Thursday, September 17, 2009

The World’s Most Precious Resource

By Chris Mayer

Yesterday, I met with Ben Simpfendorfer, who is chief China economist for the Royal Bank of Scotland. He works out of Hong Kong, but is in the U.S. on business. We struck up a correspondence a few months ago after I read his book The New Silk Road (which I heartily recommend). We soon learned we are kindred spirits on a lot of what is happening around the world, and I was glad to finally meet him in person.

Simpfendorfer’s book highlights the growth of trade between China and the Arab world, a point I’ve also tried to show in my newsletters. It’s important for several reasons, not least because volumes are starting to become significant. They are also growing exponentially. For instance, a decade ago, Chinese exports to the Middle East totaled $4 billion. Today, they total more than $60 billion.

There are all kinds of investment implications from this shift in trade, which I’ve tried sorting out in these pages and in Capital & Crisis. The non-U.S.-centric trading models will affect the value of the dollar and commodities and more. Simpfendorfer talked about some of this over lunch.

If you’ve read this publication for any length of time, you know one of the critical issues is water. This is still not widely appreciated. But Simpfendorfer, who has traveled extensively throughout the Middle East and China -- and speaks Mandarin and Arabic (“Yes, I have no free time,” he says) -- will tell you it’s a “huge problem.”

In fact, when we talked about the state of the U.S. economy, Simpfendorfer ventured that water might be what keeps the U.S. on top for decades yet:

“The Silk Road has an average of 2,260 cubic meters of internal renewable water per person. The equivalent figure is 9,300 in the United States. In fact, an abundance of water is an important, but often overlooked, reason why the United States might defy its critics and remain the world’s major power through the end of this century.”

Conversely, when you look at the new Silk Road -- an area that covers North Africa, the Middle East and Asia -- water is what could “bring the region to its knees,” as Simpfendorfer says.

We talked about how water was crucial to nearly everything -- and not just for drinking. You need water to run factories and to make textiles and consumer goods of all kinds.

This week, there were many warnings in the headlines that the water crisis is worsening. Simpfendorfer talked about Syria and how a quarter of a million farmers had to abandon their land due to drought. It’s worse in Iraq, where water flows have fallen by two- thirds. Lack of water, Simpfendorfer offered, might do more harm to the rebuilding effort in Iraq than Islamic extremists.

You probably saw the headlines about Mexico. It’s experiencing its worst drought in half a century. Mexico City is close to running out of water and Mexican farmers will likely report crop losses of over $1 billion.

According to the LA Times:

“Hard hit have been corn, beans, barley and sorghum, plus livestock. Farmers and officials say the impact, including lost earnings, unpaid debts and shortages of staple foods, could be felt well into next year.

"‘Although no one wants to recognize it, there is a food crisis,’ said Cruz Lopez Aguilar, president of a national federation representing rural dwellers. He and others say increasing imports to make up for lost crops could raise food costs.”

Mexico is not alone. Kenya, Argentina, Australia, India, and other places have suffered drought this year. The problems are deeper than drought, but drought does magnify the weaknesses in the world’s water systems.

As an investment theme, it means companies that help alleviate water stress, manage water resources more efficiently or even own water resources outright, should grow in value over time.

Over the weekend, Barron’s published a favorable piece on Nalco (NLC:nyse), a stock I recommended several months ago to the subscribers of Mayer’s Special Situations. Nalco is the world’s largest water treatment company. According to Barron’s, “It is about three times the size of GE, its biggest competitor.”

The company has many solutions. One highlighted by Barron’s is 3D Trasar Boiler technology, which saves water and energy and also reduces emissions. Nalco is also just starting to crack the growing markets along the New Silk Road:

“This year, Nalco has added 80 people in China and India, and recently hired a well-known Chinese ex-diplomat to lead Nalco’s thrust there. The company has established a research center in Nanjing to develop products for Asia. With its huge infrastructure, polluted water systems and heavy dependence on coal-fired energy, China is a perfect prospect for Nalco’s anti-pollution services and equipment.”

Nalco has dramatically outperformed the S&P 500 Index since I first recommended the stock. Also interesting to note, Berkshire Hathaway owns 6.5% of the company and is its largest shareholder. Nalco won’t double or triple overnight, but it ought to remain a rewarding investment over the years.

During our lunch, Simpfendorfer talked about Hyflux (HYFXF:pink sheets), a diversified Singaporean water company. He met with the company and believes it is in a great position to prosper from the water troubles along the New Silk Road.

As for China, specifically, you might wonder what Simpfendorfer’s views are given that there is much debate right now about China’s economy. He said the next five years or so “would be very difficult,” but he did not expect China to collapse. This is very important, because if China does collapse, it would devastate commodity markets. Yet even modest growth in China could buoy commodity prices for years.

No comments:

Post a Comment