Organ Oseph: Desalination: Tapping The Oceans
Organ Oseph: Desalination: Tapping The Oceans
Organ Oseph: Desalination: Tapping The Oceans
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EQUITY RESEARCH
The Disclosure section may be found on the last page of this report.
Key Points
We expect demand for potable water to increase at a steady pace, putting considerable
pressure on current fresh water supplies and driving overall spending in the water sector.
Expanding populations and emerging economies will continue to be primary growth drivers
in freshwater consumption, while the supply of freshwater remains constrained by
insufficient infrastructure, fluctuations in weather patterns and contamination from both
naturally occurring and man-made sources.
We believe desalination, the process of removing salts and other impurities from seawater to
make potable water, will play an increasingly important role in mitigating fresh water
supply and demand disparities in water-stressed coastal areas, as its capital and operating
costs come down and become more competitive with traditional water treatment.
We expect the desalination market to increase at rates well above average economic
expansion. Annual spending in the desalination industry is estimated to be approximately
$4.3bn in 2005 and is expected to grow between 9%-14% annually over the next 10 years.
WATER
Richard Rossi
212-218-3741
RROSSI@MORGANJOSEPH.COM
September 16, 2005
Summary
As we broaden our coverage on the water sector, we will periodically focus on certain
sub-segments of the industry and add related companies that serve those markets to our
water coverage universe. In this report, we will explore the topic of desalination, the
process of removing salts and other impurities most often from seawater to make it
cleaner, or potable.
As we have previously mentioned in our January water sector initiation piece, Investing in
Water: Is the Glass Half Empty or Half Full?, increases in water demand due to growing
populations and the needs of emerging economies are expected to outgrow viable water
supplies, which are already constrained by insufficient infrastructure, fluctuations in
weather patterns like droughts, and contamination from both naturally occurring and man-
made sources. While it may be uncertain which solutions will be most heavily utilized to
alleviate the supply/demand imbalance and fulfill the requirements for clean and safe
water, one thing is clear – more money will have to be spent in the sector during the next
several decades. Increased public awareness of both water supply and quality issues has
further added to a sense of urgency regarding investment in these markets. Although we
do not expect spending in the water sector to increase exponentially any time soon, we do
believe that expenditures in this sector will grow at better than overall Gross Domestic
Product (GDP) rates in the US and other developed economies. In many developing
economies and certain niche markets, growth rates could easily outperform overall
economic growth and reach low double-digit levels.
One such niche water market that we expect to exhibit above-average growth
characteristics is desalination. Expanding coastal populations in the South Eastern and
Western US, as well as the Mediterranean and Middle East, along with economic
development, especially in Asia, are expected to push many of these areas, which often
have stressed water supplies, to seek out alternative water sources. Converting seawater or
brackish water to potable water is one method that continues to garner more interest. In
the past, the high cost of desalination, related to the relatively high use of energy and
other process inefficiencies, has been the main hurdle for wider acceptance of this
approach outside of oil-rich areas like the Middle East. However, advances in technology
have made systems more efficient and lowered the costs considerably. In addition,
increasingly strict EPA regulations have added to the expense of traditional water
treatment and made desalination a more competitive option.
The global market for spending on desalination is estimated to be roughly $4.3bn in 2005
and is expected to grow at low double-digit rates over the next several years. These
favorable growth fundamentals have attracted the attention of some larger companies,
looking to expand their water-related business. Most notably, in the last year, General
Electric (GE - $34.38 - NYSE) entered the desalination industry in November 2004 by
acquiring Ionics, a company with a variety of leading-edge membrane technologies, as
well as a wealth of experience in the design and construction of desalination plants. GE is
not alone in its interest in desalination. According to a Frost & Sullivan report, over 200
public and private companies serve the desalination industry. The market contains a wide
variety of players ranging from large engineering and construction providers, such as
Doosan Heavy Industries and Construction (a subsidiary of Doosan Co.: 000150.KS -
17,250KRW - KSE) and Fisia Italimpianti (a subsidiary of Impreglio: IPG - €3.47 - IM);
subsidiaries of large international conglomerates that provide an array of desalination and
other water-related services, like Degremont (a subsidiary of Suez: SZE - $29.63 -
NYSE), Ionics and Sidem (a subsidiary of Veolia: VE - $42.62 - NYSE); specialized
technology producers that manufacture membranes and valve systems, like FilmTec (a
subsidiary of Dow Chemical: DOW - $43.52 - NYSE) and Energy Recovery, Inc. (ERI);
and regional players that focus on specific geographic markets such as Consolidated
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September 16, 2005
Water (CWCO - $19.96 - NASDAQ); Waan Enviro Tech and GETCO. (See Appendix
on pages 11-15 for a larger list of companies in the desalination industry).
Key Points
Increasing Demand for Potable Water Drives Overall Spending
Rising demand for fresh water, for which there is a limited supply and no real substitute,
is expected to continue to drive increased spending in the water market over the next
several decades. Fresh water is essential for human existence. Beyond direct consumption
and agricultural needs, fresh water is vital for industrial production, energy generation and
even recreational uses. Although it is one of the most common substances in the world,
the majority of water is either in the form of ocean saltwater, frozen in glaciers or trapped
underground in inaccessible aquifers, leaving less than 1% of total water as fresh water
readily available for human use. Considering that the total number of people on earth is
expected to increase from six billion in 2000 to nine billion by 2050, global population
expansion will continue to require higher levels of water withdrawals from present water
supplies, many of which are already at or near capacity thresholds. This increased demand
will be an important driver of all types of water-related spending aimed at improving the
efficient use, sanitation and distribution of the existing water system, as well as
identifying and developing new fresh water resources. While a rise in water expenditures
will occur globally, we expect low-to-mid-single digit growth in developed countries, as
their population growth is forecast to be relatively slow and the infrastructure to deliver
water is mostly in place. In developing countries, the impact of higher growth rates in
populations combined with human migration from rural areas to cities, increased
industrialization and a growing consumer class will all put tremendous stresses on already
limited water resources and infrastructure. This should raise the need for higher rates of
water-related spending in these regions to develop increased supplies of clean, potable
water and the systems to distribute that water to end-users.
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September 16, 2005
Asia
25%
EMEA
65%
A 1999 study tracked global desalination capacity and showed, not surprisingly, that the
Middle East dominated in total volume as measured in cubic meters per day with over
half of the world’s desalination capacity (see Table 2). Saudi Arabia led all countries in
desalination capacity, with over 25% of total volume. North America was second in total
desalination capacity, with a majority of desalination plants in California, Texas and
Florida. In Asia, which represented about 11% of total volume, almost half of that area’s
capacity was in Japan and South Korea. Spain and Italy each account for roughly 30% of
capacity in Europe, which accounted for 8% of total global capacity.
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September 16, 2005
Africa Other
5.3% 1.3%
Europe
8.1%
Asia ex Middle
East
10.7%
Middle East
56.1%
North America
18.5%
In terms of new desalination capacity, we expect the Middle East to remain the largest
market with notable growth areas in Africa and Europe, mostly in countries bordering the
Mediterranean. According to the Global Water Intelligence’s May 2005 Desalination
Tracker, which follows a wide-ranging list of large international desalination projects,
there are over 120 desalination plants that are either in the initial planning phases or are
currently under construction throughout the world. The Middle East continues to be the
biggest consumer of desalination technology requisitioning over half of all new
desalination capacity (see Table 3). Africa accounts for the second largest amount of new
plant volumes, mostly in Algeria and Libya. Europe and North America each represent
roughly 11% of new plant capacity. Strong market activity in these regions includes Spain
(roughly 90% of new European capacity) and California (over 55% of added capacity in
North America).
Table 3: 2005 Desalination New Capacity by Geography as Percentage of Total New Capacity
Other
Africa 2.4%
14.5%
Europe
11.3%
Middle East
Asia ex Middle 54.0%
East
6.1%
North America
11.6%
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September 16, 2005
Consumables
3%
Fixed Charges
Maintenance & Parts
37%
7%
Labor
4%
Membrane
Replacement
5%
Electric Power
44%
Cost decreases have been driven by many factors, including increased vendor
competition, as well as technological advances in reverse osmosis (RO) membrane
performance and production. An RO element, which is the unit that holds the filtration
membranes now costs less than half of what it used to and lasts more than twice as long.
Considering an RO desalination plant can have over 10,000 RO elements, the savings in
capital expenditures are estimated to be substantial. Increases in energy efficiency of RO
plants have also taken down operating costs, as newer facilities require just one-fifth the
energy on a per-gallon treated basis as a plant did over 20 years ago (see Table 5). Some
distillation plants have found ways to lower energy costs by collocating with power
facilities and using the excess heat emitted from electricity generation in the distillation
process. In addition, hybrid desalination plants that use a combination of both RO and
distillation technologies have been shown to reduce operating costs by as much as 15%,
according to a study by the Middle East Desalination Research Centre.
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September 16, 2005
- -
1980 1990 2000 2001
All of these cost improvements have brought the price of desalination down by as much
as 80% over the last 20-25 years. For example, RO treatment costs for a 2002 plant in
Singapore were approximately $1.53 per 1,000 gallons (see Table 6), which is a
significant improvement when compared to the cost of $9.20 per 1,000 gallons from
plants in the early 1980’s. However, despite the drop in costs, desalination is still more
than, and in some cases almost double, other traditional methods of water purification.
While we believe desalination will continue to be a growing market, as it becomes a more
competitive option to traditional water treatment, this technology needs further price
improvements before it is used on a wider scale, outside of areas that have a large amount
of inexpensive energy, as is the case in the Middle East, or have limited fresh water
supply options, like island and desert regions.
- 0
1980 1990 2000 2001 2002
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September 16, 2005
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September 16, 2005
Distillation
Thermal distillation is a method that involves heating a liquid into vapor, which rises and
leaves behind most contaminants. The vapor is then condensed back into liquid form to
produce a more purified liquid. Thermal distillation basically mirrors the earth’s
hydrological cycle, where surface water evaporates, then becomes clouds in the
atmosphere, before returning to the ground as rain. In a thermal distillation desalination
plant, it essentially follows the same process. Feedwater is heated into vapor, which is
then channeled into a separate chamber. That vapor is then cooled and condensed into
cleaner water. Thermal distillation desalination plants require a lot of energy to heat the
large amounts of seawater, but usually require less pre-treatment and can desalinate lower
quality feedwater, when compared to RO desalination plants. Thermal distillation is the
preferred technology in the Middle East, primarily the Gulf States, reflecting the relatively
low costs of energy and the high salinity of the water in the Arabian Gulf, which can
negatively impact the performance of RO membranes.
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September 16, 2005
In 2005, both the House and Senate introduced identical Bills to authorize the Secretary of
Energy to make incentive payments to the owners or operators of desalination facilities to
offset the energy costs required to operate the facilities. The Bill would make a payment
to the operator of $0.62 for every 1,000 gallons of desalinated water produced and sold.
Surely, this subsidy would help defray costs. However, the bills appropriate a total of
$200mm over the course of five years, from 2006-2010. This roughly equates to
maximum funding for a volume of 175,000 gallons per day, which is the total
approximate capacity of four new plants being proposed in California. While this is a step
in the right direction, we believe that, if the Federal government is to make any major
impact on wider-spread use of desalination in the US, it will need to expand its programs.
Taking into account the current budget deficit, we do not anticipate any significant
increases in this type of desalination funding in the near future.
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Desalination Industry Overview September 16, 2005
GETCO is one of the first Saudi companies specializing in the design and supply of
Designs and supplies water, waste treatment and water
GETCO Private water, waste treatment and water desalination systems. Since 1965, GETCO has
desalination systems.
developed and expanded its facilities, expertise and manufacturing capabilities.
Hyflux is one of Asia’s leading water purification and fluid treatment companies with
Develops and manufactures membranes and provides experience in the manufacture and use of membrane and related technologies for
services related to process design and optimization, liquid/solid separation. Its product offerings range from customized liquid treatment
Hyflux SES:600 - 3.62SGD - SI
engineering procurement and construction management, plants for both industrial and municipal applications. It also offers a suite of turnkey
installation, operation and maintenance of desalination plants. services including process design and optimization, engineering procurement and
construction management, installation, and operation and maintenance.
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Desalination Industry Overview September 16, 2005
Nalco is the leading provider of integrated water treatment and process improvement
Services and chemicals to analyze, evaluate, and pre-treat
Nalco NLC - $17.53 -NYSE services, chemicals and equipment programs for industrial and institutional
feed water, as well as services for membranes.
applications.
Pall Corporation is the global leader in the rapidly growing field of filtration,
Provides advanced design reverse osmosis technologies to
separations and purification. The company provides leading-edge products to meet
provide high grade drinking water from seawater or other
Pall Corporation PLL - $28.27 - NYSE the demanding needs of customers in biotechnology, pharmaceuticals, transfusion
sources in a single automated process, without the need for
medicine, semiconductors, water purification, aerospace and broad industrial
chemical cleaning or pretreatment.
markets.
Piedmont Pacific specializes in stainless steel couplings for wet and corrosive
environments, where high strength and long service life are required. Water,
Piedmont Pacific Corporation Private Manufactures stainless steel flexible pipe couplings. wastewater, seawater and some chemical process industries have these
requirements and stainless steels have proved over time to be the most cost-
effective materials for these applications.
SIDMAS (Saudi Industries for Desalination Membranes and Systems Limited) is the
SIDMAS Private Develops and manufactures a variety of membranes. only Saudi company specialized in the production of membrane elements for water
desalination by reverse osmosis, nanofiltration, ultrafiltration and microfiltration.
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Desalination Industry Overview September 16, 2005
Cadagua, S.A., an engineering company that builds water and waste treatment
Subsidiary of Ferrovial
Cadagua Designs, builds and operates desalination plants. plants, is the leader in Spain and has international prestige in seawater desalination
(FER - €62.25 - SM)
installations.
Camp Dresser & McKee CDM is a consulting, engineering, construction, and operations firm with public and
Private Designs, builds and operates desalination plants.
(CDM) private clients worldwide.
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Desalination Industry Overview September 16, 2005
Subsidiary of the OHL Group The OHL Group provides integrated solutions to environmental problems.
Inima Designs, builds and operates desalination plants.
(OHL - €12.50 - SM)
Kindasa provides water services by producing high quality, pure and healthy potable
Designs, builds and operates reverse osmosis desalination
Kindasa Water Services Private water that matches both international and local standards. Kindasa has adopted the
plants.
reverse osmosis system for its plant, the technology of the future.
Designs, builds and operates reverse osmosis desalination Metito is a world leader in the design and supply of water / wastewater treatment and
Metito Private
plants. water desalination systems.
Mitsui & Co., Ltd. and its subsidiaries engage in general trading business. It involves
a range of global business activities, including worldwide trading of various
commodities; arranging financing for customers and suppliers in connection with its
Subsidiary of Mitsui & Co., Provides project management of desalination and wastewater
Mitsui USA trading activities; organizing and coordinating industrial projects; participating in
Ltd. (MTS1 - €8.94 - GR) treatment projects.
financing and investing arrangements; assisting in the procurement of raw materials
and equipment; providing technologies and processes for manufacturing; and
coordinating transportation and marketing of finished goods.
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Desalination Industry Overview September 16, 2005
Develops, invests in, and manages water supply projects with a focus on seawater
Poseidon Resources Designs, builds and operates reverse osmosis desalination
Private desalination, water treatment, and reuse. Provides the link between financing and
Corporation plants.
construction and operations of water supply and wastewater treatment infrastructure.
Subsidiary of SACYR
SADYT is devoted to the design, construction, investigation, maintenance and
Sadyt VALLEHERMOSO Designs, builds and operates desalination plants.
operation of water treatment systems and was established in February, 1995.
(SYV - €23.11 - SM)
Subsidiary of Veolia Sidem specializes in the outsourced management of water services for municipal or
Sidem Environmental Designs, builds and operates desalination plants. industrial customers, it is a world leader in engineering, design and execution of
(VE - $42.62 - NYSE) construction projects for turnkey facilities and water treatment plants.
Eni is a contractor for the design and implementation of large-scale plants for the
production, treatment and transportation of hydrocarbons; the monetization of
Subsidiary of Eni
Snamprogetti Designs and constructs desalination plants. natural gas (liquefaction and conversion); the conversion and upgrading of the
(ENI - €24.33 - IM)
bottom of the barrel from conventional and unconventional crude oils; chemicals;
infrastructures; and protection of the environment.
Sogex Oman is one of the Sogex Group Companies and provides supply,
construction services for large projects covering different industries on a turnkey
Sogex Oman Private Designs, builds and operates desalination plants.
basis such as building and civil construction, power and desalination plants,
electrical transmission lines and associated sub-stations of voltage.
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Equity Division
Equity Research Team
Carole Cranmer Managing Director 212.218.3752 ccranmer@morganjoseph.com
Director of Research
David Kestenbaum Senior Vice President 212.218.3851 dkestenbaum@morganjoseph.com
Richard S. Paget Vice President 212.218.3894 rpaget@morganjospeh.com
Richard F. Rossi Managing Director 212.218.3741 rrossi@morganjoseph.com
Caroline Stewart Senior Vice President 212.218.3856 cstewart@morganjoseph.com
Erik Zamkoff Senior Vice President 212.218.3850 ezamkoff@morganjoseph.com
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