Opportunities in the Real Crisis: Water

by: Graham Summers

We’ve got a water problem.

The amount of water on this planet hasn’t really changed in the last million years. However, today there are over six billion humans drinking and bathing in the stuff. And while the world’s population has doubled in the last 60 years, water consumption has more than tripled over the same time period.

And supplies are starting to get tight.

Less than 2% of the world’s water supplies is fresh. Even less is easily accessible. According to the Financial Times, about a quarter of the world’s population already lives in an area of physical water shortage— a place where water simply doesn’t exist in abundance. An additional billion people live in areas of economic water shortage— areas where water exists but there is not the necessary infrastructure to extract and distribute it.

This issue affects the whole world, not just developing countries.

At Goldman Sach’s “Top Five Risks” conference earlier in June, the investment bank announced that water was the “petroleum for the next century.” According to the presentations at the conference, the US alone needs to invest over $1 trillion in new piping and waste water plants in the next 12 years alone.

Legal skirmishes over water rights are already showing up in the headlines. However, currently they are more about making money than survival.

BusinessWeek recently ran a cover story on billionaire T. Boone Pickens’ efforts to acquire water rights from Texas landowners in order to transport the stuff to Dallas and other thirsty, fast-growing Texas cities. Similar issues are showing up in Egypt where the government has threatened military attack against any country that draws water from the Nile without a contract.

However, the area where water shortages are most acute is China.

China comprises 21% of the world’s population, but controls only 7% its water supply. And its rapidly expanding population is requiring larger and larger food supplies as consumers adopt a more western, protein heavy diet.

It takes 1.5 cubic meters of water to produce 1 kg of corn. In contrast it takes six cubic meters to produce a 1 kg of poultry and 15 cubic meters to produce a 1 kg of beef. And Chinese meat consumption has doubled since 1985.

In simple terms, anyone who can produce safe, drinkable water is at the beginning a multi-decade long bull market in the commodity.

There are a number of ways to play this trend. The largest water company on the planet is GE (NYSE:GE), though water only accounts for 2% of its revenues. Other market leaders include Veolia (VE), Suez (OTC:SZEZY), Ferrovial (OTC:GRFRF), Severn Trent (OTCPK:SVTRF), RWE (OTCPK:RWEOY), ITT (NYSE:ITT), and Pentair (NYSE:PNR).

Goldman Sachs suggests a basket of smaller plays that could potentially be bought out by the big boys. These include Badger Meter (NYSE:BMI), Calgon Carbon (NYSE:CCC), Clarcor (NYSE:CLC), Pall (NYSE:PLL), Insituform (INSU), Tetra Tech (NASDAQ:TTEK) and others. All of these are worth having a look at.