Profit from America's leaky pipes

By the time you've finished reading this article, another three water pipes will have burst somewhere in the United States. Breaking at a rate of just over one per minute, it equates to about 540,000 bursts per year across America's 1.8 million miles of water distribution lines.

All told, US water leaks total about six billion gallons per day, according to the American Water Works Association (AWWA) enough to fill 200,000 backyard swimming pools. It's a situation that illustrates the massive problems for America's water industry.

And those problems are getting worse, due to one major reason: the country's archaic infrastructure.

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Massive water infrastructure problems require massive investments

Because much of the US water infrastructure has been in place since World War II, it's no surprise that many systems across the country are in disrepair. For instance, the Hoover Dam, which pumps water to Las Vegas, Los Angeles and many other cities in southern California, is 74 years old.

Much of the US water infrastructure is even older, with the age of water pipes stretching back 80 to 100 years in cities such as Washington, D.C., Los Angeles and Chicago. Incredibly, there are pipes in New York City and Boston that still have some of the original wooden pipes laid in the ground nearly 200 years ago.

Naturally, the investment required to repair and upgrade the infrastructure is staggering. The American Society of Civil Engineers' most recent forecast puts the total at $14 billion annually for drinking water systems. Another $19 billion a year is needed for sanitation water systems. And it estimates that over the next two decades, it will take $1 trillion to repair or replace these worn-out pipes.

Unlike the electrical grid, though, repairing and upgrading the water grid usually involves tearing up streets. Not only is this more expensive, the disruption to traffic and commerce merely adds to the cost of the problem.

But according to the US Census Bureau, states and municipalities are under-funding the water infrastructure. And it's creating an investment gap of monumental proportions nearly $5 billion per year. And if you add in rising sea levels, shrinking aquifers and snow packs, the AWWA estimates that as many as 36 states could face serious water shortages in as little as five years. So what are the solutions?

Water infrastructure: the companies plugging the gaps

For all the talk about oil, natural gas and electricity, they pale in comparison to the importance of water. We can survive without electricity. But we'd all be dead in a week without clean, freshwater. It's the most precious commodity on Earth. No matter where you live whether you're rich or poor there's nothing more critical to survival.

But as the global population grows (projected to hit nine billion by 2025) and pollution increases with it, the water infrastructure problems aren't going to disappear. In fact, as the situation becomes more dire, it opens up potentially lucrative investment opportunities, as companies strive to boost water resources.

Historically, fixing the water demand problem has been to tap into more rivers or drill more wells. But environmental concerns, combined with the increasingly limited availability of water, make this less of an option.

Given that 97% of the water on Earth is seawater and just 3% is freshwater, fit for human consumption, coastal states are considering desalination as an alternative. The largest desalination plant in the United States is in Tampa, Florida. It desalinates 25 million gallons of saltwater every day.

Two of the biggest players in the desalination game are Dow Chemical and General Electric. But a better way to play this area is through Consolidated Water Company, Ltd. (Nasdaq: CWCO). It operates desalination plants and water systems in the Caribbean, serves customers through various subsidiaries in the Cayman Islands, Belize, the Bahamas, and the British Virgin Islands. You could also take a look at Energy Recovery, Inc. (Nasdaq: ERII).

My favourite water stock is Nalco Holding Company (NYSE: NLC). Nalco is the largest water treatment and water process improvement company. Its Water Services Division serves the commercial and industrial areas, serving sectors like food/drink, manufacturing, aerospace, chemicals, mining, pharmaceuticals, plus hospitals, hotels and colleges.

Israeli start-up TaKaDu is taking a different approach to the problem and a potentially more lucrative one. It provides water companies with infrastructure monitoring services. Its sophisticated software captures readings from existing meters and other monitoring equipment. It analyzes flow rates, systems pressures and other factors to predict leaks and other potentially disruptive events before they actually happen.

Costs are dependent on the size of the water system being monitored. A number of water utilities in the United States are experimenting with TaKaDu's services.

The greatest investments of the 21st century are in these sectors

Many people take the availability of fresh water for granted. Just another boring commodity that is always there when needed. But as Jeffrey Sachs, Director of the United Nations Millennium Project, bluntly states: "The world is running out of water. We need a radical plan to tackle shortages that threaten the ability of humanity to feed itself." So forget boring. Water is the single-largest health problem in the world.

What's more, the global water industry is a $460 billion market. And as the population grows, pollution increases, supplies become more scarce and more strain is placed on creaking infrastructures, it's no surprise that analysts have dubbed it "blue gold," because of its immense profit potential.

Fortune says: "Water promises to be to the 21st century what oil was to the 20th century: the precious commodity that determines the wealth of nations."

The infrastructure problem within the water industry is just another example of the big money that is beginning to pour into the energy and infrastructure sectors and will continue to do so for decades. That means substantial profit potential is on tap. And investing in companies that are aiming to solve the world's energy and infrastructure problems could be one of the best investments of the 21st century.

This article was written by Dave Fessler for the free investment email Investment U and was first published on 29 April 2010.