There are many things in life that we take for granted. We expect to turn on a switch and the lights to go on. When we turn on the faucet, we expect water to flow. Whenever we are hungry, we expect the grocery shelves to be stocked and we expect to be able to fill our tank with gas whenever it needs filling. These things we take for granted are life's necessities. Our lives need food, water, and energy to function. We expect them to be there and we give them very little thought until we have difficulty getting them. Occasionally, Mother Nature reminds us just how precious these natural resources are. Standing in line to fill your tank after a storm has shut down energy production in the Gulf of Mexico, walking into a grocery store to find stock shelves empty ahead of a hurricane, or securing water rights for farm land or a city in the midst of a drought are subtle reminders of just how precious these resources have become.
For the last two decades the U.S. and the rest of the world have invested very little to develop and secure these necessities that are so casually taken for granted. Energy, water, base metals forests and farmland have all been ignored by the financial markets. Bull markets run in cycles lasting 20-25 years. They are the product of supply and demand imbalances. The declining prices that accompany bear markets lead to a scarcity of new investment. Capacity shrinks, the industry consolidates and new investment dries up leading to decline. In the last two decades no new refineries have been built, very little has been spent on building new pipelines or power plants, building new mines, developing new cocoa or sugar plantations, or developing water infrastructures. Productive equipment in these areas have gone into disrepair, deteriorated or been cannibalized, scrapped, or shut down. The mining and energy industries are suffering from a shortage of qualified geologists and engineers. Who wanted to go to college and study geology when there were fortunes to be made on Wall Street or in Silicon Valley? The natural resource industry is suffering from a dearth of qualified personnel.
As a result of this lack of investment, we face shortages in several key commodities. The balance between supply and demand is out of whack again and it will take more than a decade to fix it. Inventory levels of major commodities are down across the board. Gold and silver are running multi-decade deficits, oil and gas are getting harder to find and water tables around the globe are dropping dramatically. We seldom think about these necessities unless prices suddenly spike. While energy and the sky-high price of oil and gas has captured headlines, water will shortly move front and center as the cost of procuring it becomes more difficult and our existing water infrastructure breaks down. As we begin this new century, a global water crisis could threaten the security, stability and the environmental sustainability of the developed and developing world. The looming water crisis will affect all nations. Without an adequate supply of clean fresh water, human development is stifled.
The fact that this crisis is upon us is made clear by recent headlines from floods in Bangladesh and eastern Europe, the water drawdown in the western United States, to the hundreds killed by Nile fever. According to a recent UN report, 25,000 people are still dying from malnutrition every day and 6,000 people, mainly children under the age of five, are dying from water-related diseases.1 The problem is the world’s population is getting larger and with it water withdrawals are increasing with it. Water stress will increase significantly in 60% of the world, especially in Africa, Asia, and Latin America according to the UN.
The crisis in water centers around three factors. They are listed below:
- Water scarcity
- Water quality
- Water-related disasters
To understand the water crisis one needs to understand the water cycle. Water is a renewable resource within certain limits. The variability of water is one of the essential characteristics of this natural resource. The unpredictability and variability of water resource flows requires management.
Water Scarcity
Most of the fresh drinking water required for human consumption comes from precipitation. The water from this precipitation is either absorbed by plants and soil or returned to the atmosphere through evapotranspiration. Most water consumed by humans comes from runoff water that has been diverted for use in agriculture, industry, or consumer use. The water that comes from evapotranspiration supports forests and grazing land and various ecosystems. The UN estimates that 26% of annual evapotranspiration and 54% of accessible runoff is now appropriated by humans.2 Because of growing population and increased usage due to lifestyles, more and more water is being appropriated. The result is that the water needed for consumption, the production of food and industrial use is becoming scarce.
“It has been estimated that today more than 2 billion people are affected by water shortages in over forty countries: 1.1 billion do not have sufficient drinking water and 2.4 billion have no provision for sanitation (WHO/UNICEF, 2000). The outcome can mean increases in disease, poorer food security, conflicts between different users and limitations on many livelihood and productive activities. Current predictions are that by 2050 at least one in four people is likely to live in countries affected by chronic or recurring shortages of fresh water'This is worrying given predictions of a 60% world urban population by 2020. At present, half the population of developing countries lives in water poverty.”3
Image cannot be displayedThe accretion of arable land through urban development has led to greater appropriation of evapotranspiration moisture. This growing urbanization is leading to the destruction of ecosystems that support the growing of food and the water necessary to grow it. It is also leading to increased political tension, since many water resource areas are shared by two or more countries.
Water Quality
The second key area affecting water is quality. Human and industrial waste, chemicals, fertilizers and pesticides are polluting our fresh water resources found in ground water, lakes, streams, and rivers. Faecal coliforms, acidifying substances from mines, metals from industry, nitrates and phosphates from farming are finding their way into our water supply. The pollution of water resources is especially bad in developing countries, which lack the economic means to manage their water resources. Pollution is affecting the quality of water as well as industries associated with water such as fishing and farming.
Water-related Disasters
In the last decade close to 700,000 people died in water-related disasters. Most of these water-related calamities were in the developing world where there are large population concentrations along floodplains and the coast. Infrastructures are destroyed with each new storm and without adequate financial resources, they seldom are rebuilt or repaired. This leaves the community more vulnerable to the next disaster. Floods are the most common form of disaster with over 150 flood events in 2000. Sometimes, as in the case with Bangladesh, a water-related adversity brings about a concerted effort to change and become prepared.
Factors Affecting Water
These three water-related issues are impacted by myriad factors with population growth appearing at the top of the list. There are 3 billion more people that inhabit the earth than in 1970. Since 1970, water supplies have decreased by one-third. By mid-century population growth is expected to stabilize around 9.3 billion, 50 percent higher than where it is today. Based on these projections, nearly 7 billion people will live in water-scarce regions in the world by the year 2050.
Closely associated with population growth is increased demand coming from agriculture, urbanization, industrialization and energy. All of these factors are placing stress on the world’s water ecosystem. These issues were addressed recently at the World Water Forum in the Hague in March of 2000. The Hague Ministerial Declaration identified seven challenges for the global community to confront in this new century. They include the following:
- Meeting basic needs: This means recognizing safe and sufficient water sanitation as a basic human need.
- Securing the food supply: enhancing food security through efficient mobilization and use of water.
- Protecting ecosystems: ensuring ecosystem integrity through water resource management.
- Managing risks: providing security from floods, drought and pollution.
- Sharing water resources: promoting peaceful cooperation between different water uses, and between different states.
- Valuing water: managing water and taking into consideration economic, social and cultural values, with a realistic pricing of water services and their cost.
- Governing water wisely: ensuring good governance at both the private and public sector
Because of its importance as a natural resource, water has been given a high profile by governments, international organizations, and NGOs around the globe. In addition to these problems governments are wrestling with the challenges of growing urbanization as well as the needs of industry for clean fresh water. Water is not only vital to maintaining city life, but it also plays an important role in the production of food and energy.
The World Bank has recently drafted a plan to combat water scarcity, linking it to poverty. Building water infrastructures is expensive. Most water investments entail large-scale infrastructure investments that are risky and expensive. The costs to build these infrastructures, such as dams, can be enormous with uncertain rates of return and long payback periods. But without these large scale investments, future water supplies would remain in jeopardy. How these infrastructure investments will be financed is emerging as one of the key policy issues of this new century.
What is becoming clear to government leaders is that the longer water quality and scarcity issues are unaddressed, the greater the danger of a water crisis this new century is going to see; a crisis that will be much more difficult to cope with and much more complex than the current energy crisis. These crises will beset us through frequent heat waves, droughts, storms, floods and changing precipitation patterns. Frequent and stronger El Ninos seem to be accompanying warming trends throughout the globe. As temperatures warm, water is sucked out of the soil at elevated evaporation rates. This leaves less moisture in the soil affecting groundwater, rivers, and crop yields.
We live in a world of finite resources. There isn't much we can do to alter the actual quantity of water in the earth. The supply of water is essentially fixed. What can be done with this fixed supply is that its location and quality can be altered. Our access to fresh water is a product of intervention through dams, storage, and diversions. Because most of us live in cities, what happens in one part of the country may affect other parts of the country. A drought in water-short California impacts crop prices for fruits and vegetables nationally. Draining the Florida Everglades has meant less rainfall for Miami. The large Ataturk Dam affects the supply of water in Syria and Iraq.
Water Wars
Image cannot be displayed When it comes to water, there are no alternatives. Water is as much a political resource as it is a natural resource. Between nations it is a question of who controls it. The question of ownership and rights has provoked countless disputes, conflicts and wars throughout all of history. Water was a factor igniting the Six Day War of 1967. The Arab League became angered after Israel's construction of its National Water Carrier appropriated much of the water of the Jordan River for use in Israel. Today a bitter quarrel is emerging between Turkey and its nearby neighbors, Syria and Iraq, over the flow of water from the Tigris and Euphrates rivers. The Southwest Anatolia Project, a major engineering feat, will place 22 large dams and reservoirs along the Tigris and Euphrates rivers at the top of their source in Turkey. Turkey in essence will control the flow of water along these historic rivers impacting Syria and Iraq. The Euphrates is Syria’s primary source of water. What is left over goes to Iraq. There is no formal agreement between the three states to share the water.
While oil dominates Middle East politics, water may soon displace energy as the most important resource in the region. It isn’t just the West Bank, which sits on top of a water aquifer or the Ataturk Dam. Most of the world's major rivers are the subject of disputes or the source of political conflict. In Africa the Nile River region is becoming the source of potential conflict and war. Over two-thirds of the African population is threatened by water scarcity and famine. The countries that border the Nile--Ethiopia, Eritrea, Burundi, Rwanda, Zaire, Kenya, Tanzania, Uganda, Sudan and Egypt – are among the world’s least developed economies that are poor and growing with enormous debt loads. They are primarily agricultural economies dependent on the water from the Nile. Their countries are afflicted by soil erosion, drought and land degradation. Many of these countries are the recipients of foreign aid. These are poor countries without the resources to effectively manage their water resources. Without the funds necessary to build water infrastructures, the only option seems to be war or genocide.
What is clear from headlines and developing stories in the resource sector is that water is moving to center stage as an apparent water crisis confronts the world. Unless it is addressed soon, this crisis may affect the stability and sustainability of all nations, especially in the developing world. We all share and inhabit the same planet and water affects us all. Millions die each year from water-related diseases or from lack of adequate and clean water. Millions more will die without access to safe and clean drinking water. As population growth continues and more people are added to the planet, the water issue can no longer be ignored. It is going to take people, peace and enormous resources to solve this crisis. It will take more than the efforts of politicians and diplomats. It will require cooperation globally and enormous amounts of capital. From a private sector viewpoint, it is an awakening opportunity still in its infancy.
Water Investment
How big is the global water market? It is much bigger than anybody thinks. Even though the global water market remains fragmented and in the hands of government, there are estimates as to its size. Global Water Intelligence in the U.K. has estimated its size ranging from 0-0 billion annually.
GWI estimates per capita residential water use at about 15,000 gallons a year with an average price of __spamspan_img_placeholder__.54 per cubic meter. Their estimates allow for a 10-15% margin of error. The total global water market is made up of residential use, waste water, industrial water, and agricultural use.
Investment in water is a global opportunity. It isn’t just the U.S. market with the highest per capita use of water. Opportunities abound from China to Brazil. There is an enormous need for water investments globally from water utilities to supply and support water use in major metropolitan areas to water treatment, equipment, and filtration companies.
In the U.S. there are more than 50,000 community water systems. Most water systems serve communities of less than 3,300 people. They are small, inefficient and there are too many systems. Most water systems are owned and controlled by government with less than 1% of the systems serving populations of 100,000 or more.
Water is the only utility that hasn’t been deregulated. There are high barriers to entry, requiring economies of scale and large capital investments. Demand continues to increase as supply remains finite. No substitutes exist as demand remains inelastic. The EPA has recommended that it would require 1 billion in new investment to bring the nation’s water systems to standard. Where will this money come from? Most of the revenues remain in government hands. The water sector is so small that very few analysts on Wall Street even follow the sector. Value Line covers the water utility sector with coverage of only three water utilities. They cover only a few of the filter and water treatment companies. The group as a whole remains underowned and ignored by investors. Water is hardly on the radar screens of most analysts and investors. But it should be. A water index made up of 20 U.S. and international water stocks is up over 45% since the beginning of 2001 versus losses for the major U.S. stock indexes. Those returns don’t include dividends, which are high by comparison to other sectors and companies.
The market cap for the sector is less than billion. Liquidity isn’t the greatest and stock prices can jump suddenly with the smallest amount of buying pressure. However, prospects should improve over the next few years as the market for water grows and the industry consolidates. At present a "Pac Man" phase is taking place throughout the whole industry. Investor-owned utilities are buying municipal systems; large public companies are buying smaller public companies; larger European companies are buying out U.S. utilities, and small private systems are being consolidated to achieve greater economies of scale.
In my Perfect Financial Storm Series and more recently in The Next Big Thing, I have highlighted water as one of the most important sectors to be invested in this new century. There is a reason. The world's population continues to grow and along with it the demand for water. Water is a growth industry that is essential to our wellbeing. In addition to supply, the need for water treatment systems to provide clean and safe drinking water is one of the biggest and forthcoming issues of our day. New spending on sewer systems will become a key growth driver in the years ahead. I believe water is going to emerge, along with energy, as The Next Big Thing. As the tables listed below point out, investing in water has been highly profitable over the last 5 and 10 years on a total return basis and from an income point of view. As the returns below illustrate, water has become “Blue Gold.”
References:
[1] The United Nations World Water Development Report, p.4
[2] Ibid, p.10
[3] Ibid, p.10
