The "Oil of the 21st Century"... And How "Blue Gold" Can Make You Rich

by Martin Denholm

The "Oil of the 21st Century"... And How "Blue Gold" Can Make You Rich

by Martin Denholm, Senior Editor, Investment U

Friday, March 26, 2010

As I write to you, I'm sipping on the world's most essential commodity.

It is, of course, water.

I say "of course," but despite its critical importance to every single human being, the water industry is shamefully neglected. On Monday, March 22, for example, World Water Day came and went with barely a mention from the media, despite the industry's mounting problems.

I confess... like many other people, I take the availability of water for granted. But around 80 countries are currently in the midst of serious water shortages. And that's only going to get worse, as the global population grows, infrastructures become even more strained, and global warming and pollution worsen. Within the next 50 years, over half the global population will be living with water shortages, affecting four billion people by 2050.

So while oil, natural gas and even electricity grab the bulk of the headlines, they pale in comparison to the importance of water. It's quite simply a commodity that we can't live without.

But there are huge problems...

The Water Industry's Supply-Demand Crunch

For a start, our fresh water supply is finite. There is no way to make more water and no substitute for it. It can't be increased by technological breakthrough, scientific discovery, or by throwing money at the problem. Yet demand keeps growing.

On top of that, about 97% of the world's water is non-potable seawater, unfit for human consumption in its current form. That means just 3% is fresh water resources, with most of it trapped in glaciers, icecaps, groundwater and soil.

At the same time, global population growth is surging, putting a huge strain on supply...

  • In 1900, there were about 1.6 billion people on the planet. Today, there are 6.5 billion.
  • Since 1940 alone, annual global population growth has risen by 1.5% to 2%. And by 2025, the world's population is expected to hit nine billion.
  • 2.5 billion people - about 40% of the global population - don't have access to clean water. Two-thirds of China face water shortages. And 15% of the Latin American population - roughly 76 million people - lack safe water.
  • The World Health Organization estimates that 80% of all sickness is attributable to unsafe water and sanitation. Each year, five million people die from water-related diseases - many of them children. In fact, water-borne diseases kill one child every eight seconds.
  • The Population Institute says global demand for fresh water already exceeds supply by 17%. And the 2030 Water Resources Group estimates that global water requirements will soar by over 50% over the next 20 years. That's 40% higher than what current supplies can provide.
  • The International Food Policy Research Institute says that by 2020, the world will have an additional two billion people, who will require 20% more water than is currently available.

Needless to say, less water is going to impact food production, too.

Can The Water Industry Satisfy Agriculture's Insatiable Thirst?

Did you know that agricultural crop production accounts for about 65-70% of all water usage?

And quite simply, more people on the planet means more pressure on the water industry to satisfy agricultural needs. Indeed, the 2030 Water Resources Group says industrial water usage, which accounts for about 15% of current total water usage, will rise to 22% by 2030. And it's no surprise to learn that much of the additional demand will come from China. It means that water originally destined for farms won't make it that far.

As Jeffrey Sachs, director of the United Nations Millennium Project, bluntly states: "The world is running out of water. We need a radical plan to tackle shortages that threaten the ability of humanity to feed itself."

The question is: How can the world shrink the supply-demand gap cost-effectively and without damaging the environment?

Boosting Water Efficiency and Purification

The water problem isn't going to disappear. In fact, as the situation becomes more dire, it opens up a potentially lucrative investment opportunity, as companies strive to boost the world's water resources.

The water industry is already an estimated $460 billion market globally - one that analysts have dubbed "blue gold," because of its immense profit potential.

The world needs to act fast - and two companies you might not ordinarily think of are offering solutions.

In terms of agriculture, Nestle (OTC: NSRGY.PK) is helping to boost water efficiency by dishing out $30 million worth of "micro-credit" loans per year to 600,000 farmers across the globe.

Then there's India - a country whose water needs are projected to double over the next two decades, according to consultancy firm, McKinsey.

Already, 75% of the rural population doesn't have access to safe drinking water, but Tata Chemicals is aiming to arrest the problem with a new water purifier, which helps prevent the spread of cholera and typhoid. Even better... at 1,000 rupees ($22), it's half the price of Hindustan Unilever's Pureit purifier.

Four Water Investments for Your Watchlist

In the United States, water investments to consider include:

  • Watts Water Technologies (NYSE: WTS): The firm is active in North America, Europe and China and manufactures products focused on water flow, safety and conservation. It's one of the leading companies in the water industry and sports a hefty $1.1 billion market cap. It kicks back a $0.44 annual dividend (1.4% yield).
  • Energy Recovery, Inc. (Nasdaq: ERII): The small-cap company's main focus is turning seawater into drinking water - a process known as desalination.

The easiest way to take advantage of the companies aiming to solve the world's water problems, though, is to invest in an ETF. These funds buy shares of companies involved in water production, treatment, technologies and services and aim to replicate their combined share price performance all at once. Two to consider...

  • PowerShares Global Water (NYSE: PIO): The fund invests in stocks that are part of the Palisades Global Water Index and ADRs within it. Just over three-quarters of its assets are invested in companies that derive at least half their annual revenue from water projects.
  • Claymore S&P Water (NYSE: CGW): The fund invests in about 50 U.S. and international water-based companies that make up the S&P Global Water Index.

Water is a major economic, political and investing theme. It affects our very survival in terms of our need for drinking water and food and is closely linked with the makeup of the energy sector.

In taking its availability for granted, many people may believe water is a "boring" topic. But as the world's water problems worsen, it's one destined to become front-and-center of both the political and economic stage. It's simply a matter of time. Invest now and "blue gold" could represent one of the best investment opportunities of the century, in the same way as oil did in the last one.

Best regards,

Martin Denholm

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