The Business of Water

October 15, 2017

 

 

The movie ‘The Big Short’ was based on the book ‘The Big Short: Inside the Doomsday Machine’ by Michael Lewis.

 

It told the story of 4 investors who predicted the credit and housing bubble collapse in 2008 and decided to bet against Wall Street, earning billions of dollars in the process.  Dr Michael Burry, was the first investor to predict the housing bubble and his placard in the end credits ignited my curiosity. 

 

My first thought was, how exactly does someone ‘invest in water’ and for a brief second I wondered why?

 

The why of course is straightforward enough. What I had learned about water in Montessori was enough to raise alarm bells. Like everyone else I was taught that 70% of the Earth’s surface is covered in water and freshwater – the kind we can drink – only represents 2.5% of that amount.

 

Post Montessori, the plot thickened. I later found out only 1% of that freshwater is easily accessible, with most of the other 99% trapped in glaciers and snowfields. In the end, only 0.007% of the planet’s water is available to fuel and feed the world’s 7 billion people.

 

And this is where it gets really complicated…

 

Water Use -  The Facts

 

  • According to the United Nations, water use has grown at over twice the rate of the world’s population increase in the last century

  • Today, we use about 30% of the world’s total accessible renewal supply of water

  • In less than 10 years, that percentage could reach 70%

  • By 2025, an estimated 1.8 billion people will live in areas plagued by water scarcity, with 2/3rds of the world’s population living in water-stressed regions

 

We can no longer afford to be oblivious of the situation. In matters of water, much like the housing crisis, we cannot afford to not pay attention. Especially considering its significance - 75% of the human body comprises of water and it is one of the prime elements responsible for life on Earth.

 

Investing in Water Scarcity -  The Beginner’s Guide

 

There is a growing and critical demand for access to freshwater and for related products and services. There are opportunities to invest in water scarcity in both emerging markets and the United States. Financiers are also investing in water infrastructure, which is becoming increasingly important.

 

All in all, you have 3 different options if you want to invest in water - Purchase water rights, invest in water-rich farmland or invest in water utilities, infrastructure, and equipment.

 

Or you can benefit from investing with a company that focuses on addressing the increasing demand for and limited supply of water. These could represent some of the best growth opportunities for investors. While water itself is not (yet) a traded commodity, you can invest in companies that derive revenue from this limited resource in 3 ways:

 

  • Expanding the water supply: Exploration, desalination and wastewater treatment plants are developing new water infrastructure and creating sustainable and reliable supply systems

  • Increasing current water efficiency: Companies that are developing improved irrigation, leakage detection and smart meters are creating effective solutions for reducing demand and promoting sustainable use of available resources.

  • Improving water quality and treatment facilities: This includes companies that are developing cutting-edge filtration technologies and disinfection chemicals.

 

The Investors

 

Michael Burry isn’t the only interested party. There are others and all of them are in it for the long haul, playing the long game. Customarily, opportunities that benefit from demographic trends or from the increasing effects of climate change are particularly attractive to investors with a long-time horizon. While water scarcity will not become acute tomorrow, it is the kind of long-term theme that farsighted family offices include in their portfolios.

 

The likes of French multinational SUEZ, American Danahar Corporation and Swiss Georg Fischer are capitalising on the voracious demand for water infrastructure and new technologies. Businesses are now focused on a range of issues, from smart irrigation to maintaining drinking quality to water distribution efficiency and huge dam engineering projects, which mean there are potentially hundreds of entry points for investors.

 

Beyond Europe, advanced water trading schemes in Australia were introduced in the mid-2000s, and allowed investors to buy water rights that were previously owned by farmers.

 

The U.S.

 

The U.S. will require significant investment in water treatment and transportation in the very near future. For example, the poor infrastructure that caused lead poisoning in Flint, Michigan is not an anomaly. The American Society of Civil Engineers (ASCE) predicts that at current rates there will be an $84.4 billion gap by 2020 between what we’re spending on water infrastructure and what is needed. Without upgrades, the U.S. is facing a loss of $416 billion in GDP.

 

California is coming up to its 6th year of experiencing one of the worst droughts on record. The Government of California is spending about $20 billion annually on their water supply, a number that is expected to increase. Investments are needed along the entire water-value chain, and global water-infrastructure projects alone are expected to see annual growth of 5%-8% according to Bank of America Merrill Lynch.

 

China

 

Around $US7.5 trillion ($10.1 trillion) is the projected global spend in water infrastructure over the next 15 years, according to the World Economic Forum, and as international regulation is tightened, $US300 billion is slated to address water pollution by China's Water 10 plan.

 

At the high-tech end of the water sector, Israeli firm Emefcy Group[1] has received plenty of investor interest recently.

The technology has been designed for remote areas, to be used in poor parts of the world that suffer from severe water shortages. The company announced it has 3 new commercial agreements in China and investors have flooded in to buy stock, which has soared 27 per cent so far since the beginning of May.

 

"Anything that looks to contribute solutions to China's extremely serious water issues is likely to receive investor interest," Tom King, chief investment officer of Nanuk Asset Management, said. "A lot of these smaller companies have a lot of value ascribed to the future."

 

Australia

 

In Australia, there is a $30 billion water trading market, thanks to agricultural reforms in the mid-2000's. Water and agriculture demand has been growing strongly.

 

The Water Embedded in Food

 

This brings us back to Dr. Michael Burry’s water trade. In a December 2015 interview with NY Magazine, Burry had this to say about water:

 

Transporting water is impractical for both political and physical reasons, so buying up water rights did not make a lot of sense to me… What became clear to me is that food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas. This is the method for redistributing water that is least contentious, and ultimately it can be profitable, which will ensure that this redistribution is sustainable. A bottle of wine takes over 400 bottles of water to produce — the water embedded in food is what I found interesting.

 

The Big Questions

 

How can we capitalise on this and how much capital would be required? It sounds as though growing food in water-rich areas and selling it in water-poor areas would be the least contentious and most sustainable method for water distribution. The value is clear but it might be too early to assess the barriers and risks associated with pursuing such a strategy. 

[1] Emefcy has developed a Membrane Aerated Biofilm Reactor (MABR) product that enables wastewater to be reused for specific purposes such as crop irrigation.

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