01 October 2020 / Reese Tisdale
Identifying Water Industry Bright Spots Amidst Uncertainty
Do you feel better now, at the close of September, than in March 2020? It’s a simple question that Bluefield’s team of water experts addressed with clients during a recent webcast, Addressing Market Uncertainty: Revised Water Sector Forecasts.
Certainly, water is not the first thing that comes to mind during a recession, but mounting stresses on municipalities, industrial firms, and stakeholders are escalating with serious, long-term implications. For this reason, Bluefield analysts are tracking key elements influencing water investment decisions and market outlooks.
But even in times of uncertainty, new opportunities emerge.
As recently discussed, the team’s optimism at the start of the pandemic has eroded because of extended state quarantines, remaining high unemployment, and mercurial, if not incoherent, U.S. federal guidance. This prolonged uncertainty—supported by historical, recessionary data and dynamic macroeconomic inputs—underlies a 21% decline in municipal capital expenditures (CAPEX) over the next five years in the U.S., alone. The 188 other countries forecasted by Bluefield fair slightly better with a combined 18% decline during the same period.
But even in times of uncertainty, new opportunities emerge. The recent fallout has changed consumer behaviors, company operations, and strategic planning overnight. As such, decision makers are now being forced (or should be considering) to pivot towards more resilient services, solutions, and sectors. The following is a select list of bright spots, among others, identified by our team of water experts:
- Digital Water to accelerate over speed bumps. Bluefield’s position on the digital water market hasn’t changed all that much from initial COVID-related projections from April. A top-line contraction in digital water expenditures is forecasted in the short term—driven primarily by declines in capital- and labor-intensive, hardware-centric segments (e.g., smart metering, SCADA)—which together account for more than 70% of annual spend. However, growth in remote workforce and asset management solutions will surge in the aftermath of this downturn.
- Services and associated business models to benefit from downturn. Utilities and industrial firms are unable to defer spending on critical, day-to-day operations, in contrast to capital investments. To put things in perspective, our analysis demonstrates that municipal operating expenditures (OPEX) grow, if only at a modest pace, through recessions. Current forecasts indicate a 1.52% CAGR, which is in stark contrast to the aforementioned CAPEX outlook. For this reason, among others, organizations across the industry should be looking for opportunities to add value through aftermarket services.
- Volatility forces dynamic approaches to more COVID-resilient industry verticals. At a topline, industrial water market forecasts for OECD countries will decline by almost 23% in the 2019 through 2020 period. Although, they will rebound more quickly than municipal markets. With extractive industries bearing the brunt of the downturn, partly because of China, companies are shifting their attention to more buoyant sectors (e.g., pharmaceutical, biotech, IT & electronics). This is highlighted by Evoqua management’s recent comments pointing out that oil & gas shutdowns and COVID-related swimming pool closures have dragged down revenues (3%-5% from prior year) and that they would zero-in on healthcare segments.
- Mounting stresses on municipalities lead to opportunities for private investment in water. The longer-term financial implications could be significant for water utility owners. In the absence of significant stimulus, politicians and city councils will be forced to revisit private sector participation proposals to raise capital. For this reason, we are already seeing more outsiders looking in (e.g., private equity, critical infrastructure players) considering the water sector as an opportunity. Short of divesting, contract operations represent another path to rehabilitating assets, adopting more advanced solutions, and heading off the public concerns about water quality and deteriorating infrastructure.
Market research, when done properly, reflects the nuances and critical factors shaping changes in the competitive landscape (e.g., market share), supply chain strategies, and forecasts of a specific sector. In today’s connected environment, where we are constantly overwhelmed by information, executives need to be confident in the insights guiding their decisions. It’s uncertain times like these when a transparent methodology and credible analysis become even more important.
Since March, our water experts have been guiding clients as they address the current uncertainty surrounding their businesses, and client engagement has never been higher. We anticipate this to continue, particularly as we head into the fourth quarter and strategic planning season for 2021. Don’t get left behind, take advantage of our annual Insight Services, Consulting roster, and growing team of water experts ready to address your questions.