The Drought On Water Profiteering Will Break ? Eventually

Which Australian company has made money from the drought? Is it a water tank manufacturer? A distributor of spray gun hoses? Actually, its ConnectEast — the listed company building the new Eastern Freeway from Mitcham to Frankston.

I recently met a beaming John Gardiner in his site office. Sitting beneath the biggest map of Melbourne youve ever seen, the ConnectEast managing director quietly explained that extended dry weather meant the Eastern Freeway construction program was ahead of schedule. There are never any puddles on the bitumen and that means the work moves ahead apace, just like the stock, which has jumped from $1.10 to $1.40 in the past six months.

But the ConnectEast story is a one-off. In contrast, the biggest stocks on the ASX are facing some very big costs if water starts getting priced appropriately. Whats more, some of the special deals that have been struck in the past between gormless government officials and sharp-eyed corporate executives will have to be reviewed, if not reversed.

The first big reversal almost happened in the lead-up to last weeks water conference in Canberra. The controversial privately owned Cubbie Cotton farm which has a water storage capacity as big as Sydney Harbour (yes, you read that right) nearly found itself under a compulsory acquisition order — that plan did not work but the story is far from over. Separately BHP, which somehow negotiated a deal with South Australia long ago allowing it to pump 33 million litres of water a day — free — into the Olympic Dam uranium mine, must be wondering when Water Minister Malcolm Turnbull will come knocking on the door.

I asked brokers if they had ever analysed the market in terms of water use and the work has yet to be done. But the big users are obvious. Alongside miners, there are brewers — 3.5 litres of water for 1 litre of beer (Fosters and Lion Nathan) — and soft drink companies — 1.5 to 3 litres for every litre of fizz (Coca-Cola Amatil).

As for the good news, its slim. In the long term, high-tech companies will emerge whose sole purpose will be to exploit opportunities from the water shortage. There are some listed examples already but they are tiny companies. More commonly, investors are putting money into well-known industrial stocks in the hope that they will make money from water-saving products, but that principle has so far proved, well, leaky. According to one leading analyst, the standout opportunity is pipe maker Crane Group, which could end up making miles of pipe to cover irrigation channels if the PMs $10 billion water program gets up and running.

Two other "water product" stocks have been Nylex and GUD. Nylex, the remnants of the once great BTR Nylex group, makes gardening equipment, but not very successfully. Its share price has been decimated over the past year. The other hopeful is GUD. Now GUD really should be in a position to make money from its range of purifiers and other water products. But believe it or not, GUD also makes Victa lawnmowers and as youve probably noticed, cutting the grass these days means slicing weeds from the dust — you dont do it too often.

GUD reported a 26 per cent drop in half-year profits a few weeks ago. Like the water issue itself, there are no easy solutions for investors.

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