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Water is the world’s lifeblood, and it’s impossible to deny that there’s a global shortage that may be getting worse. While water accounts for ~70% of our planet’s surface, freshwater comprises a mere 3%. Since the 1980s, rapid urbanization and growing populations have driven 1% growth per year in freshwater demand. With that, around 1.1 billion people across the globe still lack adequate water. Additionally, by 2025, water withdrawals are expected to rise by 50% in developing countries and 18% in developed countries, meaning two-thirds of the world population could face serious water stress, according to a United Nations report . The following figure shows how water stress would intensify in various regions including the U.S., India and China by 2040:

 Source: World Resources Institute

While the statistics look alarming, let’s look at the glass half full outlook of this situation—it presents opportunities for investments in water management and distribution. To better understand how, let’s have a look at some areas in the water industry that need urgent improvements:

Agriculture Exhausts Water Reserves

Agriculture is the largest consumer of water, with 70% of water withdrawals from rivers and underground flowing toward irrigation  (according to Lenntech). Additionally, rising population and rapid urbanization are pressuring farmers to grow more food and, as a result, withdraw water at an ever increasing pace. This is particularly true of groundwater, since it is seemingly the most convenient source for individual farmers, especially in arid/semi-arid regions. But, such withdrawals are often not accompanied by adequate recharges causing concern about groundwater’s sustainability as a water reserve. With increased industrialization, the pressure on this “water savings account” will only increase if other sources remain underutilized. There is potential to invest in improving groundwater management and develop alternatives such as distribution networks designed to supply water from rivers and lakes to moisture-deficient regions.

Source: OECD

Plenty of Water, But Little is Safe

Availability of natural water doesn’t help if it is not treated properly. In India, for example, around 77 million lack access to hygienic water, exposing the country’s population to dire water-borne diseases (Water.org).

Shortcomings in water treatment are something even developed countries encounter as an issue. The Flint water crisis is an example of how aging water systems and poorly maintained infrastructure can have an extremely harmful impact on people’s health. The mishap is reminiscent of the 2001-2004 Washington D.C. public drinking water lead contamination fiasco.

On one hand, these crises reveal challenges faced by state-owned utility projects; on the other, they unveil investing opportunities.

Fiscal Budget Pressures Beckon Private Investments

With politically-driven objectives of delivering water at abnormally low prices, state-owned utilities eventually find themselves cutting corners on maintenance expenses, pressured by budget constraints. This then can result in threatening consequences—akin to the Flint, Michigan debacle. What follows is government facing an even greater uphill challenge to fix problems that have been building up for decades. Replacing 7 million lead service lines across the U.S. could cost $50 billion, according to Fitch Ratings. Additionally, repairing water distribution systems could require $1 trillion over the next two decades, as estimated by American Water Works Association. Thus, the figures raise questions as to how much an already constrained fiscal budget can be stretched to address the task ahead.

Here lies the immense possibility for states to seek private sector services to maintain and distribute water. Private players may need to charge more initially than state owned counterparts, but given the private sector’s potential to invest in cost-saving technologies and/or achieve economies of scale over time, this could make water relatively cheaper in the long run.

Involving private players brings additional sources of capital, such as publicly traded equity, that could ease government debt burdens and assuage taxpayers’ anticipations about having to foot the bill for the city’s water treatments.

The need for increasing the private sector’s presence in the water industry, particularly in the aftermath of crises like the Flint contamination case, is reaffirmed by authorities’ pushing forward bills such as the Sustainable Water Infrastructure Act to invite private capital into water and wastewater management. Additionally, bills have been introduced in Wisconsin, Illinois, New Jersey and Pennsylvania to facilitate transfer of municipal water systems into the hands of for-profit players. 

Water Investments Should Aid in Economic Progress

Investments in water can potentially generate economic development through a variety of channels—manufacturing could get a boost through demand for water extraction and treatment equipment, and better public health could contribute to an increase in productivity. In fact, a 2016 UN report points out that a high positive correlation exists between water investments and national income. In the U.S., $188.4 billion investments in water quality preservation and storm water management can generate 1.9 million jobs, according to the report.

Bottom Line for Investors

Given the scarcity in water and inefficiency in water treatment, there’s no dearth of opportunities for new investments. After being scarred by recent mishaps of state-owned utilities, consumers are expected to be supportive of more private capital in the industry. But, what is perhaps the greatest incentive for water utility investors is that the demand for water is non-cyclical—its demand shouldn’t sway much with inflation and/or interest rate changes. This should induce investors to eye water utility equities for long-term potential.

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By Mark Melin

The latest hot investment is a water investment, one that is particularly liquid but deals in a scarce commodity.

Water has always been a valuable commodity, but it is one that many experts have said is under appreciated, under priced and laced with government subsidies. Hedge fund legend Michael Burry of The Big Short fame first popularized the idea of investing in water, and now the government of Saudi Arabia investing in U.S. water rights is raising eyebrows.

Also see:

Dr. Michael Burry — Part One: Starting Small

Dr. Michael Burry — Part Two: How Much Can I Lose?

Dr. Michael Burry — Part Three: Looking For Bargains

Dr. Michael Burry – Value And Quality

Water is a cheap commodity

The days of “cheap water” are behind us, Ben Grumbles, President of the U.S. Water Alliance, previously told ValueWalk. He says water and its infrastructure has been “taken for granted” and is “a leaking time bomb.”

The commodity that is perhaps most under appreciated in the U.S. was the focus of Michael Burry’s next “big short” for a reason.

“We often spout off the fact that 70% of the Earth’s surface is covered in water,” Burry was quoted as saying. “While this is true, freshwater – the kind we care about – actually only represents 2.5% of that amount. On top of that, only 1% of our freshwater is easily accessible, with most of the other 99% trapped in glaciers and snowfields. In the end, only 0.007% of the planet’s water is actually available to fuel and feed the world’s 7 billion people.”

The United Nations has noted water use has grown at over twice the rate of the world’s population, with today people using nearly 30% of the world’s total accessible renewal supply of water. Projections are that in less than 10 years, that percentage could reach 70% and by 2025, an estimated 1.8 billion people will live in areas plagued by water scarcity, with 2/3rds of the world’s population living in water-stressed regions.

Drinkable water is a scarcity issue, something that they are well aware of in Saudi Arabia.

Saudis pile in on water investment

Almarai Co., Saudi Arabia’s largest dairy company, recently purchased land and water rights in California’s Palo Verde Valley, an area that has preferential access to water from the Colorado River. The Saudi company was reported to have acquired a large tract near Vicksburg, Arizona, a region known for fewer well-pumping restrictions than other parts of the state. The purchase of nearly 14,000 acres enable the Saudis to take advantage of weakened water rules and the move is not sitting well.

“It flies in the face of economic reason,” said John Szczepanski, director of the U.S. Forage Export Council. “You’ve taken on all of the risk a farmer has. The only way you can justify that is that they’re really not trying to make a profit. They’re trying to secure the food supply.”

Indeed, not only does Saudi have a water problem, but it could be getting worse due to recent Government cuts (although at least for now the Government has no plans to stop water investments). A recent report from Jadwa Investment notes:

Another project to commence operations is the $2 billion oil-fired power and desalination plant in Yanbu, with a capacity of 2,500 mw of power and 550 thousand cubic meter a day (cm/d) of desalinated water.

And:

The rapid growth in demand for power and water will continue to be met with continuous project expansion.

Watch water investment, it could be the next big thing.

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Toledo water crisis is bad. Is your city next?

Gripping headlines in recent days that 400,000 people don’t have access to clean water in Toledo, Ohio became national news. I know we often hear a lot of third world countries having inadequate drinking and bathing water, yet the issue of water shortages are increasingly affecting more and more Americans. Exceptional droughts in California, extreme water shortages in Arizona, New Mexico, Texas, Utah, Colorado and Oklahoma, as well as abnormally dry conditions in areas of Georgia, Alabama, North Carolina, Virginia, New York and even Connecticut are collectively highlighting a growing problem here at home that should only make water preservation an issue of national priority.

Irrigation accounts for roughly 40% of water taken from lakes, aquifers and rivers. The development of biofuels will further constrain our fresh water supply by another 10% within 20 years. That brings roughly 50% of water being accounted for and that doesn’t even take into account the millions of gallons of water needed to fracture oil and gas wells over their lifecycle or the hundreds of thousands of gallons of water vital to cooling power plants (coal, nuclear, biofuel, solar thermal, gas, nuclear). All of this at a time when many lakes are drying up around the country or as recently seen in Ohio, becoming contaminated. 

So shouldn’t focusing on ways to recycle water, purify saltwater from the ocean or tap new innovation to develop next generation energy solutions like wind or solar PV, energy sources that do not require water use, be key investor themes in coming years? Same for energy sources like geothermal power which consumes less water than traditional power plants (see chart) and small modular reactors which don’t require external water. I believe so. Therefore If you are interested in allocating some of your portfolio dollars to water, check out the PowerShares Water Resources ETF ($PHO).

At the end of the day, without much more water conservation efforts, our place as an industrialized nation will be challenged. Here is a scary chart from The US Drought Monitor partnership which shows just how far the dry temperatures and water concerns are presently spreading across the country and maybe even into your own neighborhood. 

We simply can’t focus on the word sustainability if we have an “inability” to make real progress on preserving our water supply. Just ask the people of Toledo.  

Photo Credit: Flickr/Kevin Cortopassi

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