6/22/2011 1:37 PM ET|
Is water the new gold?
The next hot commodity for investors could be one you think is everywhere, but which in reality is increasingly hard to find: Clean, fresh water.
Economics professors love to haze dewy-eyed freshmen with the diamond-water paradox.
It goes like this: Why, if water is so vital to life, is it essentially free? While diamonds, merely rocks with aesthetic qualities, cost a fortune. You can die of thirst. But you won't die if you don't have sparkly things on your fingers.
The answer, of course, is water is nearly free because it's plentiful, while diamonds are prized for their rarity. But if all the wells were to run dry, you'd happily trade all your worldly possessions for a single glass of water. It's all about survival.
Here's the rub: As a consequence of of population growth, industry and agriculture, fresh, clean water is about to become a lot harder to find. Sure, most of the world's surface is covered in the wet stuff. But 97% of it is full of salt. And most of the remaining 3% is frozen in glaciers or dusting the tops of mountains. Of what remains, a tiny amount is easily accessible in freshwater lakes, rivers and reservoirs.
The rest is held in ancient underground reserves such as the Ogallala Aquifer beneath America's heartland. And like fossil fuels, it is essentially a nonrenewable resource that is being rapidly depleted. That's because this "fossil water" is being extracted much faster than it's being replenished by rainfall.
The law of supply and demand makes this a scarcity story, just like copper, crude oil and gold. But unlike all of those resources, there is no substitute for clean water.
In an era of alternative investments, with even staid portfolio managers looking at things like timberland and physical gold as they fight a decade of flat returns in the stock market and ultralow yields in the bond market, water could be the next great commoditiy play.
And unlike those who invest in diamonds or gold, a water investor will never have to justify the practicality of his investments. It's as simple as this: You drink it or you die. The stakes couldn't be higher. Ismail Serageldin, the World Bank's leading environment expert, warned that the "wars of the 21st century will be fought over water."
First, I'll outline the scope of the problem. Then, we'll look at ways to profit from what is likely to be the defining natural-resource problem of the next decade.
To be sure, it's easy to suffer from crisis overload these days. Climate change. Crop failures. Tornadoes. Oil spills. The list goes on. But of all the issues, water is probably the most troubling yet underappreciated.
According to the United Nations, 50% of the global population will be living in water-stressed regions by 2030. Citigroup estimates that about one-third of the global population will not have access to adequate drinking water by 2025. Right now, 35% of the world's population, or 2.4 billion people, do not have access to safe drinking water and sanitation, the U.N. says.
These issues are poised to result in political turmoil, because more than 20 countries today get more than half their drinking water from rivers flowing out of neighboring countries, and more than 240 water basins around the world cross political borders. Major rivers like the Colorado and the Rio Grande, sucked dry by thirsty municipalities and farmers, now reach the ocean only during very wet years. Imagine the issues to be faced in the years to come along rivers like the Mekong, which flows through China, Burma, Laos, Thailand, Cambodia and Vietnam.
The problem is that the world is using too much. Water demand in the United States has tripled in the past 30 years while population has grown just 50%. Every 20 years, world water consumption doubles -- a growth rate twice that of population.
Water also plays a central role in the major investment themes set to play out in the decades to come: the rise of the emerging-market economies, increased demands on the world's arable land (a result of the spread of high-protein diets), and increased urbanization.
People, as they become wealthier, tend to use more water. Studies by the Environmental Protection Agency put average American household water consumption at about 100 to 150 gallons per day per person, by far the highest in the world. Compare that to an average of 74 gallons in Europe, just 35 gallons by the Swiss and 23 gallons by the Chinese. Africans use just 17 gallons. Now, think of all the double-head showers being installed in tony condos throughout China and India.
Next up is agriculture, by far the largest user of water at 70% of demand globally. Because of rising population and the need to raise and feed the cattle and poultry bound for the plates of increasingly carnivorous Asian gastronomes, the U.N. estimates that an additional 10% of farmland will be put into use by 2030. That will increase total water demand by 14%.
And finally, the great human migration into cites will further strain antiquated infrastructure in the developed world and force the construction of new facilities in the emerging world. In 1950, 29% of the world lived in cities. The U.N. estimates that number will be 60% by 2030.
How bad is the problem? The EPA estimates that the cost of upgrading and replacing America's dilapidated water infrastructure will be more than $1 trillion. At current spending rates, it would take us 700 years to replace aging water assets.
It gets worse. Aqua America (WTR, news), a utility that operates between Texas and Maine, reports that it operates with some 75-year-old pipes. York Water (YORW, news) still uses some cast iron pipes from 1840. In Boston, they've recently found wooden pipes still connecting water mains to historic residences. And in New York City, many water mains are nearly 100 years old.
It's not just an American problem. London reportedly loses 50% of treated drinking water to leaks in old pipes.
As for piping water to newly expanding cities, finding adequate supplies is a big issue. Asia contains 61% of the world's population but only 36% of its fresh water supply. China is even worse off, with 21% of the world's population but only 7% share of the fresh water.
The money pump
Alex Prud'homme warns of the troubled fate of fresh water in his new book, "The Ripple Effect." The idea originated from a conversation with American chef Julia Child (his great-aunt) on the French obsession with bottled water and how that obsession was spreading to the U.S.. From that light conversation, Prud'homme uncovered the dark future outlined in his book.
The book boils the problem down to this simple fact: The Earth holds all the water it always has, "but the number of people using it, how they use it, and where they use it has dramatically changed." We abuse water. We take it for granted, pollute it and price it too cheaply. And we take too much of it from underground reservoirs too quickly.
The Ogallala is the third-largest aquifer in the world. It supplies nearly 30% of all of America's fresh water and the vast majority of the supply to grain-growing states like Kansas, Texas and Nebraska. But it's running out. At current consumption, the aquifer will be pumped dry in as little as 20 years.
Investing in water
For investors, the good news is that there is money to be made here. Scarcity creates value where there was none before. Speculators have already descended. T. Boone Pickens, a Texas oilman pushing natural gas as an alternative automotive fuel, has secured water rights to a large tract of the Ogallala and wants to sell the water to the highest bidder.
The need for more investment has many turning to the private sector and the profit motive. That carries risks. Things went very wrong in Bolivia back in 2000 during the Cochabamba Water Wars. After the system was privatized, rates jumped, and the poor could no longer afford life's most basic necessity. Riots and deaths followed, forcing the president to declare a "state of siege."
Whether water is provided by government entities or private enterprise, a few truths are evident. Water will become more expensive, because the resource isn't "free" and is getting less cheap over time. And money will have to be spent on new desalination plants, recycling facilities and on efficiency efforts. Companies that make the technology and equipment needed to filter, disinfect and test water supplies are likely to benefit.
As a result, Citigroup expects the $450 billion global water industry to grow at a steady 5% annual rate in the years to come. While this may seem modest, the growth is noncyclical (which means that it should grow regardless of the business cycle) yet nondefensive (it should accelerate as emerging-market economies develop). In the volatile economic environment we've had lately, these are valuable characteristics.
The Citi Global Water Index, which includes stocks like private utility Aqua America, pump maker Pentair (PNR, news), and filtration outfit Pall (PLL, news), is up 126% over the past 10 years versus a 24% increase for the Standard & Poor's 500 Index ($INX). The five-year performance of 25% also beats the S&P 500's 16% rise. Pall and Pentair are the two most-attractive individual stocks in the sector, as they maintain clean uptrends out of the March 2009 bear market low. Pall looks particularly attractive at current levels as it emerges from a six-month consolidation pattern.
For those looking at broad exposure to the sector, there are a number of water sector mutual funds and ETFs. Funds include the Calvert Global Water (CFWAX), the Allianz RCM Global Water (AWTAX) and the Kinetics Water Infrastructure (KWIAX). The most liquid ETF is the PowerShares Water Resources (PHO).
One nice thing about water is that, unlike gold, it isn't subject to the whims of popularity or the deftness of central bankers. It's essential for life. It's a constrained, mismanaged resource that's improperly priced. It's denser than oil and difficult to transport. And they sure aren't making any more of it.
At the time of publication, Anthony Mirhaydari did not own or control shares of any company or fund mentioned in this column.
Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at firstname.lastname@example.org and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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Comparing water to gold and fossil fuels is ridiculous. We have the raw materials (mostly in the form of surface water) for clean water we just don't have the proper infrastructure to clean the water or deliver it. In essence, the comparison is like saying we are running out of oil because we don't have enough refineries. Elementary school science teaches you the earth cycles its water and it is a closed cycle (water is not lost.) It's further evident we are not running out of surface water by the flooding in the US and other countries. We have water. We just don't have the means to process and distribute the water. (And we can always desalinate ocean water, too.)
We should be questioning why most of the U.S. economic stimulus package went to transportation projects and very little to water/wastewater projects. In my opinion, water is more important than gold...and transportation.
We need to fund our water infrastructure. This is a problem that money can fix, unlike oil. And if the government doesn't fund it, private enterprise will. Which is what Mr. Pickens is relying on.
WHY can't anyone bring up the subject of overpopulation to the general public ? Stop that dreadful Duggar woman first and then work on the rest of the world. Fewer people, less dense living, less risk of global disease spreading, more peace of mind, ability to send more resources to poorer countries, more people fed well, less pollution, a chance to save endangered forests and other habitat for plants and animals. The list is endless.
This all sounds great until you realize that the oceans are really big and desalination isn't particularly expensive or complicated.
The problem isn't the fresh water being available, it is getting it to where people want to live (or getting people to quit moving to where there isn't any water). Even at the low-flow rates at night and during winter (50,000 cubic feet per minute), enough fresh water goes over Niagara falls to meet the needs of every person in the US and Canada (and this is with all the upstream withdrawals already factored in). Most of this water ends up being emptied into the ocean unused. The Mississippi dumps 4 times this much water into the Gulf of Mexico (low flow is ~200,000 cfs). These two combined could provide fresh water at the US usage rate for everyone in the western hemisphere (and these rates are after they already provide the water needs for roughly 100,000,000 people living in the watersheds).
West Texas, New Mexico, Arizona and Southern California are DESERT. Yet people keep insisting on moving there, and worse yet insist on planting inedible crops (grass lawns and non-native trees) that require them to dump millions of gallons of the precious fresh water on the ground to keep these decorations alive. Combine this with all the desert that has been converted to farmland thanks to Hoover Dam, and you can see how we aren't being very efficient.
As to the Ogallala, T. Boone's rights will be worthless if (as Mirhaydari claims) the aquifer is going to be sucked dry by 2025 or 2030, so are we supposed to invest our money in the rights to drill more dry wells? I'm confused here. Not really, since the floods along the Missouri and Mississippi wil provide a nice recharge to the aquifer over the next couple of years.
Mirhaydari once again pulls some sensationalized BS and some shoddy science to demonstrate his ignorance for the MSN readers to see. On top of that, on what is supposed to be a financial website, he makes absolutely no indications of how this is supposed to impact your finances going forward.
The same thing can be said about Lead vs. Gold....and by lead I mean bullets. When the crap hits the fan and a country is spiraling down into nothing...you can have all the gold in the world....but it don't mean anything, but lead does. I can't throw a gold coin at someone to get them away from my food, water, and family....but boy that lead will bring someone down. Everyone is investing in Gold right now because everyone thinks it means something if a government collapses. Sure...perhaps...if you can get your stock pile out of where ever it is, put it on a row boat with you and sail to another land. But good luck throwing all those gold shillings at the people coming to kill you.
Please support the use of Retention ponds in your local area. They ease flooding, and recharge the groundwater. They are far superior to Detention ponds, which just ease flooding.
Plenty of water rains/snows down on the US. We simply need to hold it from becoming runoff and going into the ocean. (Bonus: it's cheaper to build a retention pond than to upgrade drainage systems when new development is built.)
Occasionally I get sad knowing that, even with luck, the number of years left to me are a great deal fewer than I wish. Then I think about all the poop preparing to hit the fan in about 15 yrs.
and I feel somewhat better! Not that I don't vote for the environment, recycle like crazy etc. but I fear we've already reached the point of no return for most of the world's population.
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