HardAssetsInvestor

Written by HardAssetsInvestor.com  |

November 21, 2008

Water: The Ultimate Commodity

Details

In a classic article for HAI University, our editors examine a commodity "in silent
crisis."

• Never-ending demand
• The business activities
• Unique investment opportunities

We all need water to live. As useful as oil, copper and corn may be, we could get by without them for a while. But water? Water is a necessity. And for some, this makes it the ultimate commodity.

People invest in commodities for a lot of reasons: for diversification; as a way to play growth in the developing world; because they think demand growth will outstrip supply.

By those metrics, water may be the ultimate commodity investment. Demand for water is steady and never-ending, meaning water investments should not be correlated with broader economic developments. Meanwhile, history shows that as economies develop, citizens will demand more and more water to support richer lifestyles, making water an interesting play on countries like China and India. And finally, the world is in a silent water crisis, with rising demand set against limited supply; a classic commodities squeeze.

Water Crisis

The world currently faces a water crisis of both supply and demand.

We're taught to think that there's plenty of water: 75% of the Earth's surface is covered with it. The problem is, most of that water is useless: 97% is seawater, 2.5% is frozen in the ice caps and just 0.5% is fresh and available for use. Worse, much of what remains is contaminated, polluted or otherwise degraded, and not fit for consumption.

On the demand side, water needs are growing ... fast. The world's population growth provides an underlying pressure on demand, while growth in the developing world accelerates that demand curve dramatically.

Meeting this global crisis from a fixed supply will involve massive expenditure, and it will be the companies that clean, support, supply, reuse and save water that will benefit from this flow of capital.

Supply

As if the problem of a fixed supply were not enough, there are three further major supply problems affecting the world's water situation.

First, the distribution of existing water resources around the world is horribly uneven: 60% of the world's fresh water is located in just nine countries. And unlike many commodities, water isn't portable; it simply doesn't make economic sense to transport water from (say) Canada to (say) China; water, even if its value rises tenfold, is simply too voluminous.

Second, where water is actually available, it is often not available in a suitable form. It may, for instance, be either too hot or too old, or, perhaps, too dirty or too salty. Increasingly, it's also too polluted; in the U.S., the gasoline additive MTBE has rendered a significant percentage of wells unfit for human consumption.

Third, in developed countries, where water is generally available as needed, the infrastructure supplying it is old and decaying. Estimates of how much a country like the U.S. must spend upgrading its water infrastructure over the next 20 years measure in the billions.

Demand

Population growth and economic growth are the two biggest drivers of demand. On the one hand, as population numbers increase, so does the demand for potable water. On the other, as economies grow, so does the demand for water for use in both agriculture and industry: the richer people get, the higher they live on the water food chain. The U.S., for instance, is the world leader in water consumption per capita, largely because we live such a rich, luxurious lifestyle.

Water: The Business Activities

While the case for investing in water, as a theme, is compelling, the question remains of how actually to go about making such an investment.

Unfortunately, unlike many other strategic commodities, water is not yet traded on any exchange. Indirect investment, therefore, remains the only option available to investors; that is, investment in those companies in a position to provide solutions to the water crisis. Estimated by some already to be worth $450 billion a year[1], the water and water treatment industry is predicted to grow to some $650 billion in the next 20 years.[2]

The current major investment options are:

Utilities

The job of water utilities is to deliver the actual water to the consumer. Most water in the world is delivered through utilities.

In the U.S., there are a number of large such companies; for example, California Water Services Group (NYSE: CWT) and Aqua America (NYSE: WTR), and myriad small ones. Continued consolidation and rising water values are the key to profits in these markets.