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JPMorgan: Water Supply a Key Issue

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surf1944   Wednesday, 04/16/08 02:06:55 PM
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JPMorgan: Water Supply a Key Issue
Monday March 31, 3:07 pm ET
By Ernest Scheyder, AP Business Writer
JPMorgan Says Investors Should Closely Examine Water Supply When Mulling Investments

NEW YORK (AP) -- Wall Street has given scant attention to companies that rely directly on water for their survival, even as the world's supply of the liquid is threatened by mismanagement and pollution, a JPMorgan report said Monday.

"In many regions demand for water now outstrips renewable supplies. It is likely this gap will widen," analyst Marc Levinson said in a note to clients. "Water pollution is getting worse in many developing economies, which exacerbates the challenge of delivering sufficient water of the required quality."

Yet many companies provide only "general" information on water that neither qualifies nor quantifies the potential financial risks from a sudden supply disruption, said Levinson in the report, which was cowritten by six analysts.

"An investor in a mining company has a sense of the company's proven reserves, which play an important part in the valuation of the company," Levinson said. "No corresponding data are available on the water reserves available to companies that draw water from the ground."

The problem is especially potent in the gambling, semiconductor and beverage industries, which heavily rely on the liquid for their operations, Levinson said.

Casinos and other resort operators use water in Las Vegas operations to wow consumers with everything from water fountains to simulated Venetian canals. Yet despite several initiatives to conserve resources, Vegas has an "image problem," he said.

"Visitors increasingly are questioning the desirability of such water-based extravagance amid the area's drought-like conditions," he said.

MGM Mirage, with 81 percent of adjusted earnings coming from Las Vegas alone, is most exposed to water problems in that city, he said.

Chip makers rely heavily on water to clean silicon wafers and cool tools. Intel Corp. alone uses as much water in a year as Rochester, N.Y., which had a 2006 population of 208,123, Levinson said.

Beverage companies, which have the most direct need for water, have worked to improve water efficiency, he said. Yet Coca-Cola and other food and beverage companies treat water risk as a global issue, rather than a local and regional one, which it is "first and foremost," Levinson said.

Coca-Cola said that it is transparent about usage and conservation, which includes now using air -- instead of water -- to clean bottles before they are filled. Also, the company said its global distribution network allows it to produce products near where they are consumed.

"We do recognize that our access to safe water around the world is linked to our business," Coca-Cola spokeswoman Lisa Manley said in a phone interview. In 2002, Coca-Cola used 3.12 liters of water to make one liter of its product, but as of 2006, when the most recent numbers are available, it used 2.5 liters, she said.

Quantity and quality trends can have "clear implications" for businesses and investors, even as the "increasing competition" for water among various groups has the potential to damage growth and reputation, JPMorgan's Levinson said.

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