Investing in Water (Hard Assets Investor)

Water: The Ultimate Commodity
Written by HardAssetsInvestor.com
Sunday, 04 November 2007 19:07

We all need water to live. As useful as oil, copper and corn may be, we could get by without them for a while. But water? Water is a necessity. And for some, this makes it the ultimate commodity.

People invest in commodities for a lot of reasons: for diversification; as a way to play growth in the developing world; because they think demand growth will outstrip supply.

By those metrics, water may be the ultimate commodity investment. Demand for water is steady and never-ending, meaning water investments should not be correlated with broader economic developments. Meanwhile, history shows that as economies develop, citizens will demand more and more water to support richer lifestyles, making water an interesting play on countries like China and India. And finally, the world is in a silent water crisis, with rising demand set against limited supply; a classic commodities squeeze.



Water Crisis

The world currently faces a water crisis of both supply and demand.

We're taught to think that there's plenty of water: 75% of the earth's surface is covered with it. The problem is, most of that water is useless: 97% is seawater, 2.5% is frozen in the ice caps, and just 0.5% is fresh and available for use. Worse, much of what remains is contaminated, polluted or otherwise degraded, and not fit for consumption.

On the demand side, water needs are growing ... fast. The world's population growth provides an underlying pressure on demand, while growth in the developing world accelerates that demand curve dramatically.

Meeting this global crisis from a fixed supply will involve massive expenditure, and it will be the companies that clean, support, supply, reuse and save water that will benefit from this flow of capital.

Supply

As if the problem of a fixed supply were not enough, there are three further major supply problems affecting the world's water situation.

First, the distribution of existing water resources around the world is horribly uneven: 60% of the world's fresh water is located in just nine countries. And unlike many commodities, water isn't portable; it simply doesn't make economic sense to transport water from (say) Canada to (say) China; water, even if its value rises tenfold, is simply too voluminous.

Second, where water is actually available, it is often not available in a suitable form. It may, for instance, be either too hot or too old, or, perhaps, too dirty or too salty. Increasingly, it's also too polluted; in the U.S., the gasoline additive MTBE has rendered a significant percentage of wells unfit for human consumption.

Third, in developed countries, where water is generally available as needed, the infrastructure supplying it is old and decaying. Estimates of how much a country like the U.S. must spend upgrading its water infrastructure over the next 20 years measure in the billion.

Demand

Population growth and economic growth are the two biggest drivers of demand. On the one hand, as population numbers increase, so does the demand for potable water. On the other, as economies grow, so does the demand for water for use in both agriculture and industry: the richer people get, the higher they live on the water food chain. The U.S., for instance, is the world leader in water consumption per capita, largely because we live such a rich, luxurious lifestyle.



Water: The Business Activities

While the case for investing in water, as a theme, is compelling, the question remains of how actually to go about making such an investment.

Unfortunately, unlike many other strategic commodities, water is not yet traded on any exchange. Indirect investment, therefore, remains the only option available to investors; that is, investment in those companies in a position to provide solutions to the water crisis. Estimated by some already to be worth $450 billion a year[1], the water and water treatment industry is predicted to grow to some $650 billion in the next 20 years.[2]

The current major investment options are:

Utilities

The job of water utilities is to deliver the actual water to the consumer. Most water in the world is delivered through utilities.

In the U.S., there are a number of large such companies, for example California Water Services Group (NYSE: CWT) and Aqua America (NYSE: WTR), and myriad small ones. Continued consolidation and rising water values are the key to profits in these markets.

Historically speaking, water utilities have provided consistently strong returns, and these companies remain respected as steady, low P/E and high-yield stocks.

In addition to the current crisis, the further privatization of public water utilities globally will also offer established utilities the opportunity for water utilities to grow their businesses.

Water Treatment

The greatest innovations in the water industry are to be found in the field of water treatment. The three most important technologies are:

Wastewater treatment (whether industrial or domestic) - a market worth more than $200 billion a year - with such players as the French companies Veolia and Suez and the U.S.-based NALCO.
Filtration and chemical treatment, with pure-plays like Calgon Carbon and the involvement of such large entities as ITT and General Electric.
Desalination, an arena in which, again, General Electric plays, together with others such as Dow Chemical and Singapore's Hyflux.
Each of these sectors has a key role to play in solving the water crisis, and each will benefit from efforts to solve the crisis.

Infrastructure

Currently a $50 billion sector, infrastructure companies make their business from making and supplying equipment - for example, valves, pumps and pipes - and servicing the water utilities - for example, digging wells and irrigation canals. In addition, there are companies that both make and supply the systems to actually monitor, measure and meter water use ... increasingly important as the value of water grows.

Once again ITT and General Electric are to be found in this space, but so, too, are a number of smaller specialized companies based both in the U.S. and Europe, such as Badger Meter - a leading provider of residential water meters.



Investing In Water

Companies active in the business of water can be categorized not only by activity, but also by their structure.

The behavior of the small, specialized, often technology-based, companies can be akin to that of any other technology stocks. In contrast, companies like Suez and Veolia are essentially just huge utilities, and behave according. Finally, large conglomerates like General Electric are also major players in the market.

Although there has been considerable consolidation, across its breadth the industry remains highly fragmented, with some very large players and a slew of mid-size and smaller players. As a result, and with the large role that conglomerates play, developing a coherent water-themed investment strategy is challenging.

There are now, however, several water-sector tracking indexes available to help address just this issue: the ISE Water Index (HHO), the Palisades Water Indices (PIIWI and ZWI) and the S&P Global Water Index (SPGTAQUA). Backtested data on each of these stocks shows water has been a strong-performing theme already; moreover, water stocks have had only a weak correlation to the S&P 500, and have been negatively correlated with other commodities, making them a strong diversification option for new portfolios.

These indexes are currently ‘investable' through four different exchange-traded funds, or ETFs: First Trust ISE Water (FIW), Powershares Global Water (PIO), Powershares Water Resources (PHO) and Claymore S&P Global Water (CGW).



Conclusion

Water is the most important commodity in the world, and it is a commodity ‘in crisis.' As the world's population grows, and as the emerging markets develop, ever more water is needed and commensurately less is readily available. For companies that find, extract, clean, supply, reuse and save water, business opportunities are, therefore, set only to multiply. Consequently, for investors, water as a theme, commodity and a sector provides a unique and exciting investment opportunity.





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[1] "The Global Water Market: A Slow Business With Pockets of Action." Global Water Intelligence. Issue 10, Oct 2007. 30 Sept 2007

[2] Water and Waste Water Markets Worldwide Increase to Over 650 Billion US $ by 2025. More High Tech. Helmut Kaiser Consultancy. 12 Jul 2007. 30 Sept 2007 http://www.prlog.org/10023705-water-and-waste-water-markets-worldwide-increase-to-over-650-billion-us-by-2025-more-high-tech.html

Investing in Food (Barrons)

MONDAY, OCTOBER 19, 2009
UP AND DOWN WALL STREET



A Whiff of Reality By ALAN ABELSON


.........What especially piques his interest in ag is that voracious consumer of everything, China. And, more specifically, that nation's likely problems in securing enough grain to meet the explosive growth in demand it's destined to experience in the years ahead. For, Dylan notes, as countries become more industrialized, which is happening by leaps and bounds in China, their citizens' consume more protein. In particular, rising incomes and urbanized lifestyles invariably lead to higher meat consumption, which, of course, means higher grain demand.
China, he points out, has 22% of the world's population (which is one heap of a lot of mouths to feed) but only 8% of the planet's arable land and 7% of its water. It has been losing nearly 1,400 square miles to desert every year, and industrialization has been taking an increasingly big bite, as well.

Meanwhile, water is becoming a major headache, and one needn't be an old farm hand to know that it's tough to grow anything, even cactus, without H2O. Using World Bank data, Dylan reports that half of China's cities face water problems, most of its fresh water comes form Himalayan glaciers, which have been disappearing (climate change, anyone?), and tillers of the soil are being forced to drill for new sources that frequently prove unsustainable.

All of which underscores the likelihood that China will need huge imports of grain to satisfy inexorably rising demand. However, global grain inventories hover around record lows, despite bumper harvests the past two years, and agricultural markets remain tight, Dylan observes, highly sensitive to virtually any kind of disruption.

The simplest way to invest, Dylan offers, is one of the grain indexes or ETFs. That approach has the advantage of being the purest way of gaining exposure, provides liquidity and, as a bonus, if you're worried about the long-term consequences of recent easy money and stimulus and all that, rates as a decent inflation hedge.

Personally, he prefers investing in equities and, further, in the equities of companies "whose business is to boost agricultural productivity." While he allows as he's aware of the advantage of buying indexes, he shies away from doing so because "you risk being saddled with a load of stocks whose business models you don't understand or whose valuations you don't like. So rather than buying the universe of agricultural stock, why not instead buy the value stocks within that universe?"

He has a few straightforward rules on how investors should uncover those value stocks. To wit: The shares of a company whose operations earn only the cost of capital isn't adding any value and should sell no higher than book value. A stock should trade at a discount to book if its operations return less than the cost of capital because it is destroying value. And a stock of a company with a very high return on equity should see that high return capitalized by the market at a premium to book value.

Any commodity bull market, he reflects, "is in its essence a bottleneck, and mankind has a good track record of figuring out ways around such bottlenecks." So buying companies whose business is to boost agricultural productivity, and buying them on the cheap, he believes, will furnish decent returns regardless of what happens to grain prices. Obviously, if commodity prices go up, so, as night follows day, will returns.

Adorning Dylan's analysis is a table listing various agriculture-related stocks, their return on equity and book value. He rates them according to how far the stock is from what he considers fair book value. The half dozen cheapest include Golden Agri-Resources of Singapore, Chaoda Modern Agriculture of Hong Kong, Yara International of Norway, Incitec Pivot of Australia, Global Bio-Chem of Hong Kong and Agrium of Canada. All are burdened by a slug more debt than the rest of the list, but their average return on equity is 25%.

The home team (in this case the U.S.) is represented by Bunge and Archer Daniels Midland , both selling at a discount to "fair book." Somewhat pricier is Mosaic , and even more so -- we'd say deservedly -- is Monsanto .

Clean Water Technology (from Forbes.com)

Out Of The Labs
Water Wizardry
Jonathan Fahey, 08.26.09, 6:00 AM ET


Seventeen billion gallons of sweet, fresh water are produced from salty water every day, enough to slake the thirst of 350 million people. Yet scientists don't really know how it is done.

Good thing they at least know how to make the process, which takes lots of energy, better.

Many desalination plants remove salt by forcing seawater against a membrane that allows fresh water through, but not salt ions. This is called reverse osmosis, and anyone with a set of taste buds can tell that it works. But scientists still haven't been able to model exactly what is going on.

"I can make you a membrane that does what you want," says Eric Hoek, a professor at UCLA's Henry Samueli School of Engineering and Applied Science. "But I can't give you an equation that describes it."

Hey, whatever works. Hoek developed a membrane now in the process of being commercialized by a start-up company called NanoH20 that the company says could double the amount of fresh water produced per day compared with conventional membranes.

Desalination is booming worldwide, both because there are ever more people who need ever more scarce, fresh water and because desalination has been getting cheaper. Part of this is because desalination plant designers have incorporated clever energy recovery devices to reduce the amount of power needed to run the plants. (See "Making Sweet Water From (Almost) Perpetual Motion.") And part is due to big improvements in membrane technology.

Nikolay Voutchkov of Water Globe Consulting says membranes have gotten 2.5 to 3 times more efficient in the last decade, helping to drive the cost of desalinated water down from $6 to $7 per 1,000 gallons of fresh water to between $2.50 and $3.20.

But Jeff Green, chief executive of NanoH20, says that while costs came down through about 2003, they started to level off and even creep up a little because improvement of current membrane technology stalled.

In order to squeeze the salt out of water, seawater has to be pushed against the reverse osmosis membrane at very high pressures. Engineers have made the membranes, which are polymers very similar to Kevlar, stronger, more uniform and better at rejecting salt. But whenever they try to increase production by increasing their permeability, too much salt gets through.

"Polymer chemistry has been around for decades," says Green. "These membranes have been optimized."

Another issue: These membranes, constantly wet, are wonderful places for bacteria to flourish. The membranes get fouled and have to be treated with chemicals or replaced.

Hoek, a member of UCLA's Water Technology Research Center, knew that one way to both get water through faster and to make things less hospitable to bacteria was to incorporate so-called hydrophilic, or water-loving materials.

Current membrane polymers are hydrophobic; water beads on them like on a recently waxed car. That increases the pressure needed to force water through, and it creates comfy microscopic dry patches for bacteria to grab onto.

Hoek decided to try some well-known, porous, clay-like materials called zeolites, made of alumina and silicates. He knew particles of 100 nanometers could be made with pore sizes as small as just 0.2 nanometers, about the same size as a water molecule, but smaller than the 0.8 nanometer size of a salt ion. "We wanted to make a pore that water wanted to go into," he says.

People have tried (and are still trying) to make pure-zeolite films, but have failed in part because they are too difficult to control and too expensive to manufacture.

Hoek decided to make the zeolite nanoparticles first, then bake them into conventional polymers. The nanocomposite result wasn't quite as hydrophilic as pure zeolite, but also not as hydrophobic as plain polymers.

Also, he was able to add tiny traces of silver onto the nanoparticles, which act as an antimicrobial and make them even more resistant to bacteria. (See: Pure Bioscience Looks for a Silver Lining.)

He put his new nanoparticle-spiked polymers through the ringer, exposing them to high-pressure water and thriving bacteria. The results were good enough that NanoH20 was able to raise $15 million from venture capitalist firms Khosla Ventures and Oak Investment Partners to try to commercialize it.

NanoH20's Green says the company has modified Hoek's work substantially to improve and perfect the nanoparticle membrane, but he won't say how. He says the company is targeting nearly 100% improvement in water production, from 6,000 to 7,500 gallons per day per eight-inch area of membrane to 12,000 gallons per day. The membrane will be the same size and shape as current membranes, so plants won't have to be retrofitted. The company is building enough capacity to produce "tens of thousands" of membranes--a big plant incorporates 10,000 to 20,000. The first membranes will go on sale early next year.

Hoek, though, remains steadfastly humble about his discovery. "I threw one material that was already known into this membrane that was already known," he shrugs.

If they work, these membranes will be an impressive step in reducing the cost and energy required to deliver fresh water. If we still don't understand the physics of what's going on? The water will taste just as sweet.