ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU

Clean water is one of the areas of sharpest contrast between industrialized nations and the developing world. When New Jersey faced drought restrictions last summer, suburbanites complained of dying lawns, but they still had plenty of clean water to drink. In developing countries, on the other hand, diseases caused by unsafe drinking water, insufficient sanitation, and poor hygiene related to inadequate water supply kill 5 million people each year, according to the United Nations.

	PURIFICATION An industrial wastewater plant in the U.K. uses Ciba Specialty Chemicals' water treatment products. CIBA SPECIALTY CHEMICALS PHOTO

But the world is trying to solve these problems. Water took center stage at the World Summit on Sustainable Development in Johannesburg, South Africa, earlier this year. The UN has set a goal of providing 1.6 billion people with adequate drinking water by 2015, meaning an estimated $23 billion will have to be spent on water infrastructure annually, versus $16 billion today.

Most of this money will be spent on plumbing and equipment, but chemistry will play a key supporting role in solving the global water supply problem. "Improvements to the overall standard of living in developing countries are closely linked to the availability of a supply of safe drinking water and treatment methods for the purification of wastewater," says Mark Garrett, head of Ciba Specialty Chemicals' water and paper segment. "The infrastructure must be available to provide this in order that our product lines can be used in a reliable and efficient way."

Ciba supplies flocculants and coagulants to the water treatment industry, as do competitors such as Ondeo Nalco and France's SNF Floerger. Flocculants help particles bind together so they can be removed from water. Coagulants neutralize charge on particles so they can stick together. The two types of chemicals are often used in concert in water treatment processes. Specialty chemicals companies also supply biocides, antiscale agents, and other specialty products to the industrial and municipal water treatment sectors.

These chemical producers supply water treatment services companies such as GE Betz, Ondeo Nalco, Drew Industrial, and USFilter. Companies like these do plenty of chemical formulation and even some of their own chemical synthesis. However, they see themselves as service companies first and foremost. They strive to act as consultants to the water treatment process, to the point that they are starting to run customers' water treatment plants.

"In any of the chemical water treatment companies, the main things we supply are service and technology. The products are almost secondary," says Len Gelosa, vice president and general manager of Ashland's Drew Industrial Division. For example, he says, Drew recently helped a metal ingot maker save about $10 million by using advanced automation technology to control water chemistry.

 WATER TREATMENT is a niche market for the specialty chemicals industry. According to Ray Will, a specialty chemicals consultant with SRI Consulting, the global market for specialty chemicals in water treatment is worth $5 billion, representing about 1 to 2% of the overall specialty chemicals market.

Will says the water treatment business is fairly mature in the developed world, especially the U.S., which accounts for $2.8 billion of the market and experiences annual growth of about 2.5%. Western Europe is an $800 million market with growth of about 2.7%. In Japan, specialty chemicals for water treatment is a $700 million business with 2.2% annual growth.

Will says European countries rely more heavily on commodity chemicals for wastewater treatment than on specialty chemicals. For example, some European countries tolerated ocean dumping of municipal and industrial water treatment sludges until just a few years ago. "Sludge disposal is something that the U.S. market has been much more concerned about," Will says, adding that the situation in Japan is similar to that in Europe.

It should come as no surprise that in the developing world, the water treatment market isn't so mature. Charles K. Brennan, president of Brennan Research, puts the global growth rate of water treatment chemicals and services at 4 to 5% annually. He says growth in Southeast Asia, China, and Latin America is about 7 to 8%.

In the developing world, municipal water infrastructure is often in its infancy, according to Ciba's Garrett. "The general driver is the improvement of the overall water purification process," he says. "To do so cost-effectively is a factor that is even more crucial in developing countries."

On the industrial side of the water treatment business, Will says growth in the developing world is higher than in the developed world because multinational companies are moving manufacturing there and bringing advanced waste disposal techniques in the process.

Peter W. Nichols, president of SNF Holding Co., the U.S. subsidiary of SNF Floerger, says his company is expanding two U.S. plants, largely to support growth in Asia. "We envisage that the majority of our business in 10 years will be in the Far East relative to today, where it is a minority," he says.

There are still some sectors in the developed world where water treatment is seeing growth. Wastewater is one of these because of ever-changing discharge regulations, Nichols points out. "The government legislates tighter controls in what public and private companies can discharge," he says. "Every time they enact something that's more stringent, the quality of wastewater needs to be improved, and if that's the case, customers will buy more of the products we provide." Wastewater treatment is growing at about 7% globally per year, Drew's Gelosa says.

Desalination is another such area, growing at about 10% per year globally, says David Cartmell, vice president of Great Lakes Chemical's industrial water treatment business, which supplies scale control agents for reverse osmosis membranes. About 50% of the drinking water in the Middle East depends on Great Lakes' products, he says, and growth is about 13% annually.

Rampant acquisitions over the past five years can be seen as evidence that some companies saw the global emphasis on water coming. Major deals in treatment services during this time include GE's acquisition of Betz Dearborn; Vivendi's acquisition of USFilter; and Suez Lyonnaise's purchase of Nalco, Calgon, and Aquazur. Deals in upstream chemicals include Ciba's purchase of Allied Colloids and Great Lakes' acquisition of FMC's process additives division.

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SERVICE An Ondeo Nalco sales representative inspects water at a refinery. ONDEO NALCO PHOTO

BUT SOME EXPERTS say that in fact it was the maturity of the industrialized market that drove acquisitions in the water treatment business. Brennan says times have changed from the late 1980s, when water treatment was one of Wall Street's favorite sectors. "The growth, profitability, and health of the industry have been anemic," he says, adding that the move of manufacturing to developing economies, particularly in Asia, has eroded the U.S. industrial water treatment segment.

SRI's Will agrees. "The trend through the recession is that we have seen the closure of certain types of capacity," he says. "The only way to squeeze money out is to consolidate business."

Great Lakes' Cartmell is more of an optimist, maintaining that maturity is really a factor only in the U.S. industrial market. If revenues are down, he says, it's because of prices, not volumes. "Water treatment is a reasonably recession-proof business," he says. "People always need air-conditioning units, drinking water, and cooling towers. We don't see much downturn, but we see pressure on pricing from the big end uses."

Cartmell says the price pressure is happening because of the economy and also because of Asian suppliers copying specialty chemicals that lose patent protection and making commodities out of them. "The Chinese and Indians are extremely adept at copying," he says.

Elie Saad, director of performance chemicals for Bayer Corp., which supplies antiscale additives, says this factor spurs specialty chemicals companies to come up with new technologies. "In chemistries that are not state of the art, there is competition, primarily from China," he says. "It is keeping us on our toes and forcing us to be more innovative." For example, Bayer developed iminodisuccinate, a chelating agent that received a Presidential Green Chemistry Award from the Environmental Protection Agency.

Although some acquisitions in water treatment are mere consolidation or cost-cutting measures, some companies are clearly staking a claim in a promising business. For example, Ciba didn't have a water treatment business before it purchased Allied Colloids. Its stated intention was to develop a strong foothold in a growing market.

ALSO, CONSOLIDATION is leading to complementary technologies and capabilities that enhance the products and services that companies can offer to customers. "Consolidation is driven by the fact that this is a technology-driven business," says George Oliver, vice president and general manager of GE Betz. "If you don't have leading-edge technology, you can't compete."

Outsourcing--in which a service company runs a customer's water treatment plant--is a trend behind much of the deal-making. William J. Roe, chief operating officer of Ondeo Nalco, says industrial outsourcing is still too small to be called the latest craze. "It is still a concept in its infancy," he says. "I'm not sure the total market is in excess of $500 million to $600 million."

But there are advantages to outsourcing that make it an attractive growth area. "The industrial marketplace is tight on capital," Roe says. "Outsourcing is a viable option."

Suez, a French infrastructure services company, purchased Nalco as a means of nurturing the new market of industrial outsourcing. "The Suez strategy is to take the privatization that they were doing in Europe in the municipal sector and bring it into the industrial sector," Brennan says. "Nalco represented an opportunity to add thousands of industrial accounts," he adds.

Roe agrees, pointing out that under Suez' ownership, Nalco has progressed from providing services to its industrial customers to actually operating their water treatment units. "With Nalco, Suez has the best supplier of water treatment and process services to industry in the world. We have become the conduit for expanding the Suez offering to industry," he says. "We lacked some of the resources and skill sets to be able to do outsourcing alone, but with the Suez group behind us, we have the resources to pull those together."

	FLOOD Water rushes around a cooling tower system distribution deck. ONDEO NALCO PHOTO

NALCO STARTED signing outsourcing contracts several years ago in a joint venture with USFilter. The joint venture signed between 30 and 40 such contracts before it was broken up by Vivendi's acquisition of USFilter and Suez' purchase of Nalco. Since then, Ondeo Nalco, as part of Suez, has signed hundreds of outsourcing clients.

The cross-fertilization also brought Ondeo Nalco into municipal wastewater treatment markets. "We have seen good, strong, double-digit growth performance out of our municipal group since its inception," Roe says. "It has given us a shot in the arm."

But consolidation was also part of the strategy, Roe admits. By combining three companies, Ondeo Nalco strengthened its chemical manufacturing base. "The convergence of Aquazur, Calgon, and Nalco into Ondeo Nalco was not only an expansion in terms of size and global presence, but also in the ability to consolidate and take the best of our enhanced supply chain," he says.

Similarly, GE thinks of Betz as a growth platform that it can enhance through integration. Oliver says there are chemistry synergies with GE's plastics and materials business as well as business synergies with the industrial clients of units such as GE Power Systems. "We see a lot of the customers we saw with GE," he says. "This is an acquisition where we have brought GE initiatives and a lot of GE people into the business. For us, it is a new platform where we can invest in technology and bring in innovation."

And, Oliver claims, GE is also taking technical capabilities from other divisions. "We're developing technology from GE divisions like medical systems in imaging that will allow customers to get real-time feedback on their water treatment processes," he says.

Great Lakes' purchase of FMC's process additives division also combined technologies. Though the FMC business was mainly a producer of flame retardants, it also made scale control polymers, which are now marketed with the bromine compounds in Great Lakes' Biolab biocide business. About half of Great Lakes' sales in industrial water treatment originated with FMC.

Cartmell calls the acquisition a success from a water treatment point of view, largely because there was no overlap of individual technologies. Indeed, Cartmell was with FMC and says he considered a joint venture with Biolab before the acquisition was announced.

Water treatment chemicals and services companies say their merger and acquisition activity relates directly to the increasing emphasis on the global water problem, even if they supply mainly industrial markets and not municipal potable water systems. "A lot of industrial sites use a lot of water. There is a lot of emphasis on the cost of water driven by scarcity," GE's Oliver says, adding that his company, like others, is developing technologies to recycle water that in turn add to the overall amount of water available.

THE INCREASED focus on water resources will be good for business, according to Drew's Gelosa. "I think it is inevitable that it will lead to growth and more interest in water," he says. "It is something that won't happen instantaneously, but it will happen as the strain on water increases."

Ondeo Nalco's Roe agrees: "I believe that those who are in the water treatment chemicals and services business see it is a good place to be in terms of fundamentals--the ability to grow the business and the ability to maintain a respectably profitable business."

And no one supplying services and chemistry to water treatment would disagree that they are making the world a more sustainable place. "When I talk to people outside of the chemical industry, their first reaction is that the chemicals business is a dirty industry," Great Lakes' Cartmell says. " 'No, it's not,' I say. 'What we're doing is making the quality of drinking water better.' "

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