1、 UBS InvestmentResearchGlobal Water - Outlook 2011 Outlook 2011 Is2011 the year for water investments?Water scarcityisrecognisedasaneconomic constraintincertainregions,particularlyChina,India, partsofAustralia and the westernUS. Increasingtariffsand more stringentregulationsfor treatmentand discharg
2、eallsupportincreasedinvestmentinthe sector. Abounce backinthe desalinationsegment is possiblenextyear after the peakinvolumesin2007 and the subsequentpronounceddecline. Implicationsof “TheReturn of the PoliticalEconomy” Access towater has alwaysbeena political issue andsubsidisedtariffs havehistoric
3、allydiscouraged investmentinthe sector. Tariffsare nowbeginningtoriseglobally,movingWater Utilitiescloser to fullcostrecovery. ChinasFactor PriceReformshould allowa marketprice for water, and US tariffsare nowstartingtorise. Re-leveraging - The Imperativeand AppetitetoPursue Financinghasalwaysbeenac
4、ritical issue for water companies,particularlythesmaller oneswho soughttoexpandplantcapacityrapidly.The Mitsui/HyfluxJVearlier thisyear allowsMitsuito enter the Chinese water market and shouldprovide the newentitywithfundingtodeveloplarger projects infuture. MostPreferred StockIdeasfor 2011 We prefe
5、r:SuezEnvironnementfor ownership ofAgbar, exposure todesalinationviaDegremontandChinese JVwithChongqing;Itron,asa majormeterplayerinthe US, where stronggrowthisforecast for smart water-metering;Hyfluxfor itssuccessindesalcontractsinMENA, the likelihood ofwinningthe contracttobuildSingaporesseconddes
6、alinationplant and strongbalance sheet fromthe MitsuiJV. Global EquityResearch GlobalUtilitiesSector Comment30 N Morgan-KnottAnalystshirley.morgan-+44-20-7567 9122Julie Hudson, CFAA+44-20-7568 4632Hubert JeaneauA+44 20 7568 3496WaterMost Preferred Stocks CompanyMarket Cap(US$bn)UBS RatingShare Price
7、 Price Target P/E 2011ESuez Environnement 9.06 Neutral13.9814.0015.27x ITRON 2.35 NeutralUS$58.58 US$70.00 11.3x Hyflux1.30 NeutralS$3.26 S$3.35 30.71x Source:UBS estimates.Priced asatmarketclose onNovember26,2010 This report has been prepared by UBSLimited ANALYSTCERTIFICATION AND REQUIRED DISCLOSU
8、RES BEGIN ONPAGE 14. UBSdoes and seeks to do business with companies covered in itsresearch reports. Asa result, investors should be aware that the firm may have a conflict of interest that could affect the objectivityofthis report. Investors should consider thisreport as only a single factor in mak
9、ing their investment decision.abGlobalWater - Outlook201130 November2010UBS 2Outlook 2011 - SummaryWhat is the outlook for Water and our central thesis for 2011?Estimatesare thatby2025 water scarcitycould affectannualglobalcrop yield tothe equivalentof losing the entire grain crops of India and the
10、UScombined(30% of globalcerealconsumption), againsta background of expected fooddemand growthof70-90% by2050. Energyproductionaccounts forabout39%ofall water withdrawals inthe USand31% ofwater withdrawals inthe EU,which isestimated togrowbyas much as 165% and 130% respectively.1Ineconomicterms2,inth
11、eUS,water shortagesare reportedtohavecost the agricultural sector $4bnper year over the pasttwo years and someestimates putthe costof environmentaldegradation andpollution atbetween 8% and 12%ofChinas GDPannually. TheUNhas stated3that water scarcityis alreadyan economicconstraintinmajorgrowthmarkets
12、 such as China, India and Indonesia, as well as commercial centresin Australiaand the western United States. Inwater investmentterms,increasing regulations aredriving greater water efficiency, favouring water reuse and setting higher treatmentstandards for water discharge which should favour treatme
13、nt, irrigation and metering companies. Indeveloping countries, there isalso asignificant infrastructure gapwhichis a large potential market for Water Utilitycompanies.Global WaterIntelligence (GWI) forecastscapex investmentof $247bn 2010-16, anincreaseof 54% over the period.Thiskind ofinvestment, ho
14、wever, isinour viewdependentonaprice beingset for water thatreflects its truevalue,andallows companies torecoup their investment. There are signs thattariffs are beginning torise, inincreasing recognition oftheir roleinpromoting conservation. GWIs surveyof globalwater tariffs showed an average incre
15、ase of 8.5% between June 2009-10, and a similar increase is anticipated next year. Withinthis aggregate figure, however, thereare somestriking numbers. For example, Australias average increase of 12.1%,mainlyreflectingthe costofdesalination infrastructure.SydneyWater is alsoconsidering theintroducti
16、onof scarcitypricing mechanismsas an alternative as partof its2012 price review4. InIndia,Water Utilities havestartedtomoveawayfrom subsidies andcloser tocostrecovery:Delhiimplemented a 47% tariff rise atthe startof 2010, whileHyderabad and Mumbai each increased rates by25%. Inthe US, as GWIpointsou
17、t, despitehigher than inflation tariff rises lastyear, manyUSconsumerscontinue topayconsiderablyless than Europeans per cubic metre of water -withthe exceptionofwater-stressedcities suchas HonoluluandSanDiego(thoughitisworth noting thatconservation measures havegonesomewaytobringing down the USs tra
18、ditionallyhigh per capitaconsumption figures insomeareas).1The Bubbleisclose tobursting;World EconomicForum,January20092UnderstandingWater Risks; WWF, March200933rdUnitedNations WorldWater Development Report: Water inaChangingWorld4Watertariffscontinue upwardmomentum;GWI,Vol11,Issue 9,Sept10 Within
19、the watersector we arepositive on treatment, irrigation and metering companiesCompeting demands forwaterforfood and energy productionWaterscarcity is already an economic constraint in some developed markets Regulations and infrastructure gap support waterinvestment Tariffs appearto be on anupwardtre
20、nd Sydney Wateris considering scarcity waterpricing as partof its 2012 price review Indian WaterUtilities are moving away from heavy subsidies towards cost recovery GlobalWater - Outlook201130 November2010UBS 3InChina, theMENAregionIndonesia, Nigeria and Mexico, thereisa trendtowards privatisation,
21、which supportsincreasing water tariffs. Ona regional basis, GWIforecasts significant investment in China; there hasbeen good expenditure inJapan though thisislikelytoleveloff. Western Europe maybe down thisyear, butthiswillneed toincrease as the requirementsof the EUWater Framework Directive (WFD) a
22、re implemented. Inthe US,resourcing challenges in the Western states and the sub-standard state of USinfrastructure suggests theneed forsignificantinvestment. However, despitetheUSeconomycoming back abitmore strongly,MENAisexpected tobe one ofthe strongestregions.UBS estimates thatof Indias $500bn i
23、nfrastructurespending over fiveyears, 17% will be spent on water supplywith a further 8% on irrigation. Interestingly,38%is forecastto bespent onpower Utilities -within which our analyst prefers companies with water inplace.5Implications of “The Return of the Political Economy” Access towater has al
24、waysbeena political issue,drivenbytariffs onthe onehandandregulationsonthe other withthe aimofensuringaffordabilitytovulnerable customers. The latter concernhas traditionallykeptwater tariffs artificiallylow,whichhas led tooverexploitation and increasing water stress insomeregions. Currently,for exa
25、mple, water tariffsare reduced by92.5% in Beijing and 70.8% inMumbai up for certain customers. Developing countries often use anincreasing block tariff(IBT), where thefirstblock of water used isdeliberatelysetbelowcost. However, indications are that this first blockis set toohighfor political reason
26、s.Internationally-citedstandards for basic water needs are usuallyinthe rangeor 4-5 cubic meters per month for a household of fivepeople6. Of17emergingAsia Utilities,onlytwohad a firstblock of thismagnitude, withthe majorityhaving initialblocks of 15 cubic meters per month or higher.7Asnoted above,
27、tariffs arenowbeginning torise globally, withan averageincrease of8.5%betweenJune2009andJune2010and asimilar increase anticipated for nextyear. Onthe regulation side, higher qualitytreatmentand water source protection measures are increasing. TheEuropeanWater FrameworkDirective required EUMember Sta
28、tes toensure by2010that waterpricingpolicies provide adequateincentives for users tousewater resourcesefficientlyand that thedifferent wateruses make an adequatecontribution tothe recoveryof costs of water services.85India Infrastructure:nextfiveyearsbiggerand better;Bansal,10thJune 10 6WHO,1997;Uni
29、tedNations,1993;Gleick,1996.7DatafromAsian DevelopmentBank,reported in:WaterTariffDesign inDevelopingCountries:DisadvantagesofIncreasing BlockTariffs(IBTs)and AdvantagesofUniform Pirce withRebate(UPR)Designs;Boland,Whittington,John HopkinsUniversity,UniversityofNC 8http:/ec.europa.eu/environment/wat
30、er/quantity/pdf/com_2010_0228_report.pdfGWI forecasts significant investment in China. Essential investment in the USmay be constrained by the economy. MENA is expected to be one of strongest regions Wateris inherently political Social tariffs and differential pricing need to become morerefined toen
31、able investment Tariffs are beginning torise globally, increasing 8.5% June 09-10 Increasing regulation towards higherquality treatment and watersource protection GlobalWater - Outlook201130 November2010UBS 4Inits latest price review,UKregulatorOfwat,for the first time set financialincentives tosupp
32、ortwaterconservation,includingwater efficiencytargets andsustainabilityindicators for larger water suppliers.9The non-regulated utilitieswill haveto offset reduction in water supplied as water conservation increases. Suez Environnement, for example,has estimatedthe volumeofwater billedinFrance has d
33、eclined byroughly1% peryear, over the lastfifteen years10. Tocounter this, Suez isfocusing on gains inproductivity, the establishmentof contracts independentof volume and developmentofservices withgreater added value inboth the production and distribution of drinking water andwastewater treatment. I
34、nthe US, there isgrowing recognition thatcertainindustries can haveasignificantimpacton water resources. Hydraulicfracturing (fracking), forexample,notonlyuses vastquantities ofwater tostimulate the productionofoilor gas fromdeep rockformations, the process alsohas the potentialtocontaminate the sur
35、rounding aquifers withthe waste fluids fromthe process, which contain certain chemicals. Inmid-September, Wyoming became the firststate torequirenatural gas producers topubliclydisclose the chemicals theyuseintheir hydraulicfracturing water. Regulatoryexperts sayother statesmaysoon follow11.InColora
36、do12, an April2009Supreme Courtruling stated thatwater permitswere required for oiland gas production incoalbed methane (CBM) depositsthatpumped tributarygroundwater. However, Colorado State Engineer DickWolfe decided that33 of the aquifers used inCBMproduction were non-tributary,exempting manyCBM p
37、roducers fromthe ruling. 15 plaintiffs arenowsuing State EngineerWolfe, includingthe Denver Board ofWaterCommissioners, and the cities of Boulder, Durango and Sterling as well as tworanching families who argue that CBMgroundwater pumping undermined theirsenior water rights. Inan acknowledgementof th
38、e intensive water abstraction bypower producers,the California State Water ResourcesControlBoardruled inOctobertophaseoutallOnce-Through Cooling (OTC) systems13, which relyon river or sea water for cooling. Thisisthen dischargedback intothe aquaticenvironment,often at temperatures significantlyabove
39、 the ambient receiving water which isharmfultoaquaticlife and disrupts the eco-systemof the water body. Power plants willbeable tochoose between implementinga closed-cycle cooling system, such as a cooling tower, or another unspecified structure and allplantsare required to be in compliance by2024.
40、Ofthe 19 USplants that use oceanwater for once-through cooling, the highest conversion costs will likelybe for nuclear plantsthatrequire significantlymore water for cooling. 9OfwatsForward Programme2010-2011;OfwatPR09/15 forthe period2010-15 10SuezEnvironnementProspectus,17thSeptember201011Newfracki
41、ngrules inWyoming;AmericanWater Intelligence, Oct 1012 Pumping outgroundwaterinpursuitofcoalbed methane seemstobe leading toa legalquagmire.13California ordersplantstocutintakeflow by93%;GWI,Nov10 Price incentives shift away from volumetric pricing; non-regulated utilities may have tooffsetdeclining
42、 volumes In the US, the impact offracking on waterresources is beginning to attract regulatory attention Waterpermitting dispute overcoal bed methane operation OTC systems being phased outforpowerproducers in California GlobalWater - Outlook201130 November2010UBS 5This policyaimstobringthermoelectri
43、c plants incompliance withtheCleanWater Act,which requiresthatthe the location, design, construction, andcapacity of cooling water intake structures inpower plantsmustreflectthe besttechnologyavailable for minimizing adverse environmentalimpact. Aclosed-cycle cooling systemuses between 93% and 98% l
44、ess water than a once-throughcooling system. Californias movecould promptother regulatoryagencies, including the EPA,to place restrictions on water use in USpower plants. The Districtof ColumbiaWater andSewerAuthority(DC Water) isunderfederalmandatetocutby45% the amountof nitrogen thatitreleases int
45、othe Potomac River and Chesapeake Bay.The deadline is2015 and was imposed bythe EPAwhenit issuedthe treatmentplants new five-year operatingpermit.The utilitys response is a $950 million projectthat consists mostlyof a tunnelmeant toholdthe excess stormwater that currentlycantbe fullytreated.14Thewor
46、k isscheduledtobegin in2011andbe completed by2014 and DCWaterestimates that local water rates could increase tenfold. Animportantaspectof Chinas 12thFiveyear plans market reforms is Factorprice reform, when marketpricing willbe introduced for the first timefor resources such as coal, oil, gas, elect
47、ricity, and water.AsUBS AnalystTao Wang pointsout, the currentChina growthmodelhas favoured industrialgrowthwith(often implicit)subsidies on land, energyand resources, and laxenforcementon environmentalregulations. Asa result,growthhas beenexcessivelyresource andenergyintensive,threateningthe sustai
48、nabilityofChinas long termgrowth.15The ChineseNDRC (NationalDevelopmentand ReformCommission) hasactuallyrequired thatallproposed power plants includea recycled water systemsince 200816and thatwater tariffs for domesticand industrialcustomers should ensure a price advantage for recycled water. The Fa
49、ctor Price reformmaysupportcompliance inthisarea, wherethere waspreviouslyless rigid enforcement and smaller penalties for non-compliance. What are thelikely key themesfor2011? Sludgemanagement GWIsuggests thatthe potentialsludge management(ie recovering materials, including energy, fromwater treatmentfor further use) has a double-driver inthatregulations are increasinglyreducing the amountofsludge thatcan be senttolandfill,andinCh
