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Filling Your Cup With Water Plays

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As the saying goes, where there is a crisis there is an opportunity, and issues related to clean water will likely intensify in the future.

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There is a wacky Broadway play called UrineTown that deals with the concept of water – or the lack thereof. The premise is as original as it is unpleasant – in a city suffering from unending drought, private bathrooms are outlawed. Everyone must pay crippling fees to use public latrines run by a monopolistic corporation. Those who cannot pay get dragged off to "Urinetown," a mysterious place from which they never return. Finally, one latrine manager leads the people in rebellion. The catch is that the ingénue he loves is the daughter of the corporation's greedy president.

Watching this play a few years ago had me thinking how crazy the world will get as water becomes a scarce commodity. In many parts of the world this is already a problem and as populations grow and industrialized economies develop, water becomes more precious everyday.


Water Stress and Water Scarcity

In the water industry the terms "water stress" and "water scarcity" are often used. These terms have to do with a country's annual supply of renewable fresh water. A severe form is when a country's annual supply of renewable fresh water falls to less than 1,000 cubic metres per person. Such countries can expect to experience chronic and widespread shortages of water that hinder their development. Many countries fall in this category and do not have the technology to access clean water.


Water Shortages

One of the best books written on the topic of water is called When The Rivers Run Dry, by Fred Pearce. He drives home the point that we do not realize how much water we actually use on a daily basis. Between drinking, washing and flushing we use approximately 40 gallons a day. In some areas, where sprinklers, swimming pools and other uses are higher it can be double. When we add in water usage that is needed for what we drink and eat the numbers are astounding. It now takes 11,000 litres to grow the feed for enough cows for a quarter-pound hamburger, and 25 bathtubs of water to produce a single T-shirt. As a result, at the World Water Week in Stockholm, the International Water Management Institute claimed that a quarter of the world's population now lives in areas of 'physical water shortage'.

In a report from the Global Water Partnership of Stockholm, Sweden, it was stated that $4.5 trln is needed to be invested between 2000 and 2025 to improve the global infrastructure.

The reality is that more than one third of the world's population lives in countries where consumption of drinking water exceeds available supplies. In China alone it is estimated that their water supplies can support 650 mln people, which is only half of its 1.2 bln population. China has 617 cities, 300 of which have serious water shortages.

The Middle East imports 91% of its fresh water needs from other countries as Jordan, Israel and Saudi Arabia all suffer from water shortages and in Africa it is estimated that 2/3 of the population who live in rural areas lack an adequate water supply.

In the U.S. the 1,400 mile-long Colorado River is at record low levels and a decade long drought is threatening drinking water supplies for major cities and irrigation for food production in the western part of the U.S.


Pollution

In addition to shortages, pollution is a major problem in much of the developing world. In China you have a double whammy – both water scarcity and pollution. Not only are they threatening human health and development, but water problems also jeopardize China's economic plans. The impact of water pollution on human health and water shortages together has been valued at approximately U.S. $15.1 bln by Chinese sources. The lack of resources and advanced technology are partially responsible for the slow progress in solving these problems.

Half of China's population (nearly 700 mln people) consumes drinking water contaminated with animal and human waste that exceeds the applicable maximum permissible levels. Liver and stomach cancers in China are caused in part by water pollution. China has the highest liver and stomach cancer death rates in the world. Liver and stomach cancers are also three to seven times higher in polluted rural areas of China.


Increased Funding for Water Infrastructure

As water becomes more of a problem worldwide you will see governments and the private sector increasing funds to fix the aging infrastructure as well as to develop technologies to clean and reuse water. As it stands now the global water market is estimated to be $365 bln while the U.S. market is $87 bln.

The investment demand for companies involved in water management and conservation will grow as the industry matures. The U.S. Environmental Protection Agency estimated that $140 bln will be needed in the next ten years just to meet the requirements of the Safe Drinking Water Act. Many in the industry feel this number is grossly underestimated.

The hot spots for growth in the water sector is in the replacement of aging water infrastructure in developed markets and the installation of basic water infrastructure in emerging markets. While the number of pure water plays has been reduced, we are seeing large companies, like General Electric (GE), gobble up some of the water companies. GE has purchased Betz Dearborn, a water treatment business, and Zenon, which makes advanced membranes for water purification, wastewater treatment and water reuse. The company pioneered the use of technology for water and wastewater treatment that is spreading rapidly throughout the world.

GE is also building one of the largest desalinization plants in Algeria. The Danaher Corporation (DHR) recently agreed to buy Centrist, a water treatment products and services provider and I foresee some of the large sovereign wealth funds (SWF) buying up water related companies in their need to provide their countries with clean water. As water becomes more scarce, tensions are likely to arise among different users within countries and also across borders. Companies operating in water-stressed regions will have to be aware that they are competing for an essential resource and will have to manage any potential flare-ups.

So how can private investors tap into these markets? There are a number of ways and one play is to purchase the U.S. Power Shares Water Resources or individual concentrated water funds, such as Aqua Terra Asset Fund, a relatively new water fund run by an environmental engineer. One can also go to the International Securities Exchange (ISE) where a water index is the basis for cash-settled index options (HHO), ETFs (FIW), and ETF options. Cash-settled futures on the index are coming soon.

There are also individual companies such as Aqua America (WTR) or Calgon Carbon (CCC). Hyflux, traded in Singapore, is an interesting water company and recently bought into a business in Saudi Arabia, which in addition to producing oil for export is also one of the world's largest consumers of less-expensive "used" oil. This is oil that has been collected from shipyards, power plants and other related industries. Hyflux owns a method that recycles the oil and it expects this aspect of its business to grow and equal its water technologies in terms of income.

As the saying goes, where there is a crisis there is an opportunity, and issues related to clean water will likely intensify in the future.
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