By Dirk Masuch Oesterreich Water, this most precious of liquids, is constantly generating headlines, TV news reports, and analysis that make us think a global water crisis is upon us. Around the world wells seem to dry up at an alarming rate, the water table seems to drop almost everywhere we look, and water generally seems to get more scarce by the day. In a word, the world seems to be running out of water. The remaining water reserves are constantly being polluted by industrial and urban wastewaters. More and more people lack access to safe potable water and adequate sanitation. Desertification, droughts and water related diseases are a sad reality. Water infrastructure is decaying fast and generally lacks necessary maintenance and repair. Even water wars are predicted, especially for the Middle East regions. The severity of the global water crisis frequently is called to our attention by international organizations, most prominently the United Nations and the World Bank. Since water is an essential human necessity that cannot be substituted the situation sure looks frightening.
For the astute investor in crisis there is always opportunity. To spot these opportunities it is advisable to first get a hold on the big picture. Facts have to be separated from misconceptions, myths, and outright lies. Ultimately, any investment is driven by the underlying fundamentals. Of course, this is not different in the water business. So we will first focus on some facts about water as a natural resource and then turn our attention to the resulting investment opportunities in the global water business which is estimated to serve a market of up to $ 500 billion per year. A market of this size surely is worth your attention.
Commodities prices are basically driven by the simple laws of supply and demand. It is commonly held that the supply-demand fundamentals for investing in the water business could not be better: we have an ever growing demand for the underlying commodity by a growing world population and a decreasing supply of potable and safe water. But where can you actually check supply-demand balances and open interests in water futures contracts? Or, for that matter, even the price of water? Obviously, for those who demand exact figures to base their investment decisions upon there is a dilemma. You can check the price of water on your water bill or at your local water utility. But that is not really helpful. There is no website that quotes a global water price. Nor can you secure future demand by locking in futures contracts. There is no real quoted market for water. Water prices are different in other countries. They are even different in other regions of the same country. So where do we get the supply figures from?
A bit of hydrological science is in order at this point. Water is commonly believed to be a huge but finite resource since there is only so much water available on the planet. Furthermore, due to constant and increasing contamination this resource base has to be declining. This basic supply-demand assumption is not entirely correct, though. In the grand scheme of things, the planetary hydrological cycle, not a drop of water is lost. The amount of water even increases by very small amounts from magmatic water. The hydrological cycle is the closest thing to a self-containing continuum. It is powered by the solar energy from the sun which causes water to evaporate from the oceans. When carried into the atmosphere evaporated water is pure since the salts of the sea are left behind. Water vapor moves through the air as part of the weather phenomena we all know. Under suitable atmospheric conditions water vapor condenses and forms droplets: it rains. Water that falls on land moves through the cycle by a number of different paths. It contributes to replenishing subsurface aquifers, lakes and rivers. Parts of it evaporate. Other parts find their way back into the oceans by surface runoffs or groundwater flow.
Water may become scarce in some region at any time. Other parts of the world may experience unusually heavy precipitations. However, the overall planetary water budget is quite nicely balanced. Keep that in mind the next time somebody tells you the world is running out of water.
There is no need for a global panic related to water shortages (I am likely to draw some comments with this opinion which is not a majority point of view). Contrary to oil, gas, or mineral resources, water is a renewable resource, even within the lifetime of human beings. To use an analogy from the oil business: there is no such thing as “Peak Water”. This means that it is possible to manage water resources under concepts of sustainable development. There is enough water suitable for human consumption on earth to supply the present and future population. The catch is that it is not always available where we want or need it to be. In many cases this is related to the lack of financial resources that can be directed to the building of water infrastructure.
It is not a mere coincidence that most countries that experience water problems are among the poorest on earth. A point could be made for poverty being directly related to, or even being the cause, of many water problems in developing countries. Bad economics rather than bad environment are often a root cause for the lack of access to water and sanitation and the spread of diseases.
On a regional scale, severe water problems are a reality and are mostly related to the reduced availability of water or to the lack of access to potable water and adequate sanitation. Some of the problems are in fact caused or exacerbated by improper water management and/or poor planning. Megacities, for instance, assembled in hydrological basins that do not provide the water resources to sustain a multi-million population quite obviously have what we perceive as a water problem, but is it really that?
The solutions to supplying any given population with its necessary water resources historically have mostly been on a local or regional level. Administrative and political boundaries often were an impediment on the development of shared water resources. Lately, this approach has been changing to an integrated watershed management approach that comprises the entire hydrological basin and catchment area, regardless of administrative boundaries. Necessarily, this involves bilateral or multilateral cooperation in the field of water resources management. Aquifers and river basins do not stop at state borders.
Does this mean, as is sometimes advocated for the future, that countries will go to war over water resources? I don’t think this is very likely. Actually, I heard the scenario of water wars for the first time about 20 years ago. I have been waiting for them to materialize ever since. What at first glance seems to have an inevitable logic does not hold up at a closer look. The simple reason against water wars is economics: it just does not make any sense. For the costs of a week of war a nation could easily build a couple of desalination plants or start an overhaul of its water infrastructure. From a military point of view it is even less convincing. To secure its upstream water resources a country would essentially have to indefinitely secure the whole catchment area on foreign soils. Major powers not counted, very few countries in the world have the means to do this. So the most likely outcome is actually a more peaceful cooperation between nations by further agreements to jointly manage their transboundary water resources.
It is a striking fact that water generally is not priced according to the real value it provides to our way of living. This is even more true considering its absolute necessity to sustain life itself. The cost of water being delivered to our homes is not reflected in its price. This statement is true for almost everywhere in the world. Water safe for human consumption needs to be explored for, collected, treated, delivered to where it is needed, and finally, disposed off as wastewater. All of this comes at a cost.
The reasons for the pricing of water are mostly political. I do not expect this anomaly to last indefinitely, though. Water prices will have to adjust upward. This will probably be a gradual process that takes years. The public perception of water is still that of a free resource that everybody has a right of being delivered at essentially no cost. However, a market price for water could probably lead to more efficient allocations of this resource. Surely it will lead to a more thoughtful use and less wasting. What comes to mind when talking about a more efficient resource allocation is not so much individual households but the agricultural and industrial use of water. There is a huge potential for saving water in agriculture by applying more efficient irrigation techniques.
I remember a discussion with water executives of one of Mexico´s major cities some years ago. They were (and are) still spending a great amount of money on public education about adequate treatment of water. At some point I mentioned that all they have to do is raise the water price to a level that reflects its real value to avoid misuse and wasteful habits. The Director of the city’s water works gave me the answer that I almost expected: ¨We know that. But don’t you try that on my watch¨.
Some months ago we had an expert panel on future urban development. The water panel brought together the city’s leading water engineers and scientists. There was a broad consensus among the panel that water prices should be raised or even left free to find its real market price. You won’t find that part of the recommendations in any press release.
What has become clear by now is that water investing is very different from investing in most other commodities and their respective industries. The big difference lies in the pricing. With the price of water presently restricted mostly for political reasons it is hard to make a point for the supply-demand balance as a good reason for investments. Water is not your typical commodity that rises and falls in price due to market forces or seasonality.
On the other hand, this very price characteristic effectively reduces business risks. The water business is essentially a non-cyclical business which offers some of the safer long-term investment opportunities.
As an example, just think of the growing consumption of bottled water. While in the US regular tap water almost everywhere is of drinking water quality, the demand for bottled and purified water seems to be ever increasing. This is a tremendous business opportunity that is being well exploited. The opportunity arises from the general perception that bottled water is safer than tap water although in the US there is little evidence to that. Imagine you could buy a gallon of your raw material for one cent and later sell it for two dollars. That’s basically what happens with bottled water. It is mostly regular tap water treated for purification. Some brands have small amounts of salts added. Of course, that does not make them a mineral water. This business has been consolidated in the hands of big beverage companies like PepsiCo, Coca-Cola, and Nestle.
So for practical purposes what investment opportunities in the water business exist? The water industry is as diverse as you can imagine. Businesses center around all basic services related to water. It needs to be extracted, stored, collected, treated, delivered, and finally, disposed off. The companies involved in these processes offer opportunities for investment in this business, with water utilities being the most obvious choice.
Global players in this multi-billion market are French conglomerates Suez and Veolia Environment. In the US examples of investor owned water utilities are Aqua America, San Jose Water Corp., Southwest Water Co., and York Water Co. Investment opportunities also include the providers of equipment and services to the utilities (i.e. pumps, pipes, valves, filtration and water treatment equipment, construction and engineering, maintenance and operation services, and analytical laboratories). Investment in these businesses can be considered relatively low-risk due to their non-cyclical nature. Most water utilities pay out respectable and increasing dividends to their shareholders. Their long term stock performance, including dividends, is generally stable and appreciating.
One investment opportunity, though, seems to stand out as a business with a lot of growth potential. While the overall amount of water on the planet is rather stable, the amount available for human consumption is declining. Contributing factors are as diverse as saltwater intrusion into coastal aquifers and any sort of contamination. The amount of freshwater being lost can partially be made up for by adequate treatment of seawater, brackish waters, and even waste waters. The purification technology at hand is membrane filtration by means of reverse osmosis. Companies involved in this business should have an ever growing demand for their technology and services. It wouldn’t be a bad idea either to look for companies originating from and doing business in Asia.
To sum it all up, I do not agree to the case for a global water crisis. However, I do see tremendous business opportunities in the growing global water market due to the fact that clean water and sanitation are not available wherever and whenever it is desired. In those cases when natural conditions are not a constraint these problems often have a technical solution that can be provided by standard engineering techniques. Of course, all this comes at a price.
Like it or not, water prices are likely to rise at some point in the future to secure the supply of and the access to water for a growing world population.
Nevada Gold Investor
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