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Turning water into gold

2013-08-06 06:24:36

Constance Gustke

Water investments, once a quiet spot, are starting to gurgle.

For centuries, water has been seen as a free public good, with no price

attached.

But as droughts, population growth and farming demand deplete aquifers

worldwide, water prices and demand for innovative water technology are set to

steadily rise, said experts.

The dry regions such as the American Southwest are getting drier, said Simon

Gottelier, an investment manager at Impax Asset Management in London.

Every place on the global map will need to spend money on water, said

Gottelier. He predicts that the water industry will grow 5% to 7% each year on

average.

Water stocks are a multi-decade opportunity. Simon Gottelier

Financial firms are meeting the demand for investable opportunities in some new

ways. Texas-based Waterfund LLC, for one, is creating swaps, a derivative where

one security is exchanged for another. The risk management firm has also teamed

with IBM to craft a water index that finally pins a price on water use in the

world s 100 largest cities. Through these swaps, institutions can then hedge

their risks when water prices rise.

The long view

Water stocks are a multi-decade opportunity, Gottelier said, for many reasons.

One, and arguably the most urgent, is cleaning polluted water. The mighty Nile,

which runs through nine nations and supports 80 million people throughout the

region, is polluted, since heavy regulation only allocates water flow. Even

though it s polluted and carries diseases, the river water is used for farming,

drinking and bathing.

And in water-starved China, 80% of the rivers and lakes are polluted, by World

Bank estimates. Shanghai alone is spending tens of billions of yuan to fix the

problem. India has a similar problem: over-polluted rivers such as the Ganges

and Indus. The government is investing the equivalent of tens of millions of

dollars on treatment facilities.

So, like many problems with a business-oriented solution, investors are seeking

ways to profit from the surging demand for technology and systems to clean and

filter contaminated water.

Companies are also eager to discover and extract more H2O. Seventy percent of

the planet is covered in water, but only 3% of it is fresh. And that supply is

mainly stashed in hard-to-reach places such as icecaps and deep underground

reservoirs.

Easily gotten sources reservoirs, lakes and rivers are getting quickly

depleted. The Aral Sea in Uzbekistan, for example, has shrunk so much that

former fishing villages are now surrounded by desert land. Formerly part of the

famous Silk Road, the Aral Sea will be completely dry within a decade.

Storied rivers such as the Nile and the Colorado in the US are also losing

water as dams and other measures divert water from their flows for agricultural

and other uses.

Too much water is also being taken out of the Nile, said Dr Jenny Kehl,

director of the Center for Water Policy at the University of

Wisconsin-Milwaukee. But the Nile isn t alone, she added, since other great

rivers such as the Jordan and the Mekong are also running drier as usage

increases.

Deep underground aquifers, which store the freshest water, are also in rough

shape as increased demand drains them dry. The problem is particularly acute in

North Africa and the southwestern US, Kehl added.

Good news for water companies

Both dwindling supplies and dirtier water are translating into tighter water

management. And that s good news for the 300 global companies plying the water

market. Most are in the US, followed by Europe, said Gottelier. Japan is a

serious player, too.

Unlike taming carbon, water is a cheerier story.

There are already lots of solutions in place, said Cate Lamb, head of Carbon

Disclosure Project s water program. So water management can shift much more

rapidly than carbon.

Repairing and monitoring crumbling, leaky pipes, pumps and valves is a key part

of the water market. There are about 50 to 100 years of underinvestment in

water supply upgrades in parts of Europe, said Gottelier, which leads to lots

of leakage. In the US, the EPA estimates that upgrades to its aged water

infrastructure will cost as much as $400 billion.

Water needs will translate into recurring business for infrastructure

manufacturers such as Swiss-based Pentair Ltd, Texas based Flowserve Corp, and

New York-based Xylem, said Matthew Sheldon, a portfolio manager for the Calvert

Global Water Fund. They all have very strong business models, he said.

No surprise, then, that the $197 million Calvert fund s largest holding is

infrastructure stocks, along with technology plays for leak detection.

Canada-based Pure Technologies Ltd which inspects and monitors pipelines, is a

player in the water efficiency niche. The company is growing 20% to 30% per

year, added Sheldon. UK-based Halma PLC also makes leak detection equipment.

Reusing water is the fastest growing niche though, said Sheldon. So water

treatment and filtration companies such as Kurita Water Industries Ltd in Japan

and China Everbright International in Hong Kong are set to prosper, said

Sheldon.

Much of the world is catching up with purification, added Neil Berlant, a

partner at Crowell, Weedon & Co, a brokerage and money management firm in Los

Angeles. Water treatment transcends all borders.

Desalination, which removes salt from water, is being heavily used in Israel,

Spain and Australia. The main reason: its price is decreasing.

Up until now, desalination has been a small part of the water industry, said

Sheldon. But it should begin accelerating next year. Desalination players

include big water utility companies such as VeoliaEnvironnement and Suez

Environnement in France and the smaller pure-play company Energy Recovery in

the US.

Oddly, few innovative emerging water companies are making waves. The initial

public offering market, like the broader market, is still suffering. And new

biological treatments for recovering energy and nutrients from waste water are

still in their infancy, said Sheldon.

But there will be a lot more IPOs in the next few years, he added, especially

since demand for clean, plentiful water will only increase.