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How to profit from the world's most important resource

By MoneyWeek Editor Merryn Somerset Webb May 19, 2006

Merryn Somerset Webb

Ask any fund manager what liquid is the most important to the global economy and he’ll tell you oil. The tight supply-and-demand situation has pushed prices up to a level that threatens economic growth and is kicking off inflation around the world, he will say. And if we don’t really start thinking about how best to kick our addiction to the black stuff — which powers every part of our economies — there’ll be trouble ahead.

I’d agree with him on much of this — there is trouble ahead — but not on the first bit. Oil is not the most important liquid. Water is. Oil is vital to the way we live now but it is replaceable (there are all sorts of alternative sources of power) and we could, with difficulty, survive without it. 

But water, on the other hand, is not replaceable and we can’t live without it. As the Environment Agency indicated last week, it is becoming frighteningly scarce, with Britain facing the worst drought in a century. And if the UK of all places doesn’t have enough, what chance is there for warmer climes?

Although water covers two-thirds of the Earth’s surface, a mere 0.08% is usable as is; the rest needs cleaning or desalination. And, as our populations and economies grow, it is becoming increasingly apparent that is not enough.

There were shortages all over southern Europe last summer; in Britain there is already talk of hose-pipe bans. East Africa is suffering its worst drought for 40 years. In America the states are bickering about who has rights over the water in the great lakes. Huge areas in the north of India are frequently short of water — and there is genuine concern that it could be not the collapse of the American consumer, not global recession and not social unrest but water shortages that eventually derail China’s spectacular economic growth.

In the past 25 years China’s population has increased by 320m, its urban population has risen by 340m and its gross domestic product has gone up eightfold. All this means the demand for water has soared.

Feeding a growing population is very water-intensive; every tonne of rice needs 2,000 tonnes of water to reach maturity, say analysts from the stockbroker CLSA, and it takes 5,000 litres of water to grow enough grain for one cow to produce enough milk to make one kilo of cheese.

Supporting urban populations is even more water-intensive, because the amount of water a family uses doubles when they move to a city. Lubricating an industrialising urban population is about the most water-intensive thing you can do: to produce one tonne of the steel that is the backbone of China’s new infrastructure needs 20,000 gallons of fresh water.

Already there are signs that this volume of water just isn’t going to remain available. According to China’s water minister, 40% of the population already lives on an amount of water considered to be below international danger levels. The ground water below China’s big cities, which let’s not forget has taken thousands of years to accumulate, is fast disappearing. And, thanks to a decrepit infrastructure and the high levels of water pollution caused by China’s heavy industries, a good 300m people drink contaminated water every day and 80% of China’s rivers are thought to be too filthy to support fish.

So what’s the solution? One answer is that we should try to use less: a garden sprinkler uses up 540 litres of water an hour, and if you leave the tap running while you brush your teeth you will waste about five litres. But a more realistic answer is probably that we should be using it more efficiently.

China is not the only country with a rubbish water infrastructure. In Britain it is thought that nearly a third of our water is lost via leaking pipes, rising to 60% in London, where many pipes have not been upgraded since Victorian days.

This is where we come to the silver lining: the ongoing need for desalination, filtration and new pipelines, water transport and pumps all over the world means huge opportunities for investors. In America CLSA points to Pentair, which derives 80% of its revenues from the likes of pumps and filtration-purification systems, and Insituform Technologies, which makes equipment for sewers and water mains. Other big names include GE, now the largest manufacturer of desalination equipment, and Siemens, a big player in water treatment.

In Britain, Halma, a water- engineering firm, might be worth a look, while the more adventurous might check out the Singaporean firms Hyflux and Bio-Treat.

Finally, those looking for an easy way in might consider the US exchange-traded fund Power Shares Water Resources — probably the simplest way to gain exposure to the most important commodity there is.

First published in The Sunday Times (25/02/06)

Published in Commodities | More articles by Merryn Somerset Webb

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