Can investment avoid a water crisis?

Water shortages are set to be the cause of a great deal of conflict and misery in years to come, says Charles Stanley's Jeremy Batstone. Which is why the $400bn water treatment industry is such an attractive investment.

We wonder how many people know that water treatment has grown into a $400bn global market, that no one company controls more than 5% of that market and that in the US the sub-sector outperformed the S&P 500 by 7.0% over 2005? The UN estimates that by 2025 5bn of the world's 7.9bn population will have difficulty accessing "safe" water. Whilst much is made of the extent to which differences in religious beliefs underpin recent conflict, we suspect that something much more fundamental could underpin the conflicts of the future.

When the writer began his A' Level economics course the first question posed to him pertained to the diamond water paradox, the solution to which many deem to be the foundation stone of neoclassical economic thought. Essentially the paradox is expressed as a perplexing conundrum; Even though water is essential to human life, the price of water is relatively low. Diamonds are not essential to human life, but the price of diamonds is considerably higher.

Economic text books state that the more the total supply of an object, the lower will be its marginal utility because each additional unit will be put to less and less critical use. The less critical the use, the lower will be the demand. The lower the marginal utility, the lower the price etc It is important to add that in an environment in which water is scarce, the marginal utility of water can rise aggressivelynow read on!

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Water shortages: another geo-political crisis in the making

The United Nations is becoming increasingly concerned about the growing threat posed by and to rising populations caused by an absence of fresh water. In 1992 the UN's General Assembly announced that March 22nd of each year would be deemed the "World Day for Water". By 2003 the UN declared a whole year to be the "International Year of Fresh Water". Clearly far sighted authorities are uncomfortable about the outlook for this essential element. They are right to be.

Of all the water on earth, 97.5% is salt water. The remaining 2.5% is fresh water, most of which is stored in the polar ice caps or in underground aquifers. The most accessible fresh water is to be found in lakes, reservoirs and rivers but these latter resources amount to just 0.26% of all stored water globally, or 0.007% of renewable water on earth that is available for sustained usage (UN Dept of Public Information, "Water: A Matter of Life and Death").

The obvious concern is that globally, human beings as well as farmed and domestic animal populations are continuing to grow well beyond the levels once thought to be optimal to sustained well being. It may only be a matter of time before water becomes a major constraint on mankind's long-term survival.

Water shortages: rapid population growth

Much has been made of rapid population growth in Asia and parts of Africa. By 2020 it is estimated that there will be an additional 1.5bn thirsty mouths drinking from water supplies not much different from where we are today. Assuming that hunger will, as like as not, accompany this thirst it seems likely that additional water will be required for irrigation and for sanitation.

According to the World Health Organisation (WHO), around 5m people die each year from poor quality drinking water, poor sanitation or poor living conditions, the latter often due to the absence of adequate water for cleaning. The World Water Council (WWC) has produced a table of the world's largest consumers of water per person. It should come as no surprise to see which countries top the table; however, there are a number of rapidly developing countries moving swiftly up the league. For those interested in the factors which go towards including a country in the league the WWC includes, over and above personal consumption: industry (150,000 litres of water to manufacture a standard family car), power plants, agriculture, climate and sanitation.

Water shortages: WWC Water Consumption Top Ten (2000)

Country Cubic meters consumed per person per year

US 1,688

Canada 1,431

Australia 945

Japan 723

Germany 712

India 497

Finland 469

China 431

South Africa 288

UK 201

The United Nations released a World Water Development Report in 2003 which proved to be the first attempt to evaluate global water resources. Its findings were not optimistic. The Report concluded that decreasing global water supplies could result in epidemics and increased geo-political tensions. It found that one in three people in the world have insufficient water for hygiene while one in five did not have enough clean water to drink. Turning to the future, the Report indicates that over the next

twenty years the average global water supply is likely to fall by a third and that by 2050; two to seven billion people could be severely short of water.

The Report's author, Gordon Young at the University of Waterloo, Ontario, points out that as many as 6,000 people die from diarrhoea every day and that the situation is likely to deteriorate markedly in the future. Specifically, Mr Young points to the Indus river valley (India and Pakistan) and the Tigris and Euphrates river valleys in Turkey, Syria and Iraq as being particularly at risk.

Whilst much is made of the pace at which China is evolving as a major economic force, less is known about the means by which that growth is being achieved. It is believed that the water table in central China could be falling by as much as one meter a year as pumping increases and resources are not replenished. Chinese authorities have also confirmed that as many as 300 cities could be running short of water already!

Water shortages: is desalination the answer?

Inevitably, discussion pertaining to the rapid run down of a key resource quickly turns to what might be done to alleviate the situation. Inevitably, it is argued, circumstances which require drastic action create conditions in which demand and prices rise which in turn provide entrepreneurs with sufficient motivation to develop alternative processes to overcome the crisis. One possible solution might be a cost-effective means of desalination; however, in the first instance its commercial development is

likely to be limited to those countries that can most afford it while the areas most at threat remain unsupported. The fear, articulated by the UN and others, is that demographic and environmental trends have gone so far as to be irreversible and that even the utilisation of new technologies will be unable to keep up with the drain on water supplies.

The unhappy conclusion reached by most academic studies into

dwindling natural resources is that the political landscape, even wars, pertaining to an increasingly critical situation have the potential to become central to the history of conflict in the twenty first century.

By Jeremy Batstone, Director of Private Client Research at Charles Stanley

MoneyWeek has been anticipating this issue for some time now. Read our articles on how to profit from the world's water crisis and whether water shortages will end China's economic boom. If you're interested in the utilities sector, read: Which water companies you should invest in; and why you should invest in US water utilities now.