You aint gonna miss your water until your well runs dry
- Bob Marley
Amidst all the negative headlines and anxiety there are always opportunities. In fact problems often lend themselves to great investing themes. One such theme and secular growth story is water. The $500 billion global water sector offers a very compelling longer term secular story with defensive growth similar to world GDP. It is driven by the same megatrends such as water scarcity, quality and safety. What follows is a very brief synopsis on the space and investing opportunity.
Some Interesting Facts about Water
- The overall amount of water on our planet has remained the same for two billion years;
- In a 100-year period, a water molecule spends 98 years in the ocean, 20 months as ice, about two weeks in lakes and rivers and less than a week in the atmosphere;
- Groundwater can take 75 years just to travel a mile;
- Over 90 percent of the worlds supply of fresh water is located in Antarctica;
- Less than one percent of the water treated by public water systems is used for drinking and cooking;
- It takes 7,000 litres of water to refine one barrel of crude oil;
- It takes 713 gallons of water to produce one T-shirt;
- The United Sates alone consumes 410 billion gallons of water a day, more than the 285 billion gallons of oil it uses annually;
- One pound of wheat requires 132 gallons of water, versus 1,799 gallons of water for a pound of beef;
- A single 300mm semiconductor wafer requires 2,000 gallons of water.
Water is probably the most overlooked natural resource on the planet even though it is ultimately a life-sustaining one with no substitute. It is a basic building block that intersects various sectors and geographies. It is a limited resource with a steadily worsening supply / demand imbalance. Ironically, water is often in short supply when needed most and in overabundance (think flooding) in locations where it isnt needed.
Water is denser than oil and which makes it more expensive and difficult to pump through pipelines so its not so easily transported. China and India, for example, account for roughly 30 percent of the worlds population, but only about 10 percent of its accessible freshwater resources.
Strong Secular Demand
Water consumption is doubling every 20 years at a rate twice that of population growth. Currently agriculture represents nearly 70 percent of global water demand. This is not consistent throughout the world as more developed nations actually demand more water for industrial use in the higher income countries water demand is about 55 percent industrial.
One of the key aspects to consider is what would world water demand look like if the rest of the world consumed water like the US on a per-capita basis? According to the Environmental Protection Agency, the average American uses about 100-150 gallons per day versus the average Chinese at 23 gallons per day. The potential growth in water demand is simply staggering if you believe all developing nations will consume amounts similar to developed countries.
What will drive this demand? - urbanisation and food consumption trends. By 2050, it is estimated that 70 percent of the worlds population will be urban. China, for example, will likely have 42 percent of its 2007 population in urban centres to 73 percent by 2050. Toilets, washing machines, heating and cooling, all aspects of urban life, require higher volumes of water.
The changing diets in the emerging world are also creating a shift in consumption trends. As people become richer they tend to favour higher-protein diets. One pound of wheat takes 132 gallons of water but one pound of beef requires an estimated 1,799 gallons. The United Nations estimates that world food output will need to grow by 70 percent by 2050 just to meet evolving global demand.
Escalating food demand has led to an escalating demand for water. According to The Economist, areas under irrigation have doubled since 1950 and the amount of water used for farming has tripled. Citigroup estimates that of the worlds total annual precipitation, 79 percent falls into the oceans, two percent in lakes and 19 percent on land. Only two percent of the water that hits landfall actually filters into groundwater. Thus efficient irrigation systems will be crucial for future water usage.
Although it appears that water is common and available because it covers 70 percent of the earths surface, only a small percentage of it is usable fresh water. 97.5 percent of the worlds 1.4 billion cubic metres is salty. Only about 2.5 percent of total water is fresh water and it is estimated that only one percent of all water is potable.
Although supply is essentially renewable it is geographically finite in quantity. Many countries have an advantage when it comes to water as they have a relative abundance. But the emerging nations and Europe have decreased supplies relative to their populations. The United Nations recently estimated that by 2030, about 50 percent of the global population will be living in water shortage areas.
If we extrapolate these figures, one third of the global population will not have access to adequate drinking water by 2025. At the beginning of the 21st century the number of people living in countries with chronic water issues was about 500 million. By 2050 this is estimated to be four billion. Water scarcity is increasing.
Supply trends are not helping. Fresh water is dwindling due to pollution, the draining of underground aquifers, and arguably the result of climate change. In 2007, the United Nations estimated that 80 percent of wastewater in developing countries flowed untreated to lakes, rivers and seas while 2.6 billion people lacked access to basic sanitation. Climate change has also lead to more frequent droughts. The Agricultural Information Office of China has reported that droughts in China occurred every five years in the 50s, every two years in the 90s but in the past ten years they occur almost every year. Nearly 1,000 of Chinas 3,000 lakes have disappeared in the past 50 years.
Some 30 countries today actually rely on more than half of their drinking water flowing from neighbouring countries. This, at some point, could lead to supply conflicts. As Mark Twain aptly pronounced, Whisky is for drinking, water is for fighting over.
The Water Gap
This large demand trend and prevalent supply concern has led to what we call the water gap. McKinsey & Company, a consulting firm, project that if water demand continues to grow at a two percent yearly rate and water efficiency levels remain constant, there will be a gap between demand and supply of 40 percent by 2030. Barring any major changes soon, China and India may actually have some of the biggest gaps in the supply/demand balance. The Water Resource Group, estimates this could be 50 percent of demand in India and 25 percent of demand in China by 2030.
Water Infrastructure Demand
A major consequence of these trends is an immense gap between what is required to update, modernise or expand the worlds water infrastructure. In order to manage this dwindling supply of freshwater, massive amounts of capital and investment will be needed. Consider these statistics:
- In 2010 the United Nations reported that only 31 percent of the Indian population had access to a toilet;
- Leaking pipes is a big issue. The American Society of Civil Engineers estimates that around 15 percent of Americas drinking water is lost daily to leaks in poor pipelines. Canada estimates 13 percent of water is lost through leaks. China estimates a leakage rate of 20 percent. In New Delhi, only 40 percent of piped water actually reaches its customer;
- The EPA estimates it will take $300 billion to $1 trillion to upgrade Americas decaying water infrastructure over the next two decades;
- In 2006 there were only 1,000 sewage treatment plants in China (Germany had 10,000 at that time). In January 2011 China planned to spend $608 billion on water infrastructure over the next decade.
Booz Allen Hamilton, a consulting firm, estimated that the world will need to invest $22.6 trillion on water infrastructure between 2005 and 2030 to meet growing demand this is more than double what they estimated for power infrastructure spending!
There are many investment implications here but water is a difficult theme to play. Texas billionaire T Boone Pickens seems to get it and has now become the largest individual water owner in America with rights to an underground aquifer supplying 27 percent of all irrigation in the United States.
But if you cant go out today and buy water rights where do you go? Most investors turn to the water utility but we would suggest you begin looking at the infrastructure plays. Equipment in demand will include pumps, filters, water pipes, valves, irrigation systems, water treatment chemicals, and automation technology.
The other area of potential investment is in agricultural efficiency. Inputs in this model are companies that offer fertilisers, drought resistant seeds, farm equipment and efficient irrigation systems. Specifically in the water area of agriculture, drip irrigation offers less water use and loss. It allows plants to get water at the right time and significantly enhances yields. Here is a brief list of some companies (NOT RECOMMENDATIONS) which touch on the water theme:
Danaher Corporation—DHR (waste water systems)
Xylem Inc.—XYL (largest publicly traded pure play in water equipment sector)
Flowserve—FLS (pumps and valves)
Veolia—VIE FP (largest water and wastewater treatment)
Baker Hughes—BHI (industrial water treatment)
Cameron—CAM (produced water—fracking)
GE—GE (Filtration and desalination)
Mueller Water—MWA (transmission and distribution water infrastructure)
ABB—ABB (automation systems)
Dow—DOW (desalination membranes)
Franklin Electric—FELE (pumps)
Northwest Pipe—NWPT (pipe)
Valmont Industries—VMI (irrigation)
Lindsay Corp—LNN (irrigation)
Itron Inc—ITRN (meter systems to monitor and control water usage)
Hyflux Ltd. —HYF SP (desalination)
Disclaimer: The author and clients of Anchor Investment Management Ltd currently own General Electric. The clients of Anchor or author may or may not, in the future, own positions in any stock mentioned in this article. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Anchor Investment Management Ltd. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their financial advisors prior to any investment decision.
Nathan Kowalski is the CFO of Anchor Investment Management Ltd.
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