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Water - Commodity of the Future

Water as the Investment of the Future

In connection with worldwide rising water prices, companies develop different ways to save, clean and measure its consumption. This new demand opens doors for lucrative investments are possible. (Source: FAZ)

For almost 40 years, the day of the earth is celebrated yearly and it finally seems to have entered the consciousness of the public that water belongs to one of the most crucial topics. It increasingly becomes apparent that this essential resource could develop to the most sought-after commodity of the 21st century – similar as oil was for the majority of the last century.

The higher value attributed to water has less to do with depletion or shortage rather than with costs. Although there is as much water on our planet as it ever was but affordable water is scarce. “All easy to tap water sources are already tapped” whether by damming of rivers and other methods, reports Neil Berlant, consortium leader of PFW Water Fund, the only open investment fund that only offers water-related securities in its portfolio. What remains are expensive water sources – oceans, groundwater and treated wastewater – requiring either desalination, chemical disinfection or other processes to make water consumable.

There are many technologies for purification of water to fulfill the increasingly strict standards of public safety. But consumer will have to get used to paying higher prices to the local water suppliers in order to finance the necessary purification. Due to the costs, people in developing countries only have limited access to clean drinking water over long time.

The Wave of Privatization is rolling

Berlant predicts that water prices in the United States will double or triple within the coming years – even if that is not as scary as it sounds, because the increase is from a fairly low level. He expects that the higher costs trigger a wave of business possibilities because people will buy goods and services to increase water quality. This is intensified, according to Berlant, through the demand of water with much higher purity as in the past for sensitive production processes such as production of semiconductors whose optimal performance depends on purer chips.

Another trend in water around the world is a development towards a privatization of local water suppliers, because the cost of repairs of infrastructure and providing of clean water exceeds the financial capacities of most municipalities. Of the almost 60,000 local water suppliers in the U.S. the large majority supplies less than 3,000 people and only 15 percent is owned by investors. Foreign companies for instance Suez Environment and Veolia Environment expanded beyond their home areas to buy up public water suppliers in the United States and in developing countries.

The long lasting decline in the U.S. real estate market caused the disappearance of the tax money in many parts of the country. This probably results in an acceleration of the privatization process, Judd Hill thinks, Managing Partner of the Washington-based Summit Global Management, which deals with new investment ideas in the water sector.

The thought of investing in private water supply companies will certainly trigger considerable discomfort, if not turmoil, among socially responsible thinking investors, who do not only focus on the return of their invested capital, but also the impacts of management practices on employees and customers of a company. In countries such as Uruguay a countermovement to privatization already arose. There, angry crowds forced a Suez-daughter to close down because they did not fulfill the contractually agreed on services and refused to supply people who could not afford water connection. The pressure to declare the access to water as human right is now likely to increase as the Canadian water activist Maude Barlow was appointed to the first water consultant of the United Nations.

In Search of Specialized Water Companies

The need for further market-based solutions will only be recognized as people will first be motivated enough to deal more efficiently with water when they have to pay more for it.

The water sector experiences a transition period from which a more clearly defined structure will emerge. This structure will enable the formation of one-segment-companies, which exclusively commit solving the water issues, thinks Steve Hoffmann, analyst for the Palisades Water-Indizes and author of a new book: “Planet Water: Investing in the World's Most Valuable Resource“. Until then the investors must decide if large conglomerates, besides all their other business areas, deal enough with water to justify their investment, Hoffmann says. Nevertheless of their gained knowledge in water purification during the past years, Hoffmann excludes General Electric, Dow Chemical and similar companies from the Palisades-Indizes, in whose creation he contributed because their water involvement is a too small part of their overall business.

While the industry is currently extremely fragmented though the number of companies among which investors can choose, it will definitely increase over time as mergers and acquisition will occur, Hoffmann thinks. “The customer demand after cost-effective comprehensive solutions will help avoid a fragmented industry structure”, he writes in his book.
He is confident that companies specializing on instrumentation, monitoring compliance with regulatory requirements, membrane manufacturing, pumps and environmental rehabilitation will be candidates for consolidation activities in the coming years.

Some Cities Still use Water Meters

Considering the scarcity of low-cost water, logical initial target for investors are companies concentrating on saving water. As irrigation uses the majority of clean water on our planet, Lindsay and Velmont Industries are main components of Berlants Fonds and the listed PowerShares-Fonds, which license and supervise the Palisades-Indizes. Lindsay and Valmont are the leading manufacturer of efficient irrigation technology. They control more than two thirds of the US market.

Measurement is another key way to reduce water consumption. Still some cities are only partly equipped with water meters. Hoffmann recommends manufacturers of water meters such as Badger Meter and meter service providers such as Itron for scenarios, which rely on the usage of direct savings.
The increasing demand of desalination makes Consolidated Water to a good investment objective, says Berlant. The company purifies sea water for coverage of the total water consumption of a number of Caribbean islands and is constantly expanding its customer base, he explains. He also likes Energy Recovery, whose entire business concentrates on the production of equipment that drastically reduces energy consumption in desalination plants.

Increased consumer demand in private households for filtered water is observed. Calgon Carbon is in a uniquely advantageous position. Calgon is the leading provider of activated carbon, the only element used for water purification in filters for sink drains and in ice makers for refrigerators as well as in large water treatment stations.

Scenarios on the Basis of Development and Consultation

It is an estimated demand of up to one billion Dollars for infrastructure repairs in the USA over the next 20 years expected. Mainly due to decades of disregarding the maintenance and make Mueller Water Products a good investment, Berlant thinks. Mueller sells different components of water hydrants from meters to pipes. Also Northwest Pipe and Ameron will benefit from the necessity of replacing old and leaking pipes. Geospatial Holdings, a small company from Pittsburgh, is currently exclusively dealing on the Pink Sheets, using the Wi-Fi-Technology for cartography of laying pipes so that local water supply companies can find them to perform repairs on. Hill from Summit compares this service with underground Google maps.

Behind most high-tech options for treatment - and in some cases also recovery – which are developed for sewage are stricter and more extended regulations of the U.S. Environmental Protection Agency. Hoffmann believes that some of the best candidates for investors are some of the development and consultancy companies which are already established in the water decontamination business. “They take care of the management of water in a very comprehensive integrated manner and are in the front line of knowledge of specific applications, like the legislation on water catchment areas”, he explains.

Some of these companies he included in the Palisades-Indizes, among them Aecom Technology and the Canadian company Stantec, which both specialize on the use of bio membrane reactors to eliminate contaminated nutrients. He also likes Tetra Tech as they follow the same integrated approach to sewage management.

One of the most urgent environmental problems concerns farm drains of rain water which is loaded with nitrogen and other components of chemical fertilizers, and urban drain of water full of oil and other pollutants which is washed away from dirty streets and parking lots. Excessive drains that cannot flow back into the groundwater end up in the nearest rivers, lakes and in the ocean, leading to excessive growth of seaweeds and other plant life, which consume oxygen when dying through which so called dead zones emerge, which cannot neutralize pollutants anymore.

Published on Friday, 16. December 2011 at 12:14 pm

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