When looking for a dominant investment theme the approach I take involves looking at global or big picture conditions. I study trends, read the news, basically watch and listen to what’s going on in the world. What I’m looking for is a trend so powerful, so dominant, it’s going to be my guide to where I invest – I focus on the factors that I think will drive headlines going forward.
This is “Top Down” investing and in this author’s opinion is the most rewarding way to invest.
In the resource sector there are considerable opportunities presenting themselves - investable themes always blossom from major trends.
In a recent article, "An Argument for a Contrarian Investment" I wrote:
"…the most investable trend over the next 20 years is going to be in the resource sector, the renewable and non-renewable resources, the minerals, ores, fossil fuels and biomass a wealthier and growing global population is increasingly demanding from finite supplies and already strained production capabilities."
Two of these resources/commodities are undoubtedly going to be potash and uranium, here’s why I think so….
Water
There's a lot of water on the planet we inhabit – an estimated 326 million trillion gallons or 1,260,000,000,000,000,000,000 liters.
That makes it hard to believe that there are somewhere between 780 million to one billion people without basic and reliable water supplies and that more than two billion people lack the requirements for basic sanitation.
Harder still to believe are reports water is going to get much dearer in our near term future – yet Peter Voser the chief executive of the world's second-largest energy company, Royal Dutch Shell, warned us in June 2011, that global demand for fresh water may outstrip supply by as much as 40 per cent in 20 years if current fresh-water consumption trends continue.
Our planet is 70 percent covered in ocean, ninety-eight percent of the worlds water is in the oceans – which makes it unfit for drinking or irrigation because of salt.
Just two percent of the worlds water is fresh, but the vast majority of our fresh water, 1.6 percent, is in its frozen state and locked up in the polar ice caps and glaciers.
Our available freshwater (.396 percent of total supply) is found underground in aquifers and wells (0.36 percent) and the rest of our readily available fresh water, 0.036 percent, is found in lakes and rivers.
Freshwater aquifers are one of the most important natural resources in the world today, but in recent decades the rate at which we’re pumping them dry has more than doubled. The amount of water pumped has gone from 126 to 283 cubic kilometers per year - if water was pumped as rapidly from the Great Lakes they would be dry in roughly 80 years.
Another effect of over pumping is saltwater intrusion. If too much groundwater is pumped out from coastal aquifers saltwater may flow into them causing contamination of the aquifer.
A growing number of rivers do not make it to the sea. Streams, rivers and lakes are almost always closely connected with an aquifer. The depletion of aquifers doesn’t allow these surface waters to be recharged - lowering water levels in aquifers is being reflected in reduced amounts of water flowing at the surface. This is happening along the Atlantic Coastal Plain, groundwater depletion is also responsible for the Yellow River in China not reaching the ocean for months at a time, the failure of the Colorado River in the U.S. and the Indus River in Pakistan failing to reach the ocean every day.
There is widespread surface and groundwater contamination that makes valuable water supplies unfit for other uses.
One of the greatest issues facing us in the 21st century is how we will share this less than half a per cent of usable freshwater to feed our increasing population - if the predicted 40 percent shortfall occurs, and United Nations (UN) population growth estimates are correct, we’ll need to feed nine billion people - two billion more people than today - by 2050 using far less fresh water than we have available today.
Advances in technology, innovation, and best practices/conservation are already clashing with finite water resources, relentless population growth, changing diets, a lack of investment in water infrastructure and increased urban, agricultural and industrial water usage.
Investment in water management as a percentage of GDP has dropped by half in most countries since the late 1990s.
Climate Change
The Earth's climate has been continuously changing throughout its history. From ice covering large amounts of the globe to interglacial periods where there was ice only at the poles - our climate and biosphere has been in flux for millennia.
Approximately every 100,000 years or so our climate warms up temporarily.
This temporary reprieve from the ice we are now experiencing is called an interglacial period - the respite from the cold locker began 18,000 years ago as the earth started heating up and warming its way out of the Pleistocene Ice Age.
These interglacial periods usually last somewhere between 15,000 to 20,000 years before another ice age starts. Presently we’re at year 18,000 of the current warm spell.
As studies of past ice ages continued and climate models are improved worries about a near term re-entry into the cold locker have died away – the models now say the next ice age will not come within the next ten thousand years.
The study “Climate Trends and Global Crop Production Since 1980” compared yield figures from the Food and Agriculture Organization (FAO) with average temperatures and precipitation in major growing regions.
Results indicated average global yields for several of the crops studied responded negatively to warmer temperatures. From 1981 - 2002, warming reduced the combined production of wheat, corn, and barley - cereal grains that form the foundation of much of the world's diet - by 40 million metric tons per year.
The authors said their study demonstrated a clear and simple correlation between temperature increases and crop yields at the global scale.
Arable land
Arable land covers just three percent of the world's surface. Based on historical data arable land decreases by 25 million acres annually - it is estimated that one hectare (one hectare equals 2.47 acres) of productive land is lost every 7.67 seconds. The greatest causes of lost productive land are desertification and urbanization.
Desertification - new deserts are growing at a rate of 51,800 square kilometers per year. As an example Nigeria (Africa’s most populous country) is losing almost 900,000 acres of cropland per year to desertification because of increased livestock foraging and human needs.
Urbanization - The change of diet among newly prosperous, urban populations in developing countries is the most important factor stoking the rise in global food demand.
A rising income means more money in the household budget. The new middle class consumers forgo plant based calories in favor of adding more protein from meat and dairy products to their diets. It takes up to 8 kilograms of grain to produce one pound of beef - less for pork, chicken, milk or eggs - between 2kg and 6kg. As meat consumption soars, more grain is needed to feed more livestock.
In 1995, the Chinese ate an average of 25kg of meat per person, by 2007, the Chinese were consuming 53kg of meat per person.
In 1980, the world ate 133 million tonnes of meat and drank 342 million tonnes of milk. By 2002, consumption had increased to 239 million tonnes of meat and 487 million tonnes of milk. The United Nations Food and Agriculture Organization (FAO) estimates that by 2030 global annual consumption of meat will stand at 373 million tonnes and 736 million tonnes of milk.
The more people there are on this planet and the more Asians, and others, decide they want a western style diet the more grains/oilseeds are needed to feed them. And many of those very same grains are needed to raise the animal protein, the beef, pork and chicken they want - they are also the very same grains the world’s poorest people, the ones who can’t afford to climb the protein ladder, depend on to survive.
Feeding Ourselves
The central issue for us over the next few decades is not climate change or the global financial crisis - it is whether humanity can achieve and sustain the enormous harvest we need from this planet to feed ourselves.
We are going to have to grow more food. To do that we need to increase yields on our arable land and find more fresh water for irrigation. The world's options for increasing food production are limited by the supply of land and water. We must a) place more of the world’s land under cultivation or b) increase yields on existing usable land or c) both of the above.
We need to grow more food on the productive land we have, that means we need to invest in water infrastructure, fertilizer production and nuclear energy.
Potash
In order for a plant to grow and thrive, it needs a number of different chemical elements. Three of these are the macronutrients nitrogen, phosphorus and potassium (a.k.a. potash, the scarcest of the three).
Potassium makes up one to two percent of any plant by weight and is essential to metabolism. The availability of nitrogen, phosphorus and potassium in the soil, in a readily available form, is the biggest limiter to plant growth.
Potash is a major source of potassium. Potassium is found in every plant cell, it helps plants:
- Grow strong stalks
- Resist stress - weeds, insects, disease and changes in temperature
- Improves water retention
- Strengthens roots and stems
- Assists in nutrient transfer
- Activates vital plant enzymes
- Ensures the plant uses water efficiently
- Helps keep the food you buy fresh
A huge increase in the application of potash-rich fertilizers will have to happen - the increased use of plant nutrients is the most effective way to increase crop yields in the face of:
- An increasing global population
- Water shortages
- Decreasing arable land
- Improved and diversified diets
Uranium
How do we source the fresh water we’re going to need to supply (for drinking, irrigation and sanitation) the world’s current, and expected to grow, population?
The answer is uranium, or rather the nuclear power generated by uranium to run seawater desalinization plants.
Nuclear energy works, it’s safe and recognition is slowly dawning it’s going to be impossible to meet the global, growing demand for energy and cut carbon dioxide emissions without nuclear energy.
However there’s more to nuclear power than just the upside from greener electricity.
Marco Rognoni, of Saline Water Specialists, says desalination of brackish and sea water by reverse osmosis is expensive and inefficient.
“The selection of the appropriate desalination technology between evaporation and reverse osmosis is grounded on several factors, including investment cost, maintenance cost, degree of availability, heaviness of the duty, and the required purity of the desalinated water. The main factor, however, is often the running cost of the plant, and specifically the cost of the consumed energy."
Energy use accounts for between 35 and 45 percent of the total cost of producing desalinated water using reverse osmosis - sea water is forced under pressure through a semi-permeable filter, the ions that make seawater salty are left on one side of the filter and purified water is formed on the other side.
Evaporative (evaporation is the process that describes the transformation of a chemical compound from a liquid to a gas form) desalination could be the least expensive approach to generating fresh water because of the free heat energy available as a by-product of electricity generation using nuclear power.
When seawater is heated, the water evaporates into water vapor. Elements within the solution that are not water, in this case salt, will not change form at the same temperature as water and are left behind in solid form. As the water vapor cools it becomes fresh water we can use for drinking, irrigation and sanitation.
Conclusion
Once in a long while we as investors are given a glimpse, a window into the future. How can there be any doubt that access to clean fresh water for drinking, sanitation and crop irrigation is going to become the one overriding concern for billions of people?
