Water, Water Everywhere—for How Long?

12/13/2007 12:00 am EST

Focus: COMMODITIES

Josh Wolfe

Editor, Forbes/Wolfe Emerging Tech Report

Josh Wolfe, editor of Forbes/Wolfe Emerging Tech Report, says the availability of water is a critical problem whose solution will create many investment opportunities.

Water will forever be the problem of tomorrow in the US—or so goes the conventional wisdom.

Today, water remains among the cheapest commodities. But it is also essential to all living things—whether they be crops, livestock or human beings. As a critical component in virtually every manufacturing and processing plant, water is also necessary for economic sustainability and growth.

Plus, unlike any other commodity, water has no substitute regardless of price. Meanwhile, worldwide demand is growing for this irreplaceable resource and, although over 70% of the earth's surface is covered in the stuff, less than 0.5% of it is suitable for consumption.

The global population currently stands at 6.5 billion people, and it is expected to reach eight billion by 2025. But don't expect the demand for water to merely keep pace with the 19% growth expected in population. While the earth's occupancy has doubled in the past 100 years, overall water use has quintupled—largely due to the demands of manufacturing.

As countries like China and India become more industrialized, it's likely that their economies will also soak up more fresh water while contributing more pollution to existing water sources. That trend will also increase pressure on wastewater treatment and disposal.

Unfortunately the worldwide infrastructure for treating, distributing and disposing of water is outdated at best. Modernizing global water systems could take an estimated $1 trillion over the next 20 years, by some estimates. But the task is likely to become a local priority for major metropolitan areas if worldwide populations continue to shift to urban centers.

The potentially massive capital expenditures needed to update and maintain the world's water infrastructures are likely to encourage cash-strapped municipalities all over the planet to privatize and consolidate their water services, which could usher in a rising tide of investment opportunities.

According to Summit Global, public water utilities have been among the top performing industry groups for decades. As a group, all publicly traded US water utilities showed a total return just over 383% from December 1996 through the end of last year, [easily outdistancing the major indexes.]

Launched in December 2005, the PowerShares Water Resources (AMEX: PHO) ETF tracks the Palisades Water Index, and from its inception to the end of 2006, its returns outstripped the Standard & Poor’s 500 index by 6.5 percentage points. The firm’s top holdings [recently] included irrigation company Lindsay (NYSE: LNN), French conglomerate Veolia Environnement (NYSE: VE), engineering consultancy Tetra Tech (NASDAQ: TTEK) and pump and pipe supplier Pentair (NYSE: PNR).

Claymore S&P Global Water Index (AMEX: CGW) offers geographically diverse holdings—[which is] important given the sector's global nature. Its investments span 16 countries, but over half of its assets are based in the US, France and Japan. Plus, the fund's three largest holdings—French companies Veolia and Suez and Japanese manufacturer Mitsubishi Heavy Industries—represent just over a quarter of its total assets.

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