The narrow path to chinese blue gold

Implications: The water industry is a very fragmented industry, where opportunities for investment abound. Large water services giants (Veolia and Suez) established in China for several decades are being challenged by smaller regional and local competitors (Hyflux, Biotreat, etc.). From multi-million capital intensive infrastructure assets will long concession terms (over 15 years) negotiated with local governments involving complex financial, human and management skills, to more focused systems integrators or engineering & construction contractors competing on prices and short term project delivery, or even niche technology players focused on specific industry segments (Sinomem), there is a diverse range of business models and sector specific risks and opportunities playing out in this sector. Given this complexity it is essential for investors to analyze each opportunity at close range, in order to distinguish a clear path between success and failure.

Analysis: The article rightly suggests that access to fresh and pollution free water in China is a growing concern. There is indeed competition between agricultural users and the increasing demand of industries and municipalities due to China's fast pace of economic growth and urbanization.

Water scarcity is particularly acute in the Northern provinces of China. This might lead to serious business disruption if not addressed in time by asset owners. Unlike other utility shortages such as energy (fuel and electrical power supply) where several mitigating strategies are possible using simple economic cost/benefit analysis, water has no substitute. This leaves water conservation, reuse and recycling as the only way to address water resource scarcity problems. In the most extreme cases (desertification) the challenge defies economics.

When there is access to the sea, desalination is of course one of the possible answers: better technologies at lower costs have given rise to an increasing number of projects. One should not forget that such projects are energy intensive which displaces the question to the sustainability of China's growing energy demand. Success in the rush to this blue gold will not only depend on mastering the right (energy and cost efficient) technologies, but also on the ability of the industry players to extract the maximum value from their capital and human investments. Given the level of competition in the industry and the tight grip of the local governments and local industry, the real challenge has just begun.