The End of Cheap Water?

By Chris Mayer

The price of water is starting to rise in a big way, at least in China. I’ve expected this for a few years.

Water rates in China have been so far below the global average it’s ridiculous. Especially when you consider the severe water problems in China. The Chinese are water-poor. They are sucking their aquifers dry. It is particularly bad in the north of China. The groundwater under the North China Plains is draining away quickly. By some estimates, China will exhaust this water supply in the next ten years.

You probably know that the city of Venice is sinking a fraction of an inch per year. But that’s nothing compared to what is going on in Beijing. Parts of Beijing are sinking 8 inches a year! According to Andrew Lees (The Right Game), it is the world’s largest cone of depression (an underground hole created by a depleted water table) at over 15,000 square miles. The second largest cone of depression is around Shanghai.

So finally, many cities are raising the price of water. The WSJ points out several places where water prices could rise 25-48%. Shanghai, for instance, raised water rates 25% in June and plans another 22% increase next year.

The second event that caught my eye was the collaboration between China and India to monitor the health of Himalayan glaciers. This area is very important to both countries. They fought a war over it in 1962. So, the fact that they are getting together on the Himalayan glaciers is meaningful.

Here is why it is so important: Seven of the world’s largest rivers, including the Ganges and the Yangtze, are fed by the glaciers of the Himalayas. They supply water to about 40 per cent of the world’s population.

Well, those glaciers are shrinking. The Indian Space Research Organization, using satellite images, has studied the changes in 466 glaciers. It found they had lost more than 20% of their size between 1962 and 2001.

This melting increases the water flow at first, but eventually slows dramatically as the glaciers either melt completely or reform. These observations have given rise to a kind of “Peak Himalaya” theory where people wonder if we have not seen the maximum water flow from the mountains.

We know the current run rate on demand is already well above what is sustainable given annual rainfall and river flows. That’s why you have those depressions under Beijing and Shanghai. That explains the depleted aquifers and the rivers that don’t reach the sea. Now throw into that ugly brew a decline in water supply from the Himalayas. The situation is worse than it seems, if that is possible, because much of the existing fresh water in both countries is so polluted it is unfit for human consumption.

As if all of that weren’t bad enough, the demand for water is still rising rapidly in China and India. The water use per capita in China and India are still well below global averages. As these countries industrialize, they’ll consume exponentially more water. It takes water to make just about everything. For example, to make a 1 tonne passenger car takes more than 100,000 gallons of water. Just to make a cotton shirt takes over 1,000 gallons of water. And most of our water goes into making our food.

So, population growth by itself guarantees increased water demand. (Globally, water consumption increases at more than twice the rate of population growth.) These two countries already have big populations and both will get bigger. When you look at demographic trends, China and India alone will add close to 600 million people over the next 30 years. That’s two present-day United States.

Fresh water, like oil, is getting a lot harder to find for 40% of the world’s population. It will get worse before it gets better. The days when we think of water as a cheap resource are coming to a close. That’s especially true for China and India.

Bottom line: We need to create more fresh water. You do that by finding new sources either through new supplies (drilling deeper, desalination, etc.) or by using existing supplies more efficiently (irrigation and other efficiency gains).

All of that takes time and energy. Desalination is energy intensive. Drilling deeper for water or going to more distant source requires energy to pump and move the water. Replacing older, less efficient plants and equipment takes time and energy again. (Detect a theme here?)

Countries, companies and people will find ways to make this transition. The companies that can solve these problems will do well.

Defense Needs Drive Tech Innovation

The Pentagon’s anticipated need for topflight advanced technology spells business for defense contractors, for sure. But many developments originally designed for military use wind up with big commercial markets as well. Check out some new technologies spurred by Defense Department demand.

• Small, portable power systems. The Defense Department wants hydrogen fuel cells, about the size of a loaf of bread, to power very small hand-launched surveillance drones. They’re under development by Protonex, a fuel cell maker in Southborough, Mass.

• Virtual piloting. Proxy Aviation Systems in Germantown, Md., is working on software to allow a single computer operator to simultaneously navigate, coordinate flight paths and communicate target and fire orders to multiple weaponized drones. Drones, in general, are an area of large government procurement growth, and Northrop Grumman, Boeing and General Atomics are banking on them.

• Tiny video lenses. The military thinks a variety of tiny, ultralightweight lenses about as slim and flat as a business card would have multiple uses, including attaching them to the underside of wings on unmanned surveillance aircraft or to soldiers’ helmets. Southern Methodist University’s engineering department is working on versions that use hundreds of tiny lenses working in concert. Images from the lenses are merged to provide single high quality video.

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Companies: New Lease Rule Means Labor Pains

Standard-setters have more than comment 150 letters to sort through before they can finish crafting a new rule for how companies account for leases, a project that has been under way for three years.

Some companies — particularly those such as airlines, retailers, and railroad companies that will be most affected — are hoping the rule-makers will take their dear, sweet time. As it is, the Financial Accounting Standards Board estimates that at the earliest, a formal rule will be in place by mid-2011, 35 years after FAS 13, the current lease accounting rule, was created. The new rule will apply to all companies that lease plants, property, and equipment.

Link to article:

http://www.cfo.com/article.cfm/14072875

The Economy – Global View – Protecting Yourself

What Are the Chinese Buying?
By Chris Mayer

The financial crisis is not over yet. The banks still need capital. And more credit losses are on the way — from commercial real estate to credit cards and everything in between. The Great Deleveraging is still under way, and that’s one reason — among many — that gold should do well.

The ripple effects of the financial crisis have been felt in all sectors, though. In the world of oil and gas, we see lots of production cutbacks and projects shuttered or delayed. Getting financing is tough. About the only people spending money are the Chinese.

One of the interesting bits of news this morning is how Brazil — looking for someone to help finance its massive oil projects — is turning to the China. Today, Brazil’s president, Lula da Silva, will arrive in Beijing to meet with Chinese president Hu Jintao.

The Chinese have lots of money. They sit on mountains of reserves and have been looking for ways to invest that money. So far, they’ve bought gold and put money toward infrastructure projects. They are also buying up natural resources around the globe — everything from rare earths to iron ore.

The Chinese want to seal a deal with Brazil in exchange for guaranteed oil shipments. See, the Chinese are looking out ahead. They know the massive urban migration going on in their borders. They know how much oil they’ll need to fuel their growth.

Brazil’s state-controlled oil company, Petrobras, wants to spend $174 billion over the next five years. That’s one of the largest capital spending plans in the world among the big oil companies. And China is a willing and able source of funds.

China’s government is looking for ways to further its long-term energy security goals. It wants diverse global supplies. It wants its own oil companies to have a foothold and be competitive on oil regions. Already, China has made $45 billion in commitments to Russia, Kazakhstan and several other countries.

By contrast, the U.S. government is too busy trying to figure out ways to hand dying automakers over to the unions. The U.S. government also has two wars to deal with, a massive deficit and a frightening debt load. Furthermore, the biggest states in the Union are in financial crisis. America’s politicians seem to spend most of their time trying to figure out how to fleece citizens and businesses of more cash.

These misguided ambitions and warped priorities are costing the U.S. dearly. “America has a problem,” complains Sergio Gabrielli, CEO of Petrobras, the state-controlled Brazilian oil company. “There isn’t someone in the U.S. government that we can sit down with and have the kinds of discussions we’re having with the Chinese. The U.S. economy cannot easily afford losing access to vast portions of the world’s energy supplies. But that’s a problem for another day.

Over in the agricultural markets, the financial crisis is also making its presence felt. Farmers have delayed or reduced their buying in fertilizers and equipment. Since we are already in a position where grain inventories are low, this is going to put a strain on the grain markets.

There is also a lot of government intervention here. For one thing, the whole biofuel industry probably would not be anywhere near the size it is today without the government support it receives the world over. This means more acreage devoted to producing alternative fuels, crowding out and raising the prices for food crops like wheat.

In general, I think we are in an age in which political risk is high. Increasingly, we’ll have to take into account what governments are doing. Most of them are broke. Most of them seem intent on bailing out banks and other failing businesses in favored industries. So that would mean the printing presses will run amok. That’s good for gold and commodities generally, which ought to preserve their purchasing power, as paper currencies lose theirs.