Fresh Water Is The World's Most Critical Commodity... Here's How You Can Profit From It
by Martin Denholm, Senior Editor
Friday, February 27, 2009
I'm drinking on the job again.
No, not that kind of drinking. I'm swigging away from a one liter bottle of fresh water. Like most folks, I thought nothing of it when I bought it. I took its availability for granted, even though it's that cool Voss stuff all the way from Norway.
But sadly, that's not the case for approximately 40% of the world's population, which lacks adequate fresh water supplies. What's more, the United Nations says that two out of three people will be living in areas under "water-stressed" conditions by 2025.
Water shortages currently affect 80 countries and within 50 years, more than half the global population will be living with water shortages.
But hang on a minute... isn't 71% of the Earth's surface made up of water?
Yes, that's true. But 97.5% of it is seawater, leaving just 2.5% that is drinkable. And only about 0.1% of all water is readily available. Most of it is locked up in glaciers, groundwater, and soil.
And water supply problems are only going to get worse... which opens up some very good investment opportunities.
Here's the deal...
More People = More Pollution = Less Fresh Water
In 1900, there were about 1.6 billion people on Earth. Today, there are 6.5 billion. By 2025, the world population is expected to rise to 9 billion.
But here's the problem: During the 20th century, human water consumption swelled six-fold and global water demand already exceeds supplies by 17%, according to the Population Institute.
And World Bank figures show that demand is doubling every 21 years. By 2020, the two billion extra people will require 20% more water than is currently available, according to the International Food Policy Research Institute.
And speaking of food, global population growth leads to increased industrialization and pollution. U.S. energy production requires about 40% of fresh water withdrawals. And the fact that people are also living longer means not only less drinking water, but also less water available for food production.
Crop production already claims 65% of fresh water, compared to 25% for industry and 10% for households. There is 7,000 liters (1,900 gallons) of water used for one kilogram of grain-fed beef... 5,000 liters (1,300 gallons) for one kilo of rice... and 1,500 liters (400 gallons) for one kilo of corn, according to the U.S. Geological Survey.
The point is... when it comes to water needs, it doesn't matter one iota what the economy or stock market is doing. Every single person on the planet needs water... period. And with H2O in shorter supply, the world is set to invest approximately $800 billion over the next decade in order to improve the situation. This is the time for smart investors to run with this opportunity...
The State of the World's Fresh Water Supply
For all the talk of federal budget plans, economic bailouts, stimulus packages and all the other dizzying (and often demoralizing numbers), money is no object when it comes to satisfying the world's water needs.
Put bluntly, no fresh water = no people. Certainly no need to worry about the economy, unemployment, the real estate and auto industry debacles, or anything else if you're not actually alive!
Of that $800 billion number I just mentioned, China has set aside $200 billion for its water infrastructure over the next decade. It makes the U.S. government's $8.4 billion look like small potatoes in comparison - and woefully inadequate. The Environmental Protection Agency forecasts that the U.S. will have to spend $277 billion on water infrastructure by 2019. Nevertheless, China has some serious problems...
- Two-thirds of the country already faces water shortages. Its annual water shortage is 40 billion cubic meters and it uses 30 more cubic kilometers of water than is replaced by rain.
- Of its 1.3 billion people, 300 million don't have access to clean drinking water.
- According to Summit Global Management, "75% of China's drinking water is unsuitable for drinking and cooking, and 80% of China's seven major river systems no longer support fish."
What's worse is that at the current growth rate, China's population is doubling every 12 years. More people = more food/drink needs = more agriculture development and industrialization = more pressure on water supply and demand.
So what's the solution?
Thirsty For Profits? Try These Fresh Water Stocks...
Let's kick off with a broad investment option. Because of their increased flexibility, lower costs, and the fact that they trade like stocks, I like ETFs (exchange-traded funds). With water, you can go for...
~ PowerShares Water Resources (NYSE: PHO), which tracks the price and yield performance of the Palisades Water Index. The fund includes big water companies like Veolia Environnement (NYSE: VE) and Ameron International Corp. (NYSE: AMN)
~ Claymore S&P Global Water Index Fund (NYSE: CGW), whose results aim to replicate the performance of the S&P Global Water Index. Like PHO, it holds Veolia and Aqua America Inc. (NYSE: WTR), plus Danaher Corp. (NYSE: DHR) and Severn Trent in England.
Breaking it down, Paris-based Veolia is one of the biggest water infrastructure stocks and is split into four groups: Water, Environmental Services, Energy Services, and Transportation. Click this link for a more detailed company profile and rundown of its water management operations - it has a very broad reach in the industry. With a P/E ratio of just 9, it's trading at a hefty discount and coughs up a fat 15.8% dividend yield ($3.12 per share annually), too.
Aqua America's fourth quarter revenues rose 7%, resulting in 3% earnings growth. With an aggressive acquisition policy that has seen the firm tie up more than 100 buyout deals over the past few years, it has boosted its customer base from 245,000 in 1992 to 950,000 today. It applied for $80 million worth of price increases last year, with $61 million approved. This resulted in a 10% revenue increase in 2008 and a 15.7% profit margin. It pays a 2.8% dividend.
There's another option, too...
Salty Solutions For Increasing Fresh Water Supplies
The National Academy of Sciences recently stated, "Desalination is a realistic option for increasing fresh water supplies."
In fact, global spending on desalination is set to more than double in four years in an attempt to boost the 11 billion gallons of drinking water that the process currently creates every day. That's because even that hefty-sounding number still only represents 1% of water usage.
But desalination capacity is about to surge by 45% over the next seven years, producing an extra five billion gallons of water per day. And with 1,200 desalination plants worldwide, the cities of Las Vegas and San Diego (based in two states suffering some of the most severe water shortages in the U.S.) are discussing plans to build new plants themselves.
Yes, desalination is an expensive, energy-intensive process. But there's one company that is attempting to solve it by not only producing clean water, but also recovering and recycling as much energy and waste as possible. It just signed a deal with China's largest plant, too.
Boy, after all that, I'm really thirsty now.
Fresh water is critical. We can't live without it. But with population growth, pollution, industrial expansion, and climate change resulting in shorter supplies as demand continues to rise, it's no wonder governments around the world are pumping billions into the industry for infrastructure improvements.
And water stocks could be one few areas that could truly benefit in this wretched global economy.
Have a good weekend.