Morgan Stanley Gic_peakwater 11-11

8/10/2019 Morgan Stanley Gic_peakwater 11-11

1/20

Peak Water:

The Preeminent 21stCentury Commodity Story . , *

Senior Strategy ConsultantMorgan Stanley Smith Barney

. Morgan Stanley Smith Barney

New e e pments in w ter

tre tment, es in ti n ngric t re ffer pp rt nities.Over the past half century, there has been muchdiscussion of peak oil. This term, coined by geoscientistM. King Hubbert in 1956, was based on the premise thatUS oil production would peak by 1970. Then, in 2007,author Richard Heinberg extended that concept topeak everythingpeaks in population, food production,climate stability and freshwater availability. Indeed, asweve noted before (see Water: The Perfect Storm, June2010), water may turn out to be the biggest commoditystory of the 21st century, as declining supply and risingdemand combine to create the proverbial perfect storm.Freshwater stress, already at challenging levels, is likelyto deteriorate, as water withdrawals keep rising, supplydecreases due to increasing drought, snow cover melts andgroundwater abstraction grows (see Figure 1, page 2).*Edward M. Kerschner is not an employee of Morgan Stanley Smith Barney. He is a paid consultant and a member of the Global Investment Committee. His opinions are solely his owand may not necessarily re ect those of Morgan Stanley Smith Barney or its af liates.


2/20

/

According to ITTs Value of WaterSurvey, 95% of Americans rate water asextremely important, which is morethan give that priority to any other servicethey receive, including heat and electric-ity; nearly two-thirds say theyre willingto pay more now to ensure long-termaccess to clean water. A substantial majority of Americans believe signicantreform is needed, regardless of region,residence, age, political affiliation orhousehold income (see Figure 2).

S ing t e C engeGiven the challenging supply/demandsituation, the global water industry isexpected to undergo a substantial trans-formation in the near future. Businesseswill need to make further investmentsin water technology, and utilities willneed to devote more money to waterinfrastructure. Capital expenditureson water infrastructure are expected togrow to $131 billion in 2016 from $90 bil-lion in 2010, according to Global WaterIntelligence (GWI). Sales of water- andwastewater-treatment equipment toindustrial users are expected to rise to$22 billion by 2016, up from $14 billionin 2010, a 7.8% compound annual growthrate (see Figure 3, page 3). Much of this

investment growth will be driven bychanging nancial models in the munici-pal water sector. Traditionally, less thanhalf of the money invested by utilities isderived from their own operations, withthe rest of the costs being paid by localgovernments. Given the increasing nancialpressure on the public sector, this modelis no longer sustainable. Governments

will expect utilities to nance themselvesto a greater degree in the future, and theproportion of capital expenditure fromoperating cash ow is expected to riseto 62% in 2016 from 44% in 2010. 1

Despite challenges in transforming toa new nancial model, greater nancialindependence for water utilities maybe liberating for the water sector, as

Fig re 1: F rec sting n Incre sein W ter Wit r w s

Declining supply and rising demand for freshwater is leading toa sharp increase in water withdrawals. For example, the USwithdrawal rate is forecast to be between 20% and 40% by

2025, up from between 10% and 20% in 1995.

Source: United Nations Environment Programme as of February

E

More Than 40%

Water Withdrawals as a Percentage of Total Available Water

From 20% to 40%From 10% to 20%Less Than 10%

Fig re 2: Ref rm f t eN ti ns W ter S pp yIs Nee e

According to ITTsValue of Water Survey ,a substantial majority of Americans believesigni cant water-industry reform is needed,regardless of region, residence, age, politicalaf liation or household income.

Region State Area Gender Age Political AfliationHousehold Income

N o r t h

e a s t

M i d w e

s t S o u

t h W e

s t

W a t e r

- C h a l l e

n g e d S

t a t e s U r b

a n

S u b u r b

a n R u r

a l M e n

W o m e

n

t o

t o

+

D e m o

c r a t

R e p u b l

i c a n

I n d e p e

n d e n t

U n d e r

,

O v e r

,

N o n - W

a t e r - C

h a l l e n

g e d S t a t e

s

%

P e r c e n

t i n A g r e e m e n

t

Source: ITT as of September

Please refer to important information, disclosures and quali cations at the end of this material.2 |


3/20

/

evidenced by an emerging group of high-performance, self-nancing utilities.

Private water nancing was less popularin the 2000s, but this trend is expectedto be reversed as municipalities attemptto rein in spending and balance their

budgets. Private-sector participation inthe water industry should benet fromincreased demand for advanced waterand wastewater technologies, particularlythose involving desalination and waterreuse. While more than a decade agofewer than 10% of large-scale desali-nation plants were privately nanced,57% of currently proposed large-scaledesalination plants are expected to benanced through private investors. 2

Total capital expenditure on desali-nation is projected to increase to $18

billion in 2016 from $11 billion in 2010.Capital expenditures for water reuseare also expected to reach $8.4 billionin 2016, up from $4.9 billion in 2010a 9.4% compound annual growth rate(see Figure 3). China is projected to sur-pass the US as the largest market in theworld in terms of capital expendituresin the water sector, and technology andnance should continue to be the pri-mary drivers of change in the globalwater industry. 3

T e Pr emWaTER WIThdRaWalThe amount of water withdrawal as apercentage of the total water availableis forecast to rise substantially by 2025.As population growth continues, thenumber of people affected by water stressand scarcity will increase signicantly.During the past century, global waterwithdrawals have increased six-fold(see Figure 4).

Even with population growth be-ing the major contributor to elevatedglobal water-withdrawal levels, therise in demand for water has outpacedpopulation growth by a factor of two(see Figure 5).

Fig re 3: Spen ingGr wt in t e GW ter In stry

The global water industry is expected toundergo substantial transformation in thenear future. Businesses will need to make

further investments in water technology,and utilities will need to devote more moneyto water infrastructure.

Capital Expenditureson Water Infrastructure

. %

Water- and Wastewater-Treatment Equipment

Sales to IndustrialWater Users

Total CapitalExpenditures

on Desalination

Total CapitalExpenditures

for Water Reuse

% . %. %

. %

Forecast Compound Annual Growth Rate, 2010 to 2016

Source: Global Water Intelligence as of March

Fig re 4: l ng-TermGr wt in W terWit r w s

During the past century, global waterwithdrawals have increased six-fold. Inthe 20 years between 1995 and 2015,withdrawals are expected to grownearly 50%.

E

Water Withdrawals

,,,,, Cubic Kilometers per Year


Fig re 5: Gr wt inper C pit d mesticW ter dem n

Population growth is the major contributorto elevated global water-withdrawal levels.Even so, the rise in demand for water hasoutpaced population growth by a factorof two.

E

E

E

Liters per Capita per Day




4/20

/

dRouGhTSteadily increasing temperatures associ-ated with climate change and widespreadexploitation of water resources acrossthe globe have made droughts a recurringand growing threat. A National Center

for Atmospheric Research (NCAR) studyconcluded that the US and many otherpopulous countries face an increasedthreat of severe drought in the comingdecades. 4 The majority of the westerntwo-thirds of the US is expected to besignicantly drier by the 2030s, puttinglarge parts of the nation at risk for ex-treme drought. Other regions that couldencounter considerable drought includemost of Latin America, the Mediter-ranean border regions, Southeast Asia,Southwest Asia, Africa and Australia

(see Figure 6). The NCAR study alsosuggests that drought risk should de-cline in this century in the majority ofNorthern Europe, Russia, Canada, Alaskaand parts of the Southern Hemisphere.The globes total land areas, however,should be drier overall.

Even recent heavy rains and oodingmay not mitigate drought-induced watershortages. According to Brian Fuchs,a leading climatologist at the NationalDrought Mitigation Center, temporaryspikes in rainfall and ash oods do notsufficiently abate the issue of long-termdrought. Whenever there is a lot ofmoisture in a short period of time, thepotential exists for rapid improvement,says Fuchs. While that possibility ex-ists, it wont necessarily mean the endof drought in those areas. Accordingto Fuchs, it is very difficult for waterto effectively inltrate the surface ofdrought-stricken regions because of thesubsequent hardening and compactingthat occurs in the top layers of soil.

Fig re 6: F rec sting h tter, drier F t re

The Palmer Drought Severity Index indicatesthat there is considerable drought risk forthe western US, most of Latin America, theMediterranean border regions, Southeast

Asia, Southwest Asia, Africa and Australia.

Source: University Corporation for Atmospheric Research as of October

PacifcOcean

PacifcOcean

AtlanticOcean

IndianOcean

Equator

t

Dry Wet

C n iti n 8 4 3 . . 3 4 8

T e P mer dr g t Se erity In ex

t

PacifcOcean

PacifcOcean

AtlanticOcean

IndianOcean

Equator

t

PacifcOcean

PacifcOcean

AtlanticOcean

IndianOcean

Equator

t

PacifcOcean

PacifcOcean

AtlanticOcean

IndianOcean

Equator



5/20

/

SNoW CovERThe increased climate variability through-out the world has severely affected theearths snow cover and glaciers (see Figure7). During the last several decades, theamount of ice and snow, particularly inthe Northern Hemisphere, has declineddrastically as a result of global warmingand shifting precipitation patterns. Thereduction in ice and snow volumes hasboth global and local implications onclimate, ecosystems and world wateravailability. The average monthly snow-cover extent in the Northern Hemispherehas declined 1.3% per decade in the last40 years, with the largest decreases in thespring and summer months. 5 In the nextseveral decades, the ice albedo feedbackwhereby melting snow exposes more darkground, which in turn absorbs heat andcauses more snow to meltwill acceleratethe rate of Arctic sea-ice melt. Projectedincreases in global air temperatures willdiminish the extent of the snow coverand induce premature snow melt; thisreduction in overall snow cover will itselfexacerbate global warming.

The United Nations EnvironmentProgramme (UNEP) forecasts that themajority of middle latitudes will experi-ence snow losses of as much as 60% to80% in monthly maximum snow-water

Fig re 7: dec ine in t e N rt ernhemisp eres Sn w C er

During the last several decades, the amount of ice and snow,especially in the Northern Hemisphere, has declined dramaticallyas a result of global warming and shifting precipitation patterns.

Source: National Oceanic and Atmospheric Administration as of August

Decline in North America Snow Cover

.

.

.

.

M i l l i o n

S q u a r e

K i l o m e t e r s ,

- M o n

t h A v e r a g e

Decline in Eurasia Snow Cover

Fig re 8: l ng-TermWe t er F rec st C sf r less Sn w C er

The United Nations Environment Programme forecasts that the majority of middlelatitudes will experience snow losses ofas much as 60% to 80% in monthlymaximum snow-water equivalent by theend of the century.

Source: United Nations Environment Programme as of June

-98% to -75% -75% to -50% -50% to -10% -10% to 10% 10% to 50%

Pr jecte Percent ge C nge in Sn w C er,-t - Peri vers s-t - Peri



6/20

/

the reduction of rural poverty through-out the world and, in many nations,governments continue to bolster theagricultural industry by subsidizingirrigation projects and promotingirrigation-friendly policies. The Indi-

an government, for example, providesfree electricity toward the extractionof groundwater. The proliferation ofagriculture will continue to strain globalwater resourcesa seemingly inevitableoutcome in a world that continues togrow in both size and wealth.

The Millennium Development Goals,a framework of eight international devel-opment goals that all 193 United Nations(UN) member states and at least 23 in-ternational organizations have agreed to,aim to free people from extreme poverty

and multiple deprivations by 2015. Thevolume of water for agriculture will needto increase in order to achieve the targetof halving, between 1990 and 2015, theproportion of people who suffer fromhunger (see Figure 10, page 7). To ef-fectively decrease global famine, agricul-tural outputand therefore water usemust increase.

equivalent by the end of the century. 6 The sharpest declines are expected totake place in Europe, while the UNEPmodel anticipates increases in the Ca-nadian Arctic and Siberia (see Figure 8,page 5). Snow is a vital water resource

for ecosystems and human activities, andchanges in snow cover and snow extentin the decades to come are likely to havesignicant consequences.

GRouNdWaTER abSTRaCTIoNApproximately 2.5% of the earths wateris freshwater, of which 69% is in gla-ciers and the polar caps, 30% is freshgroundwater and 0.3% is in lakes andrivers. Total withdrawals of water ac-count for 10% of renewable water, al-though in some countries this number

is more than 100%. 7 Overextraction ofwater becomes an issue when more than20% of renewable water is withdrawn,and by that standard the world is notfacing a water crisis.

At the heart of the issue, however,is the uneven distribution of water re-sources. Many countries may have suf-cient water on a national basis, but notregionally or locally, such as in China, theUS, India and Spain. Countries may alsohave sufficient water but at the wrongtime, such as in Trinidad, the Bahamasand the Cayman Islands. Long-distancewater transport and storage are a priorityin these instances, although there arefrequently logistical, nancial and/orpolitical obstacles to such investments.The majority of nations that are decientin renewable water rely on nonrenew-able resources, which has led to prob-lems in the form of overexploitation ofsurface water and groundwater. Suchoverexploitation can lead to a varietyof problems, such as saline intrusion.In some cases, wells have been drilledso deep that the water becomes con-taminated with radon from the earthscrust, which can cause severe healthside effects that include lung cancer andbirth defects. Such problems are typicallylocalized, however, and can be resolvedin the medium term via reverse-osmosisdesalination of brackish water. Larger

populations may be affected by a salin-ity crisis caused by overexploitation ofthe groundwater, but this is an issuethat takes place over a 30-year period.

aGRICulTuRE

The agriculture sector stands as the larg-est consumer of freshwater resourcesacross the globe, accounting for morethan 70% of global water withdrawals.GWI anticipates that the total land underirrigation (the main measurement ofwater use in agriculture) in the US willreach 290 million hectares by 2025a 115% increase over 1996 levels.

One of the most signicant catalyststo agricultures sustained growth andreliance on water is the steadily increas-ing global consumption of foods that

are heavily dependent on water (seeFigure 9). As a nation becomes moreaffluent, consumers increasingly prefermore water-intensive foods. The waterneeded to produce one kilo of meat is 10times greater than the amount necessaryto grow an equal serving of rice.

The utilization of modern agriculturalmethods has been a key contributor to

Fig re 9: T e C ngingC mp siti n f t eG diet

As they become more af uent, consumersincreasingly prefer more water-intensive

foods, such as meat, which, in turn, raisesthe demand for animal feed and, thereby,

for water.

to to E

,

,

,

,OtherPulses*Roots and TubersMeatSugarVegetable OilsOther CerealsWheatRice

K i l o c a

l o r i e s p e r

C a p

i t a p e r

D a y

*The edible seeds of certain leguminous plants such as peas, beans or lentilsSource: United Nations Environment Programme as of February



7/20

/

Fig re 10: C nges inG W ter C ns mpti nf r F Pr cti n

The volume of water for agriculture willneed to increase in order to achieve theUnited Nations (UN) target of halving,between 1990 and 2015, the proportionof people who suffer from hunger.

E E E

W a t e r

R e q u

i r e d f o r

F o o d

P r o d u c t

i o n ,

C u b

i c K i l o m e t e r s p e r

Y e a r

,

,

,

,

,

,

,

,

,

, Increase Over 2002 Needed to

Meet the 2015 UN Hunger TargetIncrease Over 2002 Needed toEradicate Poverty by 2030Increase Over 2002 Needed toEradicate Poverty by 2050

Source: United Nations Environment Programme as of February

uRbaNIzaTIoNIn 1990, the world had 10 cities withpopulations of 10 million or more; sixwere in developing countries and fourwere in developed countries. By 2010,there were 21 cities of 10 million ormore; 17 were in developing countriesand four were in developed nations.The UN forecasts that by 2020 theworld will have 27 cities of 10 mil-lion or more; 22 in developing coun-tries and five in developed countries(see Figure 11).

Urbanization leads to increasedwater demand, for both householdneeds and services. Household needs,which include activities such as flushinga toilet, watering flowers or washinga car, increase daily per capita waterneeds by 80 to 250 liters. Service insti-tutions, such as hospitals, restaurantsand hotels, are also major consumersof water. Urbanization can cause thedemand for water to increase five-foldbeyond the basic water requirement. 8 This increase does not include waterused in power generation or otherindustrial activities that typicallyaccompany urbanization.

More than half of the current globalpopulation resides in cities. As urban

populations continue to grow, and asthe standard of living of those dwell-ing in cities improves, there will be aneed for more stringent environmen-tal regulation, as well as increasedcapital expenditures for wat er andwastewater infrastructure.

Environmental-protection invest-ment generates diminishing returns.While primary and secondary waste-water treatments are comparativelycheap processes and contribute tothe quality of the environment, ex-tracting nutrients, pharmaceuticalby-products and endocrine disrup-tors from wastewater can be ratherexpensive and provide relativelyminimal benefit. The outcome is thatthe world is encountering a spikein the amount of money needed forwater and wastewater infrastructure,which subsequently garners moreinterest in technology. Althoughthe water industry has tradition-ally comprised a series of individualdomestic markets, it is becomingincreasingly global in various seg-ments. Advanced water and waste-water treatment, and several areaswithin the equipment supply chain,have become internationalized.

Fig re 11: ur n are sF rec st t h e t le st10 Mi i n In it nts

y 2020

Rank Urban Area Country

1 Tokyo Japan

2 Mumbai India

3 Delhi India

4 Dhaka Bangladesh

5 Mexico City Mexico

6 Sao Paulo Brazil

7 Lagos Nigeria

8 Jakarta Indonesia

9 New York US

10 Karachi Pakistan

11 Kolkata India

12 Buenos Aires Argentina

13 Cairo Egypt

14 Manila Philippines

15 Los Angeles US

16 Rio de Janeiro Brazil

17 Istanbul Turkey

18 Shanghai China

19 Moscow Russia

20 Osaka Japan

21 Beijing China

22 Lima Peru

23 Paris France

24 Tianjin China

25 Lahore Pakistan

26 Bogota Colombia

27 Kinshasa Congo

Source: United Nations as of



8/20

/

PRoduCEd WaTERThe increased prevalence of land-basednatural-gas drilling and hydraulic frac-turing throughout the US has gener-ated much debate over environmen-tally friendly methods of disposing of

produced water. Produced water iswater contaminated by the hydraulic-fracturing process that becomes infusedwith highly toxic chemicals. The dis-posal process for produced water hasbecome one of the fastest-growing watersubsectors, as natural-gas producersmust take extra precaution and dedi-cate considerable resources to makecertain that the contaminated waterdoesnt in any way mix with drinking-water sources (see Figure 12 and Figure13). An increasingly popular option for

disposing of produced water is point-of-use treatment, whereby producedwater is treated on-site. Point-of-usetreatment has low xed costs relative toother disposal options. The alternativeto this process is to transport producedwater to a treatment facility or disposalcenter via pipeline or truck.

Fig re 12: W ter Re seC nges t e G me f roi n G s

Land-based energy production results inproduced water, or water contaminated bythe hydraulic-fracturing process. As a result,the energy industry is expected to boostspending in water-treatment equipment.

Capital Expenditures on Water-TreatmentEquipment for Oil and Gas

E E E E E E

,

,

,

,

, Million US Dollars


Fig re 13: C mp nentsf t e $5 bi i n

N rt americ nPr ce -W ter M rket

An increasingly popular option for disposingof produced water is on-site treatment,which has low xed costs relative to otherdisposal options. The alternative to thisprocess is to transport produced water toa treatment facility or disposal center.

49%

30%

16%

6%Treatment

Lifting, Pumpingand Reinjection

Minimization

Off-Site Disposal

Note: Quantities may not equal % due to rounding.Source: Citi Investment Research & Analysis as of May



9/20

/

ChINaMorgan Stanley Research forecasts thatthe water shortage in China is expectedto worsen (see Figure 14). Substantialinvestment will be necessary to elevateChinas wastewater-treatment indus-

try to a level that is proportionate toits economic status.In 2010, the Chinese government an-

nounced its intent to devote 3.1 trillionrenminbi to the environmental-protectionindustry during the 12th Five-Year Planversus the 1.3 trillion renminbi allocatedin the 11th Five-Year Plan, generating anannual growth rate of approximately 15%to 20%. A study conducted at TsinghuaUniversity concluded that investmentin sewage-treatment facilities is projected to reach 153.97 billion renminbi

throughout the 12th Five-Year Plan, up35% from the 11th Five-Year Plan. As perthe Chinese governments 12th Five-YearPlan, all cities and counties are expectedto have 100% sewage-treatment capac-ity, versus the 75% of cities and 30%of counties that had sewage plants in2009. 9 Chinas market for residentialwastewater operations is forecast to riseto 40 billion renminbi in 2012 from 28billion renminbi in 2010 (see Figure 15).

Fig re 14: W ter S rt gein C in Is Expectet W rsen

Chinas fast-paced economic growth hasresulted in a water shortage that is forecastto worsen during the rest of this decade.

E E E E

Water Shortage

Billion Tons

Source: Morgan Stanley Research as of November

Fig re 15: R piGr wt f r Resi entiW stew ter oper ti nsin C in

Substantial investment will be necessaryto elevate Chinas wastewater-treatmentindustry to a level that is proportionateto its economic status. Chinas market

for residential wastewater operations is forecast to rise to 40 billion renminbi in 2012 from 28 billion renminbi in 2010.

E E

Billion Renminbi

Chinas Residential Wastewater-Operations Market

Source: Morgan Stanley Research as of November



10/20

/

T e S ti nEFFICIENT IRRIGaTIoNApproximately 70% of all water is usedfor agriculture, and our ability to expandagricultural output to sustain the grow-ing global population is restricted in

part by the limited supply of freshwater.According to the Food and AgricultureOrganization (FAO), approximately 20%of the increase in crops produced by2050 will be attributed to newly irrigatedlands, while 80% will have to come fromincreases in crop yields. Land that is tfor growing crops is nite and the areasthat have yet to be cultivated requirecostly infrastructure build-outs. Themost effective long-term solution willbe creating and enhancing agriculturaltechnologies to produce more crop per

drop (see Figure 16 and Figure 17). Asthe worlds water supplies continueto be strained by growing populationsand as arable land per capita continuesto decline, agricultural efficiency willbecome a major focus of policymakersand investors alike.

There are several irrigation techniquesthat are capable of effectively producingcrops with relatively minimal amountsof water. In most developing economies,the overwhelming source of irrigationis ooding elds. Flooding is only about35% efficient; 65% of the water evaporatesbefore it reaches the crops. By contrast,sprinklers are 75% efficient. Drip irriga-tion is 85% efficient and widely acceptedas one of the most effective water-savingirrigation systems. This process gradu-ally applies water to the crops rootsthrough a system of valves, pipes, tubingand emitters. Alternative methods thatare capable of increasing crop yieldswith less water include center-pivotsprinkler irrigation, advanced fertil-izers and watering-schedule controlsthat account for weather conditions.

Fig re 16: S re f Cr pPr cti n Incre ses,1961 t 1999

Between 1961 and 1999, nearly 80% of theincrease in world crop production camethrough increasing yield on existing land.

Source: United Nations Environment Programme, GRID-Arendal as of February

Yield Increases Arable-Land ExpansionIncreased Cropping Intensity

All Developing CountriesSouth Asia

East Asia

Near East/North Africa

Latin America and the CaribbeanSub-Saharan Africa

World

%

Fig re 17: Pr jecteS rces f Incre ses,1997/1999 t 2030

Looking ahead, increases in crop productionwill need to come from creating andenhancing agricultural technologies toproduce more crop per drop.

Source: United Nations Environment Programme, GRID-Arendal as of February

Yield Increases Arable-Land ExpansionIncreased Cropping Intensity

All Developing Countries

South AsiaEast Asia

Near East/North Africa

Latin America and the CaribbeanSub-Saharan Africa

Rain-Fed Crop ProductionIrrigated Crop Production

%

The FAO expects global irrigationwater withdrawal to increase by ap-proximately 11% to 2,906 cubic kilometersper year in 2050, up from the current2,620 cubic kilometers per year. Outputfrom irrigated lands globally is set toincrease to 3,424 trillion kilocalories

in 2025 and 5,420 trillion kilocaloriesin 2050 from 2,544 trillion kilocaloriesin 2010 (see Figure 18, page 11). Globalirrigation water withdrawals are forecastto rise by 14% in the developing coun-tries, offset by a decline of more than2% in the developed countries.



11/20

/

Fig re 18: F rec stGr wt in Irrig ti no tp t

Thanks to improvements in irrigationtechnology, global output from irrigatedlands is forecast to more than double by

2050 on just 11% more water, accordingto the United Nations Food and Agricultural Administration.

Source: United Nations Food and Agriculture Administration as of 3

E E E

Irrigation Output

,

,

,

,

,

, Trillion Kilocalories

Fig re 19: C mp siti n ft e C rn Yie

Agricultural companies are utilizing bothconventional breeding and genetic engineeringto develop crops that can maintain their outputin drought-stricken regions.

Source: Monsanto Company as of January

Tons per Hectare Agronomics Conventional BreedingMarker-Assisted BreedingBiotechnology Traits

China and India stand out as havingample opportunity to boost crop yields,as both governments have recently dem-onstrated a commitment to increasingagricultural productivity and efficiency.At the Fifth World Water Forum in 2009,

Chinas minister of water resources un-derscored Chinas goal to increase thenations irrigated area by 10% by 2020, aswell as restore 260 large-scale irrigationand drainage pumping centers within threeto ve years. In 2008, Indias minister ofagriculture declared his goal to bring 17million hectares under efficient irrigation

(12 million hectares under microirrigationand 5 million hectares under sprinklerirrigation) by 2012; the Indian PlanningCommission predicts that water supplyand irrigation capital expenditures willexperience a subsequent compound annual

growth rate of 19% to reach this goal.10

aGRI bIoTEChBiotechnology companies recognize thatdemand for drought-tolerant crops willcontinue to rise as global climate changeforms a world that is both warmer anddrier. These companies are utilizing both

conventional breeding and genetic engi-neering to develop crop varieties that caneffectively maintain their output in regionsstricken with drought (see Figure 19).For example, researchers are engaged invarious phases of testing for corn strands

that have been genetically manipulatedto retain yield stability in the driest ofenvironments. Already one particulargene that is undergoing testing has dem-onstrated encouraging yield advantagewhen water is limited, and further testinghas found the gene to be compositionallyequivalent to conventional corn.



12/20

/

WaSTEWaTER TREaTMENTTreated wastewater costs about a thirdless than desalination. In addition totertiary and advanced reuse, a signi-cant portion of water reuse involvestreatment that does not go beyond the

secondary level. Primary treatment in-volves temporarily holding sewage so

Fig re 20: In estments inW ter-Re se P nts

Investment in water-reuse plants is growingbecause treated wastewater costs about athird less than desalinated water. The output

from water-reuse facilities is forecast toreach 9.8 billion cubic meters in 2016, up

from 5.1 billion cubic meters in 2010.


Water Reuse

E E

Billion Cubic Meters per Year

that heavy solids settle to the bottomwhile oil, grease and lighter solids oatto the surface. Secondary treatmentthen removes dissolved and suspendedbiological matter. Tertiary treatmentthen allows discharge into a highly sen-

sitive or fragile ecosystem. This beingthe case, the capacity of water-reuse

facilities that offer no more than second-ary treatment is expected to increaseto 36 million cubic meters per day in2016 from 22 million cubic meters perday in 2008, and total investment inwater reuse is forecast to rise to 9.8

billion cubic meters per year in 2016from 5.1 billion cubic meters per yearin 2010 (see Figure 20). 11

Advanced wastewater treatmentmeans that sewage can be viewed asa resource with a number of possibleuses: (1) agricultural irrigation, becausewastewater ows are typically morereliable than those from freshwatersources and are rich in nutrients forthe cultivation of high-value crops;(2) urban landscaping; (3) industrialcooling and processing; and (4) indi-

rect potable water production, suchas groundwater recharge.

The water-treatment process knownas ultraviolet (UV) disinfection is gain-ing popularity throughout the waterindustry as a cost-effective and superioralternative to chlorine disinfection.Recent technological developmentswithin the UV sector have made treat-ment both affordable and simple. In thispurication process, exposure to UVlight effectively changes the DNA of anyharmful microbes, thus sterilizing thecell. The $500 million UV-treatmentindustry is expanding rapidly (see Figure21). BCC Research estimates that themarket will grow at an annual rate ofapproximately 40% during the nextve years. The Environmental Pro-tection Agency now requires certaindrinking-water sources to undergo UVdisinfection because of its ability toneutralize various parasitic diseases thatare impervious to chlorine treatment.In 2012, New York City is expected tobreak ground on the worlds largest UVdisinfection treatment facility.

Fig re 21: N rt americ nW stew ter-Tre tmentP nts using uvTec n gy

The water-treatment process known asultraviolet (UV) disinfection is gainingpopularity as a cost-effective and superioralternative to chlorine disinfection.

Source: Citi Investment Research & Analysis as of May

UV-Treatment Plants

,,,,,,,,



13/20

/

dESalINaTIoNThere are currently two methods fordesalination: Either water can be boiledand gradually evaporated in a processknown as thermal desalination, or itcan undergo a membrane-filtration

method known as reverse osmosis, inwhich the water is pushed through ane membrane that separates the watermolecules from the salt ions. GWI saysthat thermal desalination will continueto be used in regions where energy isinexpensive and plentiful, such as theMiddle East. The consulting rm alsoestimates that investments in desalina-tion plants with membrane technologywill grow to $4.7 billion in 2016 from$3.3 billion in 2010a 6% compoundannual growth rate versus just 1% for

thermal desalination (see Figure 22).During the past several decades, the

desalination industry has had remarkablesuccess in lowering its costs throughtechnological innovation. In thermaldesalination, a large portion of recentprogress can be attributed to econo-mies of scale. The membrane segmentof the desalination industry has utilizedtechnological advancements to createenergy-recovery devices and cheaper,yet more efficient, membranes, whichhave resulted in impressive cost reduc-tion for desalinated water.

Figure 23 shows water prices for reverse-osmosis projects, which are arrangedby contract date. The rst eight bars onthe chart would be familiar to anyonewho goes to desalination conferencesthey are the most common illustration

of the falling cost of desalination. Theremaining bars appear to tell a different,more complicated story. Innovation indesalination technology is continuing.As the cost of the desalination processfalls, other costs such as civil engineeringand site costs have a greater inuenceon the overall cost of water. This is par-ticularly true of desalination projects

on the California coast, where costs forlabor, permits, real estate and profes-sional services are very high.

The desalination industrys abilityto signicantly drive down costs whilesimultaneously bolstering its technol-

ogy will translate into substantial futuregrowth. GWI predicts that contracteddesalination capacity will rise to 130million cubic meters per day in 2016from 68 million cubic meters per dayin 2009. The mounting effort to drivedown the cost of desalination has resultedin the emergence of several promisingnew technologies.

Fig re 22: In estments in

des in ti n P nts

Thermal desalination plants are mainly inregions where energy is inexpensive, such as

the Middle East. Costs for membrane-baseddesalination plants are dropping becauseof more ef cient membranes and energy-recovery devices.


Thermal Desalination PlantsDesalination Plants With Membrane Technology Billion US Dollars

E E E E E E

Fig re 23: W ter Prices f rRe erse-osm sis Pr jects

Innovation drives down the cost of the desalination projects thatuse reverse osmosis. As the cost of desalination falls, costs suchas engineering and site preparation have a greater in uence onthe overall cost.

S a n t a B

a r b a r a

B a h a m

a s

D h e k e

l i a

L a m a c a

T a w e e l

a h A

T r i n i d a

d

A s h k e l

o n

T u a s

S k i k d a

B e n i S a

f

P e r t h

T a m p a

B a y ( r e h a b

)

C h e n n a

i

F o u k a

C a p D j i n e

t

G o l d C

o a s t

H a d e r a

D h e k e

l i a ( r e

h a b )

S h u w e

i h a t

A d D u

r

H i d d

M a g t a

a

C a r l s b

a d

H u n t i n

g t o n B

e a c h

W e s t B

a s i n

.

.

.

.

.

.

.

. US Dollars per Cubic Meter Completed Contracted Proposed




14/20

/

NEW dESalINaTIoN TEChNIquESForward Osmosis

Since water molecules naturally owfrom fresher solutions to saltier ones,reverse osmosis uses pressure to forcewater molecules to go against that ten-

dency through membranes that lter thewater. In contrast, forward osmosis (FO)uses a draw solution that is saltier thanseawater. Without need for any energy,the water molecules in seawater owacross a porous membrane and into thedraw solution, leaving the sea salt behind.Because the process doesnt require anypumping, it generally consumes verylittle energy. These compounds thenvaporize at lower temperatures thanthose required for thermal desalination(212F). Unlike reverse-osmosis treat-

ment, FO does not need to be forcedthrough a membrane at high levels ofpressure, which translates into substan-tial cost savings; FO requires only 10%as much electricity as reverse osmosisand does not have to rely on the costlypipes that are specially constructed totolerate high pressures. 12

In 2007, researchers at Yale Univer-sity built a pilot plant to demonstratean FO desalination process that usesosmotic pressure, rather than hydrau-lic pressure or thermal evaporation,to separate freshwater from seawateror brackish water. In February 2009, acompany built around the research from

Yale announced that it had received $10million in venture-capital funding tocommercialize its novel desalinationtechnique. The companys solutionneeds only 122F to burn off salts andleave behind pure water rather than the

much higher temperatures required forthermal desalination. Bloomberg Busi-nessweek (March 10, 2011) reported thatthe company plans to start taking ordersin late 2011.

Carbon Nanotubes

Leading chemical- and environmental-science researchers are in the midstof rening a desalination technologythat employs carbon nanotubes in themembrane-distillation process. Carbonnanotubes, which are essentially atom-

thin carbon sheets that have been shapedinto cylinders, can be immobilized inmembrane pores to construct a ltra-tion system that is superior to typicalreverse-osmosis membranes in thatthey are approximately 20 times morewater permeable and can treat waterat a relatively low temperature, higherow rate and higher salt concentration.

The September 2010 Journal of PhysicalChemistry reported that Professor Som-enath Mitra of the New Jersey Institute ofTechnology had developed a membraneincorporating carbon nanotubes thatcould lead to a faster and more energy-efficient method of water desalination.

Mitras new material reportedly resultsin much greater vapor permeation whilekeeping liquid water from clogging thepores, and it allows for higher ow rateswhile requiring lower temperatures. Ascompared with a regular membrane,

it demonstrated the same level of saltreduction at a temperature that wascooler by 20C and at a ow rate thatwas six times greater.

Biomimetic Membranes

Scientists at the University of NewMexico and Sandia National Labora-tories are working on revolutionizingthe desalination industry through thecreation of biomimetic membranes forwater-ltration treatment. Biomimeticmembranes seek to mimic the structure

and water-transport processes of livingcell membranes, which could provide anincredibly efficient and natural ltrationsystem. According to the University ofNew Mexico, The technology uses anatomic layer deposition (ALD) process,a thin-lm deposition technique onan atomic scale that sequentially ap-plies layers of chemicals to the surfaceof a substrate to produce a thin lm.The nanoporous material has twicethe efficiency of an RO [reverse os-mosis] membrane because it has highsalt rejection and improved water ux(the rate at which water permeatesa membrane). 13



15/20

/

vIRTual WaTERA 2011 United Nations Educational,Scientific and Cultural Organiza-tion study found that one-fth of theglobal water footprint (from 1996 to1995) was related to production for

exports, largely agricultural, ratherthan domestic consumption. 14 Largeinternational virtual-water ows andtheir associated national water savingsand external water dependencies high-light the point that the issue of localwater scarcity needs to be consideredfrom a global context.

Many nations save water resourcesby importing products that are waterintensive and exporting those that areless so (see Figure 24). This process canimply global water savings if the ow

is from nations with high to low waterproductivity. Between 1997 and 2001,1,605 billion cubic meters per year wouldhave been required by the importingcountries if all imported agriculturalproducts were produced domestically;however, these products were producedwith only 1,253 billion cubic metersper year in the exporting countries. 15

Nations are divided in their abilityto use science to support agriculturalproductivity and food security. Developedcountries spend $2.16 on agriculturalresearch and development (R&D) for every$100 of agricultural output, comparedwith $0.55 in the developing countries.Agricultural R&D spending in developingcountries grew to $4.4 billion in 2000from $3.7 billion in 1991. Such spend-ing was largely driven by Asia, whichrepresents 42% of total agriculturalR&D spending in developing nations(China and India account for 18% and10%, respectively). Despite Africas largesize, its share in R&D spending is 13%;Latin Americas is 33%. 16

Source: United Nations Environment Programme as of July

InvestorCountry Target Country Area (hectares) Crop or Aim of ProjectAustria Ethiopia , Biofuel

Bahrain Philippines, Turkey, UAE , Agro-Fishery

Belgium Kenya 4 , Sugar Cane

Canada Kenya, Mozambique, Ghana 3, Biofuel

ChinaDem. Rep. Congo,Mozambique, Tanzania,Zambia, Philippines,Cameroon, Sierra Leone

, ,3 Biofuel, Rice, Sugar Cane,Maize

Egypt Sudan , Wheat, Maize, Sugar Beets

Germany Ethiopia 3, Biofuel

India Ethiopia, Sierra Leone 348, 8 Flower, Sugar, Maize, Rice,Vegetables, Palm Oil

Iran Sierra Leone , Biofuel, Lemon Grass

Israel Ghana, Ethiopia , Biofuel

Italy Ghana, Mozambique , Biofuel

Japan Brazil, Kenya , Soybeans, Biofuel

Jordan Sudan , Livestock, Crops

Kuwait Kenya, Sudan , Rice

Libya Mali, Ukraine, Liberia 3 4, Rice

Luxembourg Sierra Leone ,4 Biofuel, Palm Oil, Rubber

Norway Ghana 4 , Biofuel

Portugal Mozambique, Sierra Leone ,Biofuel, Rice, Pineapple,Cassava, Vegetables

Qatar Philippines, Sudan, Kenya 4 , Fruit, Vegetables

Republic ofKorea Russia, Sudan, Indonesia, , Wheat, Palm Oil

Saudi Arabia Sudan, Tanzania, Indonesia,Ethiopia, Egypt , ,Rice, Wheat, Vegetables,Barley, Animal Feed

South Africa Congo (Brazzaville), Benin 8 , Livestock, Rice, Vegetables

Switzerland Sierra Leone , Sugar Cane

UAE Pakistan, Sudan, Ethiopia , Corn, Alfalfa, Wheat,Potatoes, Beans

UKEthiopia, Angola, Ghana,Madagascar, Mozambique,

Ukraine, Sierra Leone

, 4 ,348 Biofuel

US Brazil, Sudan, Ukraine,Ethiopia , Sugar Cane (biofuel)

Vietnam Cambodia, Laos , Rice, Rubber

Fig re 24: S ingW ter T r g l nIn estments

Many nations save water resources bymaking investments that allow them tooutsource water-intensive crops. This tableshows where countries are investing and

for which crops.



16/20

/

Figure 25 depicts the virtual-waterbalance per country. The key for Figure 25indicates which countriesand to whatdegreehave a negative balance, or a netvirtual-water export, and which have apositive balance, or net-water import. The

biggest virtual-water net exporters are inNorth America and South America (US,Canada, Brazil, Argentina), Southern Asia(India, Pakistan, Indonesia, Thailand)and Australia. The biggest virtual-waternet importers are North Africa and theMiddle East, Mexico, Europe, Japan andSouth Korea.

The 2008 food crisis acceleratedfarmland transactions (see Figure 26);governments have moved into large-scaleagriculture in their expectation of gainsfrom food crops, biofuels and environmental

services. China, the Gulf States, Japan,India, South Korea, Libya and Egypt arepurchasing farmland in Ethiopia, Mali,Sudan, Madagascar and Mozambiquein Africa; the Philippines, Indonesia,Laos, Thailand, Vietnam, Cambodia

Fig re 25: h w virtW ter F ws

Countries in green are net virtual-waterexporters. Countries in yellow or red are netvirtual-water importers. The arrows indicatethe ow patterns.

Source: United Nations Educational, Scienti c and Cultural Organization as of May

-98 to -75 -75 to -35 -35 to -15 -15 to -5 No Data-5 to 0 0 to 5 5 to 10 10 to 15 15 to 50 50 to 115

Billion Cubic Meters per Year

Net virt -W ter F w, t

Source: United Nations Environment Programme as of July

Fig re 26: In est r n T rget C ntriesin o erse s l n In estment f r

agric t r Pr cti n

Since the 2008 global food crisis, governments have moved intocross-border agriculture in expectation of gains from food crops,biofuels and environmental services.

Canada

USA

Brazil

Argentina

LiberiaGhana

Benin

Nigeria

Cameroon

SaudiArabia

EgyptLibya

Italy

Mali

IranKuwait

UAE India Lao

CambodiaVietnamPhilippines

MalaysiaIndonesia

PapuaNew Guinea

China

Russian Federation

Rep. Korea Japan

Pakistan

JordanIsrael

UkraineAustriaLuxemburg

UKBelgium

Switzerland

Germany

Norway

Portugal

Lithuania

SudanEthiopia

Kenya

Tanzania

Madagascar

MalawiAngola

Zambia

D. R.Congo

MozambiqueSouthAfrica

Rwanda

Sierra Leone

CountriesInvesting

CountriesOffering Land



17/20

/

combine to create a perfect storm.To address the challenges, the globalwater industry is expected to undergo afundamental transformation. Businesseswill need to invest in new technolo-gies, while utilities will need to devote

greater resources to water infrastructure.Investment growth in the sector willbe affected by the changing financialmodels in the municipal water sec-tor, where budgetary constraints willlimit the role traditionally played bymunicipalities. The key to profitingfrom the growth in the sec tor will beto understand the technological, cli-mactic, governmental and populationtrends affecting the water industry.The winners will be those who cangrasp those trends and discover the

underlying opportunities.

and Pakistan in South Asia; Brazil andArgentina in South America; and theUkraine in Eastern Europe.

Indian companies are buying overseasland, primarily in Africa, to grow agriculturalproducts that can be exported to large

markets. Africa has 807 million hectaresof cultivable land, and 197 million hectaresare currently under cultivation. Morethan 80 Indian companies have invested$2.4 billion in purchasing plantations ineastern Africa to grow food for Indiasdomestic markets. 17

China is also investing in agricultureoverseas. Northeast Chinas BeidahuangGroup intends to enter into an agricul-tural joint venture with Argentinas RioNegro Province. According to the Argen-tine government, Chinas state-owned

farmland investment and development

company, which is Chinas top grainproducer, is planting crops in the Pata-gonian province and paying low rent inexchange for developing unused land.The Beidahuang Groups Argentina agri-cultural investment project will include

advanced irrigation, power-generationfacilities and port-infrastructure invest-ments. Although Argentina has high-quality land with an ideal climate, thetechnology level is lacking. This synergyof technical expertise from China andland resources from Argentina makes fora partnership that should signicantlybenet both parties involved.

a de e ping St ryWater may turn out to be the criticalcommodity story of the 21st century as

declining supply and increasing demand



18/20

/

1. Lang, Heather, JablankaUzelac, and Ankit Patel.

Global Water Market 2011. Oxford, United Kingdom:Media Analytics, Ltd., 2010.

2. Lang, Heather, JablankaUzelac, and Ankit Patel.Global Water Market 2011.Oxford, United Kingdom:Media Analytics, Ltd., 2010.

3. Lang, Heather, JablankaUzelac, and Ankit Patel.Global Water Market 2011. Oxford, United Kingdom:Media Analytics, Ltd., 2010.

4. Dai, Aiguo. "DroughtUnder Global Warming: AReview"

Wiley Interdisci- plinary Reviews: ClimateChange 2 (October 19, 2010):45-65.

5. Overland, James E., JohnE. Walsh, and Muyin Wang."Why Are Ice and SnowChanging?" Global Outlookfor Ice and Snow (2007):29-38.

6. "Projected Reduction inSnow 2080-2100." UNEP/ GRID-Arendal Maps andGraphics Library. June2007. UNEP/GRID-Aren-dal. 10 Oct 2011 .


8. Source: AlexanderZehnder et al., Water Is-sues : the Need for Action atDifferent Levels, AquaticSciences, 2003.

9. Wen, Helen, and IvyLu. China Water Utilities: Brightening Outlook Thanksto 12th Five-Year Plan. Morgan Stanley Research,November 5, 2010.

10. India Planning Com-mission (Government ofIndia). Eleventh Five Year Plan. New Delhi: OxfordUniversity Press, 2008.


12. Bullis, Kevin. "A CheaperWay to Clean Water" MITTechnology Review. Oct.10, 2011 .

13. Wentworth, Karen.New Membranes forWater Purication Technol-ogy Receives R&D 100Award UNM Today. Oct.10, 2011 < http://news.unm.edu/2011/07/new-mem-branes-for-water-purica-tion-technology-receives-rd-100-award/>.

14. Mekonnen, M.M., and

A.Y. Hoekstra. National Wa-ter Footprint Accounts: TheGreen, Blue and Grey Water Footprint of Production andConsumption. UNESCO-IHE (2011).

15. Chapagain, A.K., A.Y.Hoekstra, and H.H.G.Savenije. Water SavingThrough InternationalTrade of Agricultural Prod-ucts. Hydrology and EarthSystem Sciences (2006).

16. Nellemann, C., MacDe-vette, M., Manders, T., Eick-hout, B., Svihus, B., Prins, A.G., Kaltenborn, B. P. (Eds).The Environmental FoodCrisis the EnvironmentsRole in Averting Future FoodCrises. United Nations Envi-ronment Programme, GRID-Arendal, February 2009.

17. Ramsurya, M.V. In-dian Companies Buy LandAbroad for AgriculturalProducts. Economic Times. Oct. 11, 2011 < http://farm-landgrab.org/10070>.

En n tes



19/20

/

disc s res


This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security orother nancial instrument or to participate in any trading strategy. This is not a research report and was not prepared by the Research Departments of MorganStanley & Co. Incorporated or Citigroup Global Markets Inc. The views and opinions contained in this material are those of the author(s) and may differ matally from the views and opinions of others at Morgan Stanley Smith Barney LLC or any of its af liate companies. Past performance is not necessarily a guidefuture performance.

The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors, includinquality and accuracy of their work, rm revenues (including trading and capital markets revenues), client feedback and competitive factors. Morgan Stanley SmBarney is involved in many businesses that may relate to companies, securities or instruments mentioned in this material.This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own independent investigationof the securities, instruments or transactions, and received all information it required to make its own investment decision, including, where applicable, a revieof any offering circular or memorandum describing such security or instrument. That information would contain material information not contained herein and which prospective participants are referred. This material is based on public information as of the speci ed date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or warranty with respect to the accuracy or completeness of this material.Morgan Stanley Smith Barney has no obligation to provide updated information on the securities/instruments mentioned herein.The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will dependon an investors individual circumstances and objectives. Morgan Stanley Smith Barney recommends that investors independently evaluate speci c investmenand strategies, and encourages investors to seek the advice of a nancial advisor. The value of and income from investments may vary because of changes ininterest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or nancial conditions of companies and other issuers or other factors. Estimates of future performance are based on assumptions that may not be realized. Actual events may differ fromthose assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur andmay signi cantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/ocalculation of any projections or estimates, and Morgan Stanley Smith Barney does not represent that any such assumptions will re ect actual future events.Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materiallydiffer from those estimated herein.

This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intendeto, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Smith Barney is not acting as a duciary under ether the Employee Retirement Income Security Act of 1974, as amended or under section 4975 of the Internal Revenue Code of 1986 as amended in providithis material.Morgan Stanley Smith Barney and its af liates do not render advice on tax and tax accounting matters to clients. This material was not intended or writtento be used, and it cannot be used or relied upon by any recipient, for any purpose, including the purpose of avoiding penalties that may be imposed on thetaxpayer under U.S. federal tax laws. Each client should consult his/her personal tax and/or legal advisor to learn about any potential tax or other implica-tions that may result from acting on a particular recommendation.International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertaties of foreign countries as well as the risk of currency uctuations. These risks are magni ed in countries with emerging markets, since these countries may harelatively unstable governments and less established markets and economies.


20/20

/

Investing in commodities entails signi cant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changesupply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist even(iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vthe price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, includinlack of liquidity, participation of speculators and government intervention.Asset allocation and diversi cation do not assure a pro t or protect against loss in declining nancial markets.Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic anmarket risks.Growth investing does not guarantee a pro t or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valutions, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

Value investing does not guarantee a pro t or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their businessaround or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not asolicitation of any offer to buy or sell any security or other nancial instrument or to participate in any trading strategy.

This material is disseminated in Australia to retail clients within the meaning of the Australian Corporations Act by Morgan Stanley Smith Barney AustraliaLtd (A.B.N. 19 009 145 555, holder of Australian nancial services license No. 240813).Morgan Stanley Smith Barney is not incorporated under the Peoples Republic of China ("PRC") law and the research in relation to this report is conducted outsithe PRC. This report will be distributed only upon request of a speci c recipient. This report does not constitute an offer to sell or the solicitation of an offer tobuy any securities in the PRC. PRC investors must have the relevant quali cations to invest in such securities and must be responsible for obtaining all releva

approvals, licenses, veri cations and or registrations from PRCs relevant governmental authorities.Morgan Stanley Private Wealth Management Ltd, which is authorized and regulated by the Financial Services Authority, approves for the purpose of section of the Financial Services and Markets Act 2000, content for distribution in the United Kingdom.Morgan Stanley Smith Barney is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advicwithin the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.This material is disseminated in the United States of America by Morgan Stanley Smith Barney LLC.Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide andshall not have liability for any damages of any kind relating to such data.

Morgan Stanley Smith Barney material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan StanleySmith Barney. 2011 Morgan Stanley Smith Barney LLC. Member SIPC. GWM6934017 6934017 MSSB 11/

Documents

Morgan Stanley Gic_peakwater 11-11