Editor's Note: Minyanville is excited to introduce Gerry Sweeney as the newest contributor to our community. Gerry has been involved in the water space for nearly ten years. Currently, he's the Portfolio Manager for Aqua Terra Asset Management LLC.
Water has been an investment theme for many years. But in recent years, it’s started to move from the periphery to the mainstream. Many of the factors which are driving the idea of sustainability in terms of energy, agriculture, and other commodities are at the heart of water issues.
Without question, water will be a powerful long-dated investment theme for the next several decades. However, it’s a complicated theme being influenced by many stakeholders -- from the community level to national policy.
But there will be no single silver bullet to solve the crisis. I believe, instead, that a portfolio approach will be required. Multiple technologies and techniques across various industries and at various levels of government will be essential to manage the situation. Each region and populace will have different thoughts and different methods to overcome their specific issue. While a unified set of methods would be ideal, it would appear highly unlikely that a set could be developed and maintained. This patchwork will create investment opportunities in many different industries on a global basis.
The purpose of this “primer” is to give a very high level review of global water scarcity and the investment opportunities surrounding the issue. In the coming weeks, I’ll explore more in-depth issues, as well as comment on any pertinent news which may be of investment importance.
At the heart of the water crisis is supply and demand. While water is abundant, potable or clean water is extremely scarce. Studies suggest that approximately 0.3% of all water on the planet is available for consumption. The majority of potable water is locked in polar ice caps or snow cover and in inaccessible underground aquifers. The finite amount of water needs to be used for human consumption and living standards, environmental stabilization, agriculture, energy production, and hydrocarbon mining, and most industrial and manufacturing processes.
Adding to the supply concerns are increasing levels of pollution and limited or aging infrastructure for municipal treatment. Industrial and agricultural run-off -- while recognized as a serious issue -- still causes considerable damage, and historical transgressions from these areas still mar the water landscape.
To further complicate issues, new pollutants are entering watersheds. In recent years, there have been studies showing trace amounts of pharmaceuticals in drinking water, including drugs for mental illness, cholesterol, anti-anxiety, and sex hormones (“the bro” an investment opportunity for water!) to name a few. While pharmaceuticals are recorded in trace amounts, questions arise as to the long-term effects based on daily consumption.
Adding to water stress is the unequal allocation of the resource. Water -- just as any other commodity -- is allocated unequally on a geographic basis. One of the most “water rich” countries includes Canada, which has a much smaller population and degree of global GDP.
Meanwhile, countries such as China, face constant supply constraints. Further, while China does have access to water, it’s geographically disparate in the country. The coastal areas of China represent the manufacturing centers and dense populations. However, much of China’s water is located in land from these areas, leading to overuse and over-pumping of natural aquifers in the coastal regions.
Finally, Climate change will be a major factor affecting supply. Generally speaking, climate change has, and will continue to alter the Hydrological cycle, leading to increasingly dry periods in arid portions of the world and increasingly wet periods in other regions. In other words, dry will become drier, and wet will become wetter. Some of this precipitation will come with increased levels of intensity, leading to heavier run-off and potential flooding. In areas where snow pack is essential to water supply, less snow and quicker melting periods will disrupt reliance on historical water-flow patterns. In addition, surface water and quality and quantity will be adversely affected due to evaporation and higher temperature.
These issues bode poorly for regions such as the Southwest United States -- which is reliant on the flow of the Colorado River to feed water to seven states and parts of Mexico – and is a situation repeated many times over throughout the world.
On the other side of the supply-demand equation is the fact that the world is encountering a series of events that are driving water demand at increasing rates. Population growth is the easiest to understand. Global population will increase nearly 50% over the next 40 years from 6.7 billion people to over nine billion people in 2050. More people translates to more water consumption. However, the true problems lie in socio-economic issues, the rise of the emerging markets, and the way water, energy, and agriculture interact.
As the emerging markets industrialize, they’ll require more water for industrial processes. Water is used in almost all processes from paper and pulp manufacturing to steel production to semi-conductors and biotechnology. The industrialization process will lead to migration from the rural inland areas to the coastal regions. Cities will grow, leading to urban sprawl -- which adversely effects natural watersheds and water availability and quality.
Industrialization will help populations move up the socio-economic ladder and allow for higher standards of living. Higher living standards translate into higher energy consumption for electronics, heating, air conditioning, and so forth. Water is critical for energy, not only for the mining of hydrocarbons, but also for energy production.
Conversely, moving and filtering water is extremely energy-intensive. To put the energy demands of water into perspective, consider the following statistic from a report by California Department of Energy: California uses 30% of its natural gas, 19% of its electricity, and 88 billion gallons of diesel fuel to move and clean water on an annual basis.
Further, dietary habits will change from starches (rice) to meats (chicken and beef). Meat requires significantly more water to produce a calorie than starch. Agriculture already equates for nearly 70% of global water demand and will only increase as diets change. Fertilizer, which will be critical to producing agricultural yields, is reliant on energy as an input. Oddly, food is being trumpeted as an energy resource through bio fuels, despite the obvious linkage of agriculture to the increasing water shortage.
This interaction is the water-energy-agriculture nexus; each issue feeds off the other, creating a feedback loop that demands more of the other. The nexus coupled with population growth drives water demand at nearly exponential rates while supply becomes increasingly scarce.
The Opportunity: Water as a Centerpiece to Sustainability
At the center of our long-dated thesis is the notion that water is a centerpiece to sustainability. Water is required for living standards, environmental standards, manufacturing, energy mining, energy production, and food production. Without an efficient and effective set of management tools and techniques, water scarcity will grow and hinder energy and food production. Together, these three items -- water, energy, and agriculture -- are possibly the largest issues facing society in the coming decades.
As with any industry, well-positioned and well-managed companies will be the prime beneficiaries of water stress. There will be winners and losers, incredible growth in some companies, and incredible failures. However, the world is in the very early stages of water-issue awareness. As difficulties accelerate and become more mainstream, an increasingly large amount of money will flow to the theme.
The opportunity in the water space is very diverse, as it offers opportunity in multiple industries. While infrastructure in general has been a hot investment theme over the past several years and is an important aspect of the water situation, it would be a misjudgment of the opportunity to focus on that area alone.
I break down the water-investment universe into the following subsectors: water utilities; engineering and consulting; equipment and infrastructure; treatment; instrument; test and technology; asset and agriculture; and energy and cleantech. Each of these areas has companies that have similar drivers or business opportunities. As a whole, it provides ample opportunity across multiple industries as well as natural diversification.
Using agriculture as an example, it’s the largest user of water on a global basis. There is opportunity within agriculture in a few different areas: Irrigation is one place efficiency can be added: Moving from flood irrigation to precision irrigation would reduce water usage as well as increase crop yields. Fertilizer would help increase yields, and companies that modify seeds could alter the ability of crops to withstand drought, increase their harvests, or grow with less water. All of these examples could reduce water usage, thus freeing water for other applications -- either consumptive or industrial.
Technology will increasingly become an opportunity, as well. As we discussed previously, there are new pollutants emerging that need to be monitored, tested for, and mitigated. In addition, there will be opportunity to track and analyze data surrounding water use for multiple industries. International Business Machines (IBM) recently entered the water business in this capacity, monitoring and analyzing data in hopes of making water “smarter.”
Why This Time Is Different
The investment community is very adroit at exploiting crisis for financial gain, and in the past, crises have been hyped, only to fade away without significant consequences. Dare I say that this time is different?
The water crisis is all too real, and will accelerate in coming years. I’ve come to this conclusion by looking at a series of issues which on the surface, are independent, but in reality, are inextricably connected:
- population growth
- emerging middle class
- climate change
- water-energy-agriculture nexus
- finite resource
- global trade (water movement)
All of the issues listed above are serious problems on their own. But as each one develops into a bigger problem, it influences the others and helps create the feedback loop discussed earlier. In the end, it will become a simple statement that defines the issues: Demand is outstripping supply.
There will be opportunity for new and old technologies. But in the end, the beneficiaries will be well-positioned and well-managed companies. And that’s what I’m going to find.