Despite recent strengthening of the USD since late April 2010, most emerging market currencies have seen double-digit appreciation vis-à-vis the USD since Q1 2009. This trend has created an attractive opportunity for US water treatment equipment manufacturers and technology innovators looking to ramp up export sales in growth markets like South Africa, South Korea, Brazil, Mexico, Russia and many others.

Overseas buyers of U.S. water-treatment equipment and technology benefit from a stronger local currency vis-à-vis a weak USD. And industry forecasts suggest the coming months could see sharp increases in global demand for U.S. manufactured water-treatment equipment, such as pumps, filters, valves, membranes and related water-purification or treatment technology.

Accompanying this trend are federal and state job- creation efforts grounded in export policies, such as the recently launched National Export Initiative. The NEI is the first government-wide export-promotion strategy, which aims to continue the rigorous enforcement of U.S. trade laws to make sure U.S. businesses are competing on a level playing field, improve access to credit for businesses looking to export, and improve trade promotion efforts.

A balanced view should be taken, though. In addition to the usual export risks, manufacturers are advised to note 2010-specific risks:

• Rising fuel prices (increased shipping costs)
  
• Intervention by central banks (seeking to prop up their own exports by weakening their currencies)
  
• Protectionism by leaders seeking re-election (efforts by governments to protect their own water-equipment manufacturers and jobs via trade barriers)
  
• Euro zone weakness (drives a stronger USD)

Exactly what's driving this trend and its inherent benefits to U.S. exporters is under debate. Some have cited the "capital bonanza" in emerging markets as the primary driver for stronger currencies, stemming partly from low interest rates in developed countries and rising rates elsewhere. But other experts point to the increasing credit-worthiness of emerging markets as a likely driver of this trend. Either way, a weaker USD is a boon for US exporters.

Illustrating this trend, many overseas buyers are now seeing substantially enhanced purchasing power. Since Q1 2009, the South African Rand has risen by 43%, South Korean Won by 39%, Brazilian Real by 36%, Mexican Peso by 27%, Russian Ruble by 26%, Indonesian Rupiah by 22%, Turkish Lira by 20%, Indian Ruppe by 16%, and the Malaysian Ringgit by 11%. It should be noted that all of these have lost some ground to the USD during May 2010 as many investors are selling EUR to buy USD; however, our research suggest emerging markets are likely retain a high degree of strength against the USD going forward.

The Chinese Renminbi (RMB), also called the yuan, is without question the most watched currency story of 2010. Depicted by some as the protagonist in the drama underlying complex Sino-U.S. relations, a RMB appreciation in 2010 is not a sure thing (especially considering increasing Euro zone weakness), but many agree a small appreciation before the end of the year could be in the cards. Should the RMB see substantial appreciation against the USD, U.S. water-treatment equipment manufacturers stand poised and ready to pounce on Chinese demand.

From a strategic perspective, Cornerstone doesn't advise "chasing" currency fluctuations as a sustainable strategy for U.S. equipment manufacturers; however, a trend like this may provide the rationale to launch a renewed export campaign.

In a diplomatic official statement, China's Vice Minister of Science and Technology, Cao Jianlin, said, "The policy is intended to include foreign-invested companies and Chinese-foreign joint ventures." However, similar to many aspects of businesses world over, there is the official line, and there is market practice.

This is a fight FIEs need to engage in worldwide, but expectations should be tempered by conventional wisdom that locals prefer doing business with locals, whom sooner or later, in one way or another, will return the favor.

Water equipment of technology FIEs operating or selling in China are advised to focus their business development efforts on privately invested industrial projects, or introduce product lines still unavailable in China from domestic manufacturers.

The piece of land that is Mexico has had a challenging relationship with water throughout history. With more than two-thirds of the country defined as arid or semi-arid, characterized mostly as highland or mountainous, and less than 15% of the land arable, Mexico is considered to be among the most water-constrained countries in the world.

That being said, evidence from the book Geo-Mexico indicates that though parts of northern Mexico are arid, the country as a whole receives an average of 760 mm of precipitation a year (slightly over 30 in). This is a considerable amount, more than that received by either Canada or the U.S. However, 73% of Mexico's rainfall either evaporates directly or evapotranspirates through plants. About 25% runs off into rivers and lakes. Approximately only 2% seeps down to recharge subterranean aquifers. That is not nearly enough considering increasing demand levels.

What plentiful water resources that Mexico does have are generally located in southern states, with northern states eternally facing water shortages, and are reliant on the water-thirsty U.S. via rivers and irrigation channels. Unfortunately, population and industry is primarily concentrated in regions of Mexico that face arid or semi-arid conditions like Mexico City, which lies on a high plateau and water must be pumped up to more than 7,000 feet before it reaches the tap.

Population growth presents an additional challenge for Mexico's already stressed water resources. From 1940 to 2005 Mexico's population grew from less than 20 million to more than 100 million, and though Mexico gets more rain than the U.S. or Canada, the availability of water per person in Mexico is only one-twelfth that of Canada, and about half that of the U.S. Of 177 countries analyzed by the FAO, Mexico ranked 90th in terms of water availability per person. However, if Mexico is divided into two zones, the south would rank 51st and the north would rank 131st.

Within Mexico, the Lerma Basin (between Mexico City and Guadalajara) has only about a third the national average for water availability, while the very heavily populated Valley of Mexico (containing the Mexico City Metropolitan Area) has only one-thirtieth the national average.

Although it may appear that Mexico's water challenges are rooted in geographic fortunes, and beyond the control of man, in fact the technology exists in the world today to largely stem Mexico's water crisis. So, too, do the financing and management capabilities. Unsurprisingly, the blocking factor is political, although Mexico's national water authority, CONAGUA, is undertaking historic efforts to solve a multitude of aquifer, waste water, infrastructure, and waste issues.

CONAGUA's Water Agenda 2030 highlights the priorities and underscores the necessary investment; however, it's generally recognized that Mexico's water challenges are rooted in ineffective political organization. According to some studies, 90% of bids for water-related projects come from the states, but legally the state's must rely on the country's center, CONAGUA, for technological and financing. This creates inefficient decision-making, and leads to opportunities for corruption. Spineless environmental regulators and lack of measure to enforce compliance are also cited as barriers to more effective management of industrial water use. Education and financial incentives (tariffs) would encourage less wasteful residential water use. It's estimated that about 60 million Mexicans don't pay for the water that comes out of their tap.

From an economic perspective, Singapore sees this as an opportunity to invest in state-of-the-art desalination plants, rainwater collection infrastructure, and wastewater recycling technologies. Such investment is consistent with Singapore clean-tech agenda, in which high-tech water investments will create high-tech jobs, and spur continued research in its world-class engineering institutions. It's hoped that these new sources of fresh water will eventually reduce and eliminate the need for expensive water imported from Malaysia.

Singapore's Environment and Water Minister, Yaacob Ibrahim, recently said, "With these new sources, we have diversified our water supply and built up a robust system."

As far as the five million Singaporean residents and manufacturers are concerned, they probably won't notice any change if and when Singapore does manage to realize water autonomy from Malaysia. That being said, in a region of terrorism, natural disasters, and geopolitical disputes, ability to source the most elemental of all resources from one's own territory mitigates risk across the board.

Lease expiries for most of us include some degree of negotiation, and you can be sure the halls of Kuala Lumpur government are evaluating all their tactical options. Malaysia and Singapore have another supply contract that expires in 2061, which could remain untouched, or could be a negotiation point.

According the current agreement, Singapore pays three Malaysian sen (US$.01) per 1,000 gallons of raw water, in addition to rent for the land. The cost of operating the waterworks plant in Johor State, where the water is withdrawn, is absorbed by Singapore. One further concession spelled out under the current agreement calls for Singapore to subsidize the cost Johor end-users pay for their water.

Cornerstone hosts, presents at, and/or attends a number of water-industry events like those listed below. Contact us if you are planning to attend an upcoming event.

Global Water Summit, April 26-27, Paris
http://watermeetsmoney.com/

AQUATECH China, June 2-3, Shanghai
http://www.china.aquatechtrade.com/cn/en/Pages/default.aspx

2010 Bloomberg Businessweek Green Global Business Summit, June 8, Shanghai
http://www.bloomberglink.com/gatherings_agenda.php?gathering=31

AWWA ACE '10, June 20-23, Chicago
http://www.awwa.org/ace10/index.cfm?showLogin=N

China's Water Crisis: Will foreigners be part of the solution?, September 10, Milwaukee
http://www.cornerstone-international.net/news_and_events/

IFAT ENSTORGA, September 13-17, Munich
http://www.ifat.de/en

Check out our News & Events page
http://www.cornerstone-international.net/news_and_events/