Water: a very valuable commodity

As the chattering classes worry about the implications of global warming in the second half of the 21st century, they should be reminded of more pressing priorities. The Stern Report estimates that it will cost $450bn a year to avert the worst consequences of climate change. This is an enormous amount of money to spend on a hypothesis that has achieved a political consensus before a scientific consensus. Let us consider the more immediate concern: water.

About 1.3 billion people - that's a fifth of the world population - still do not have access to clean water, while 2.5 billion or near 40% lack adequate sanitation facilities. Asia alone accounts for two-thirds of the people worldwide whose drinking water comes from unsafe sources like rivers and ponds. Instead of spending huge sums lowering the remote risks of climate change, it is feasible that spending $75bn a year (one sixth of the sum earmarked as necessary to deal with climate change) would give everyone clean drinking water, sanitation and basic health care now.

Why water shortages are set to become more acute

The United Nations Environment Programme says, 'During the 21st century, water is destined to become as precious as oil'. Just as many conflicts of the 20th century were characterised by the scramble for oil resources, access to 'blue gold' is increasingly becoming a source of resentment now. Water is a particularly vexed issue in the West Bank. The strategic value of water has long been appreciated in the Middle East but now it is beginning to make an impact closer to home. London's long run average rainfall dropped below that of Istanbul, Dallas and Nairobi earlier this year.

Water is in ever greater demand, while water of the right quality and in the right place is increasingly in short supply. The demand for water is insatiable. The population of the world has doubled since 1950, but over the same period water consumption has increased six- fold. The population of the world is forecast to rise from 6.5 billion to 8 billion in 20 years' time and as living standards improve water demand will go through the roof.

At that point water demands will exceed availability by over 50%. People will increasingly live in water scarcity areas and disputes over resources are inevitable. Since 1950 approximately 80% of all violent disputes over water have occurred in the Middle East, but now incidents are spreading round the globe.

Water supply and demand: unlike other commodities

In India and China in particular the massive and unregulated use of private pumps is depleting underground aquifers at unsustainable rates. And this week Chinese President Hu Jintao, held talks with Indian Prime Minister Manmohan Singh. India is reportedly concerned about Chinese plans to divert water from the Yarlung Zangbo river (called Brahmaputra in India) to the Yellow River. China denies such plans but their need for water provides ample motive.

If you look at water consumption in its entirety, Fred Pearce in 'When the Rivers run dry' argues that a Westerner consumes as much as a 100 times their own weight in water every day. After all it takes 11,000 litres of water to grow the feed for enough beef for a quarter pounder hamburger, or it takes 25 bathtubs of water to make a single T-shirt.

But the supply and demand dynamics for water are different for most other commodities in one crucial respect. There is exactly the same amount of water on the planet as there always was. The problems are location and contamination. Water is often plentiful where people are not and vice versa. Canada for instance has as much as China, but just 2.3% of the population.

At the same time water is becoming more polluted than ever. According to the Xinhua state news agency, the drinking water of 300 million Chinese is contaminated.

Clean water shortages: an opportunity for investors

The investment opportunity is, therefore, in an area which attends to the shortages of clean water. In particular China's breakneck economic growth has left a trail of vital problems that need to be addressed. In China only 23% of sewage is currently being treated, yet the government has a target of 90% by 2010. It is estimated that some $22bn must be spent by China on wastewater treatment alone to meet the needs of the 900 million urban dwellers forecast by 2015. The potential market for solutions to these challenges is enormous.

The global market for water treatment is currently worth $50bn and growing at a rate of 8% a year.

By Brian Durrant for The Daily Reckoning. You can read more from Brian and many others at www.dailyreckoning.co.uk

Editor's Note: A Cambridge economics graduate with nearly 25 years experience in the City, Brian Durrant is investment director of The Fleet Street Letter.