contaminated fluid produced in landfills. This requires the installation of systems that collect and pump this stuff so it doesn’t seep into your groundwater.
The drive for water filtration in residential and commercial properties has also created a boom in specific kinds of pumps, used in the process of purifying drinking water.
And in developing markets, including India and China – and Peru – pumps are needed for building water and wastewater systems. As Hoffmann says, “China and India will show the most rapid gains based on ongoing industrialization and increasing fixed investment. China, for example, is expected to be the fastest growing market for pumps, with an estimated growth rate twice that of the total market.”
The result of all this consolidation is that only a few major publicly traded independents remain. If you’re thinking like an investor, your ears should have perked up by now. Here, in the table titled “Last Pumps Standing,” is a look at three major independent pump companies:
Pumps and pumping systems are the heart of the world’s infrastructure. If not the heart, the pump industry must be close – like the liver or lungs. It is amazing the full range of activities these companies perform.
Hurricane Katrina relief efforts used pumps in draining New Orleans. The largest pumps can move 40,000 gallons of water per minute!
Pump companies also tie into the energy market. The extraction of crude oil from the tar sands of Canada uses pumps. And relief efforts in Afghanistan and Iraq use pumps to provide for the distribution of water. All this only scratches the surface of pumps’ wide range of uses.
Beyond the independents, there are pump operations in diversified manufacturers. Two interesting possibilities include Met-Pro Corp. and Robbins & Myers. Both of these companies are showing strong earnings growth and have good balance sheets. Both are too illiquid for me to recommend in C&C.
The pump industry is a little-known corner of the market, buried in the inky crevices overlooked by the big-money investors. However, it has not escaped the attention of the pump consolidators – like ITT – who are buying these things up. And it seems clear to me that the pump industry should have a place in the sun for years to come.
for The Daily Reckoning
June 29, 2006
Editor’s Note: Chris’ battle plan at Capital and Crisis is to invest in sturdy businesses with valuable assets, lots of resources and proven capabilities, able to survive and even prosper in difficult environments. It also helps to have smart people at the helm. Do all this at good prices and you’ll make a lot of money, even in a soft economic environment, even in a flat market. Their track record proves it. We had a great 2005, even though the market went nowhere.
Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of CrisisPoint Trader and Capital and Crisis – formerly the Fleet Street Letter.
Goldman Sachs is clearly “on top of the world” just like the papers say. The financial industry dominates the universe. And its masters report for work at Goldman. And yesterday, the master of the masters of the universe was confirmed by the U.S. Senate as master of the U.S. Treasury Department.
God is in His heaven. Goldman is in the Treasury. All is right with the world.
But we are full of question marks. When a company is already on top of the world, where does it go next? And what kind of world is it that a company such as Goldman would be on top of?
It is a world rich in ‘ations’ we notice: financialization, globalization, securitization, and derivatization. The words are big and new. But the ideas are old and common. In short, it is a world that favors money shuffling and debt over making things and saving money. After all, George W. Bush did not ask the president of General Motors to take the highest financial post in the country, secretary of the treasury. No, he turned to the alpha firm of the whole slick skulk, the “biggest hedge fund in the world,” Goldman Sachs.
Has an important financial deal been done in the last five years without Goldman’s fingerprints on it? Is there any bond, mortgage, or I.O.U. in all the world that does not mention Goldman somewhere in the small print? Is there any speculation, derivative, or trade that Goldman has not done to excess?
No? That’s why the New York firm is practically a living legend. Its innovations, connections, and ambitions helped turn America into Speculation Nation. And now, the credit bubble that Goldman helped to create threatens not only the world economy, but Goldman itself.
In the whole dark night of history from the beginning of United States of America to the dawn of the 21st century, the nation accumulated $ 5.7 trillion in gross federal debt. Six years into the sunny day of the next millennium – it is hardly even time for breakfast – and now the figure is half-again as much. In those same first years of this century, U.S. mortgage debt rose by an additional $3 trillion, much of it in diabolical ARMs (adjustable rate mortgages), where payments go up after the teaser rates expire. Nor is all that money used to buy houses. “Equity extraction” rose to more than 9% in the third quarter of 2005.
Meanwhile, Goldman’s worldwide trading has helped stimulate and facilitate insolvency at home and abroad. When a big corporation – or even a sovereign nation – wants to borrow money, to whom does it turn? Goldman, of course. This trillion-dollar trade in debt has helped the United States fund a current account deficit equal to 7% of the GDP. And it lured the world’s richest nation, with a modest net asset position with the rest of the world, equal to 5% of GDP in the ’80s, to become the world’s biggest debtor, with a negative net asset position equal to 20% of GDP.
And now, the U.S. householder faces a double problem. Interest rates are rising. And so are his mortgage payments. More than $1 trillion worth of ARMs are scheduled to be ratcheted up this year. And another $1.7 trillion next year. Plus, the government, which also funded of its spending with short-term financing at low rates, now must refinance trillions worth of its bonds at higher ones. “George Bush has the biggest ARM in the world,” says Niall Ferguson.
No wonder they called Hank Paulson to the U.S. Treasury Department.
More news from our currency counselor…
Chuck Butler, reporting from the EverBank world-currency trading desk in St. Louis:
“Did you hear the noise being spread about the possibility of a 50-BPS rate hike today instead of the “measured” 25-BPS hikes we’ve seen for two years? Remember the old saying about leaving the barn door open and the cow was already out of the barn? Well, Big Ben’s predecessor left the inflation door open three years ago; it’s too late to try big rate hikes now. The inflation cow is out of the barn!”
For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig
And more views London…
*** “Homes sit on market,” says CNN. “Home prices cut as once-torrid U.S. market turns chilly,” adds Bloomberg.
And here comes Reuters:
“The U.S. housing market is now tracing a clearly downward trajectory that economists say will steepen as interest rates rise, raising chances of a recession by early 2007.
“Merrill Lynch economists say there is now about a 40 percent chance of a recession in the first half of 2007 – even without a widely anticipated 25 basis-point Federal Reserve rate hike this week.
“As much as half of U.S. economic growth is now directly or indirectly related to housing sales, construction and consumer spending fueled by home equity extraction, said Sheryl King, senior economist at Merrill Lynch.
“‘If that stimulus is withdrawn, it provides a notable danger to economic growth,’ she said. ‘The higher the interest rates go, the higher the chance that the housing market cools more abruptly and you get an outright decline in home prices.’
*** CEO compensation has levels for which the term ‘filthy lucre’ was invented. It just hit a new record: 821 times the minimum wage, says a new report. The chief executive of Exxon leads the whole cackle with $400 million, a lot of money to pay a suit.
But as we explained yesterday, CEOs are not Junkers. They do not form a loyal, trustworthy class of professionals whom you can count upon to get the job done. No, it is late empire, not early empire, and in the late empire the professionals get the smell of the dollar in their nostrils and seem to think of little else. “Who will earn more money next year?” For that question, comes the ready answer: whoever can get away with it.
“I find the whole situation very interesting,” said our companion for lunch yesterday, columnist Simon Nixon. “The idea of national identity doesn’t seem to matter anymore. In the Anglo-American empire you can do anything. I mean, you can’t be elected president unless you were born in America, but almost any other job is open. Here in London, the City is practically no longer a part of England. It is full of foreigners, all working for themselves, and for these big, multi-national companies. All that matters is if they can do the job. And in the Blair cabinet, you have several members who are not English. All of which seems like a good thing, until you realize that they are no longer working for a shared national purpose. They are all just looking out for themselves.”
*** And a letter from a Dear Reader:
“I envy the fact that you choose to live in France and England. I envy the fact that you can afford to own property in Latin America (Nicaragua I believe and also Argentina). I envy the fact that you can still buy gold.
“But, Bill, I feel sad for you also.
“You seem to have lost the sense of home. You have lost the sense of family, neighborhood, roots, values.
“Instead of staying in America with your roots, family, neighbors, and fighting to defend the ideals your nation was founded on, you chose to leave and pontificate. Shame on you. I will suggest that you are a coward.
“I will stay here in the bunker with the Mogambo Guru. I will stay here and I will adapt to whatever is. But I will not abandon my country, nor my family (extended)…nor my town and neighbors.
“I feel sad for you, Bill, in that you seem to have put yourself ahead of so many other things that are important. Good luck in your selfish endeavors.”
*** We reply:
OK, you stay in the bunker. While we appreciate your concern for our emotional state, we are happy to report that all is well here.
But let us ask you a question: How do you think you got to America in the first place? Was it because your ancestors were too cowardly to stay in Ireland, Germany, England or Italy? And what about those who leave from India, China, or France, today, to make their homes in America? Are they cowards, too? Is that the problem with everyone who doesn’t stay put; does he or she lack backbone?
“Where freedom is, that is my country,” we’ve always believed. Americans used to be a restless breed, always searching for greater freedom, greater opportunity, and a place to have a smoke. Your ancestors probably left the old world because they were looking for something better – a place where they could mind their own business, earn a living and find happiness in their own way. But now that the country has become the homeland of a vast decadent empire, with an agenda of its own, we have to ask ourselves: Where should real Americans live? Where is freedom now? Where are opportunities?
There are no sure answers to those questions, but we find some of the most appealing of our countrymen outside of the country. It is as if they had left so that they could continue living as Americans should – by their own wits and their own wills. In many ways, they are the best Americans. In some ways, they are the only ones left.
*** Here at The Daily Reckoning, we always welcome a lively debate. We love to hear what our readers have to say, whether they agree with us or not – it’s what makes life interesting.
To that end, we have request for those attending the Agora Wealth Symposium in Vancouver next month. As you may know, we are in the beginning stages of our Empire of Debt documentary and will actually start shooting at the Wealth Symposium. This is where we need your help. We think it’s important to have some interviews with DR readers in this documentary; and Vancouver is the perfect time to catch some “face time” with our dear readers. So, if you’ll be at the conference and you’re interested in being in what is sure to a blockbuster smash, e-mail Short Fuse at email@example.com.