The Commodity.com Guide to Water Trading

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Why is Water Valuable?

Water is arguably the most important commodity on Earth. As important as crops, metals and energy are to the planet, none of them is possible without water.

Every agricultural crop that feeds the planet needs it to grow. Farmers couldn’t raise chickens, cows, pigs or any livestock without massive quantities of it. Miners couldn’t extract and process metals without it, and energy companies couldn’t generate fuel without it. In fact, human beings couldn’t survive without water. Yet despite these realities, many overlook water as an investment.

Although 71% of the Earth’s surface is covered with water, only 0.3% of this water is usable by humans. The rest is in oceans, soils, icecaps or the atmosphere. Of the amount that is usable, an even smaller quantity is easily attainable from sources such as rivers and streams. In fact, rivers and streams contain 300 cubic miles of water, which represents 1/1000th of 1% of the total found on Earth.

Most of the water we consume and use in industry comes from deep underground aquifers, which are underground layers of porous stone. About 30% of liquid fresh water is found in aquifers, while more than 69% is stored in glaciers and icecaps. Tapping into the supply of fresh groundwater requires natural springs or pumps.

How Did Modern Water Treatment Develop?

The history of using stored water for agricultural and human consumption dates back more than 10,000 years.

In 8,000 BC, farmers in Egypt and parts of Asia trapped rainwater for their crops. By 2,000 BC, farmers in Egypt and Peru were using irrigation canals to transport underground water to crops, and by 1,000 BC, a city in modern-day Jordan built aqueducts – artificial channels for conveying water from one place to another – to supply water to its population.

Ancient irrigation system, Arequipa, Peru via Flickr

Ancient Irrigation System, Arequipa, Peru via Global Water Forum on Flickr

Surprisingly, civilizations throughout history showed awareness of the need to maintain a clean source of drinking water.

Ancient Sanskrit and Egyptian manuscripts advised that drinking water should be stored in copper vessels, placed in sunlight and filtered with charcoal. The Greek physician Hippocrates, considered the father of modern medicine, advised that water should be boiled and strained through cloth. However, for many years, people drank untreated water from rivers and streams.

With the Industrial Revolution and the expansion of population in European cities, sources of drinking water were increasingly contaminated. Sewage dumped in rivers and streams led to outbreaks of cholera, typhoid and other water-borne diseases in the 1700s, and cities urgently sought solutions to these deadly afflictions.

In 1800, British chemist William Cruikshank discovered that chlorine could disinfect water, and by the 1890s, many cities discovered that filtering water through beds of sand could trap many deadly bacteria. By the early 1900s, public outcries led to the installation of water treatment facilities in most major US cities.

New Orleans Water Treatment Facility via Wikipedia

New Orleans Water Treatment Facility via Wikipedia

Despite the advent of water treatment facilities, rampant industrialization was creating problems for the water supply. Contaminants such as lead, arsenic, and pesticides were finding their way into drinking water. This led the US government to pass the Water Pollution Control Act of 1948. Eventually, the US Environmental Protection Agency (EPA) produced even tougher water pollution standards.

What Are the Different Types of Treated Water?

Water in its purest form consists of molecules with two atoms of hydrogen and one atom of oxygen. However, most water contains other impurities and is classified according to the presence of various minerals, salts and suspended particles.

Types of Water

VarietyDescription
Tap waterMunicipal water treated to kill bacteria and remove sediments and odors. Often tap water contains other chemicals such as fluoride.
Hard waterContains high amounts of calcium and magnesium salts. Permanent hard water contains sulfates, chlorides, or nitrates of calcium and/or magnesium and is not impacted by heating. Temporary hard water, on the other hand, contains bicarbonates of calcium and/ or magnesium. When heated, hard water forms scale, a substance which clogs heaters and pipes.
Soft waterContains low amounts of calcium and magnesium salts.
Mineral waterContains large amounts of dissolved minerals. Mineral water can be further divided into five types: saline, alkaline, ferrunginous, sulfurous, and potable. Carbonated water and soda water are examples of mineral water.
Spring water (artesian)Distinguished only by the fact that it flows from the ground naturally without the aid of drills or pumps. Otherwise spring water is no different than other water sources.
Purified waterContains the fewest impurities. Distilled water is purified by an evaporation-condensation process. Other types of purification include deionization, carbon filtration, reverse osmosis and ultraviolet sterilization. However, many “impurities” are important to human health.

How is Water Treated?

The water treatment process at most modern facilities involves 10 steps:

  1. Collection
  2. Disinfection
  3. Coagulation
  4. Settling
  5. Filtering
  6. Adsorption
  7. Aerating
  8. Fluoridating
  9. Neutralizing
  10. Distributing

Collection

Groundwater or surface water is collected using drilling wells or dams. It is then carried to the treatment facility in open canals or closed pipes. Some water treatment facilities are located hundreds of miles from the water source. In these cases, the water may be stored in intermediate reservoirs.

Disinfection

Chlorine Safety Sign via Pixabay

Chlorine Safety Sign via Pixabay

In most European plants, ozone-rich air is used to disinfect water followed by a small dose of chlorine. Most American plants simply use chlorine.

Coagulation

Flash mixers circulate the water particles with chemicals called coagulants. The chemicals cause suspended particles in the water to adhere to each other and form flocs.

Settling

Settling tanks separate flocs from the partially cleaned water.

Water Settling Tanks via Archives New Zealand on Flickr

Water Settling Tanks via Archives New Zealand on Flickr

Filtering

The partially cleaned water is filtered further using sand and pulverized coal.

Adsorption

Some plants use an additional filtration process to trap more impurities.

Aerating

Aerator - Kalaupapa Water Supply System via Wikimedia

Aerator – Kalaupapa Water Supply System via Wikimedia

In areas with large amounts of manganese, iron or dissolved gases, water treatment plants use an aeration process to remove these impurities.

Fluoridating

In some areas, fluoride is added to the water to prevent tooth decay.

Neutralizing

Some treatment facilities add other chemicals to reduce corrosion of plumbing pipes and fixtures.

Distributing

Treatment plants add small doses of chlorine to the water as it leaves their facilities. Covered tanks or reservoirs store the treated water to protect it from contamination.

Renewable water resources are the best measure of how much “water wealth” a country possesses:

Top 10 Countries by Renewable Water sources

Top 10 Countries by Renewable Water Resources

RankFlagCountryTotal Renewable Water Resources 1,000 cubic meters per capita (2014 figures)
#1Flag of CanadaCanada80.75
#2Flag of BrazilBrazil41.6
#3Flag of RussiaRussia31.5
#4Flag of AustraliaAustralia20.53
#5Flag of USAUnited States9.54
#6Flag of MexicoMexico3.64
#7Flag of JapanJapan3.4
#8Flag of FranceFrance3.28
#9Flag of United KingdomUnited Kingdom2.27
#10Flag of ChinaChina2.02

Statistics for water usage vary by country, but in the United States, nearly 85% of the water withdrawn from natural sources is fresh water. Excluding the thermos-electric industry, which utilizes both fresh and saline water, the amount of water withdrawn from freshwater sources is over 99%. Fresh water has many uses:

5 Main Uses of Fresh Water

UsesDescription
Thermoelectric
thermoelectricdiagram
Electricity-generating equipment is cooled with fresh water.
Irrigation
wheat
Fresh water provides important nutrients to crops.
Public supply
washing machine
Drinking, bathing and washing clothes and dishes comprise the third largest category of fresh water usage.
Industrial
paper
Metal, wood, paper products, chemicals, gasoline and oils industries are major users of water, although virtually every manufactured product uses water during some part of the production process.
Aquaculture
blue socks
Fish farming is the largest use of fresh water in aquaculture.

What Drives the Price of Water Investments?

Unlike most commodities, there are not liquid and well-developed water futures markets in most regions of the world.

A forwards trading platform called Waterfind commenced trading in Australia in 2014 and has expanded to other regions. However, the lack of liquidity in futures makes a physical investment in water moot for most areas of the world.

Having said that, the factors that move this market include the following:

  1. Climate
  2. Agricultural Demand
  3. Electricity Demand

Climate

Severe drought conditions, which are more common in a dry country like Australia, can cause major spikes in water demand, while periods of excessive rainfall can reduce demand. One of the most intriguing reasons some traders find water attractive is global warming. As the planet heats up, it could reduce the volume of available water sources and raise prices.

Effects of Climate Change via Publicdomainpictures

Effects of Climate Change via Publicdomainpictures

Agricultural Demand

The agriculture sector is one of the largest users of water. In addition to irrigation for crops, livestock farming uses an enormous amount of water. It takes 1,799 gallons of water to produce one pound of beef and 576 gallons to produce a pound of pork. By comparison, the water usage for a pound of corn and soybeans is 216 gallons and 108 gallons, respectively.

Electricity Demand

So much energy is used to cool electricity-generating equipment that it would be difficult to ignore the impact of this industry on water prices. Electricity demand is a function of overall economic activity, so water prices should react favorably to a strong economy.

There are several water-themed ETFs that invest in shares of water companies. The companies that comprise these funds operate in many business segments of the water industry.

Examples of water businesses include utilities that provide water service, water equipment manufacturers, wastewater disposal and water infrastructure manufacturing.

Because of the diversity of these businesses, it is impossible to generalize about what factors move these investments. Complicating this analysis further is the fact that most utilities are regulated entities and, therefore, have restrictions on how much they can raise prices.

Therefore, when an event like a drought, for example, causes water scarcity, utilities do not necessarily benefit.

However, utilities that provide water react mostly to these two factors:

  1. Interest Rates
  2. Dividends

Interest rates

Waterworks companies constantly invest in infrastructure and rely heavily on bond issuance to fund these projects. As a result, utility shares are very sensitive to a rise and fall in interest rates since changes in rates affect their borrowing costs.

Dividends

Most utilities are regulated entities and operate as monopolies or duopolies. In exchange for the lack of competition, they have restrictions on how much they can raise prices. As a result, they tend to generate steady, consistent returns, which they pay in the form of dividends to shareholders. Changes in dividends (increases and decreases) can have a big effect on water utilities’ share prices.

3 Reasons You Might Invest in Water

Companies that manufacture water equipment, dispose of water waste and build water infrastructure are likely to benefit from the factors listed below. In addition, should a global futures market begin to mature, these factors are also likely to lift physical water prices:

  1. Emerging Market Growth
  2. Climate Change
  3. Portfolio Diversification

Emerging Market Growth

The growth of the global economy is a significant factor that could lift both the shares of water equipment manufacturers as well as physical water prices. As emerging countries in Africa, the Middle East and Asia modernize their economies, the need for clean, potable water for irrigation, drinking, electricity and industry will grow.

A New Water Tank is Filled at IFO Camp via Oxfam East Africa on Wikimedia

A New Water Tank is Filled at IFO Camp via Oxfam East Africa on Wikimedia

Climate Change

Climate change has the potential to be the biggest catalyst for a rise in physical water prices. As global temperatures rise, glaciers could melt and rivers and streams could recede. These events have the potential to create major water shortfalls across the globe.

Portfolio Diversification

Investing in a vital natural resource can add diversification to a portfolio. In many cases, factors that move water investments are different than the factors that affect stock and bond prices.

Should I Invest in Water?

There are several ways to gain exposure to the water industry, and traders should consider the factors that move each of these investment vehicles.

Water Trading and Investing Methods Compared

Method of InvestingComplexity Rating (1 = easy, 5=hard)Storage Costs?Security Costs?Expiration Dates?Management Costs?Leverage?Regulated Exchange?
Water FuturesN/AN/AN/AN/AN/AN/AN/A
Water OptionsN/AN/AN/AN/AN/AN/AN/A
Water ETFs2NNNYNY
Water Shares2NNNNYY
Water CFDs3NNNNYY

Since most traders don’t have access to the new and illiquid futures markets, the most practical way they can gain exposure is through shares or ETFs.

Waterworks utilities are one vehicle for investing in the sector. However, while they pay hefty dividends and have low risk, they probably have less potential upside than investing in companies making equipment for water collection and treatment.

There are three reasons water equipment manufacturers’ shares could perform well in the years ahead:

  1. Emerging Market Growth
  2. Climate Change
  3. Infrastructure Demand

Emerging Market Growth

China, India, Brazil, the Middle East and Africa are among the many fast-growing countries and regions that will have enormous food and energy needs in the years ahead. Demand for water should grow as these economies expand.

Annual Global Water Consumption via Sampa on Wikimedia

Annual Global Water Consumption via Sampa on Wikimedia

Climate Change

Global warming is a positive catalyst for water prices. Higher temperatures will diminish the global supply of fresh water and could lead to a water crisis.

Infrastructure Demand

The United States has not invested in major infrastructure in decades. Pipes and equipment that carry water require upgrades in many developing Western economies. Water equipment manufacturers should benefit from an infrastructure overhaul.

It is difficult to envision bearish scenarios for the water industry. However, an economic slowdown that affects emerging markets or a reversal of global warming could put pressure on water equipment manufacturers.

Expert Opinions on Water

Leading experts believe water-related investments could produce profits in the years ahead.

Waterfall

A leading international body ranked water crises as some of the great threats facing global civilizations:

“Climate change risk will, in practice, flow through either excess or lack of water with the potential for severe impacts to societies globally.”

World Economic Forum annual report

A leading investment research firm concurs that investing in water assets is a timely and profitable idea:

“Demand for fresh water – which accounts for a meager 2.5% of the world’s total water content – is growing along with urbanization and an ever-increasing global population. Today, a major part of water infrastructure in the United States is approaching the end of its useful life.”

Zacks Equity Research

How Can I Invest in Water?

Investors have mostly indirect ways to gain exposure to water prices. The previously mentioned Waterfind Australia offers water forwards through which traders can purchase parcels of water in different irrigation regions across Australia. However, geography and liquidity for the platform are limited.

Water ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do. There are several ETFs that invest in companies involved in the water industry including the following:

PowerShares Water ResourcesSummit Water Infrastructure Multifactor ETFGuggenheim S&P Global Water Index ETFFirst Trust ISE Water Index FundPowerShares Global Water ETF

Shares of Water Companies

There are many publicly traded companies that have various levels of exposure to water. While investing in companies can be a leveraged way to gain exposure to water prices, many of these companies can react to other factors such as regional demand for their products, competition, production costs and interest rates. In addition, factors such as company management and the overall stock market can also affect these investments:

CompanyCurrent PriceOverviewListingsFoundedNumber of EmployeesInteresting Fact
SJW Group
SJW Group Logo
The parent of various subsidiary companies that provide regional water service, develop new water projects and develop land.New York Stock Exchange (NYSE)1866385San Jose Water Company is a public utility in the business of providing water service to a population of approximately one million people in an area comprising about 138 square miles in the metropolitan San Jose area.
Middlesex Water Co
MW Co Logo
Operates water and wastewater utility systems for cities and private organizations in the United States.NASDAQ1897309In 2008, Middlesex Water was honored as one of America's Top 100 Most Trustworthy Companies for its transparent financial reporting and conservative corporate governance.
Mueller Water Products
MWP Logo
US-based water infrastructure firm that operates in the United States, Canada and overseas.New York Stock Exchange (NYSE)18574,200One of the largest manufacturers and distributors of fire hydrants, gate valves, and other water infrastructure products in North America.
Calgon Carbon Co

CCC Logo
US-based company that designs and sells equipment to purify air and water.New York Stock Exchange (NYSE)19421,200Calgon Carbon Corporation was founded as the Pittsburgh Coke and Chemical Corporation in Pittsburgh, Pennsylvania. Initially the company manufactured products such as coke fuel in support of the local steel industry.
Rexnord Co

Rexnord Logo
US-based company that manufactures and sells water management systems.New York Stock Exchange (NYSE)1891380In October 2016, Rexnord announced plans to move its bearings manufacturing plant, with its 300 union jobs and 75-80 supervisory jobs, from Indianapolis, Indiana, to Monterrey, Mexico, in June 2017.

CFDs

Another way to invest in shares of water companies is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of companies involved in the water industry. The value of a CFD is the difference between the price of the shares at the time of purchase and their current price.

Some regulated brokers worldwide offer CFDs on shares of water companies. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to share prices without having to purchase shares, ETFs, futures or options.

Plus500 logo

One of the leading brokers for trading agricultural commodities, like water, is Plus 500. Here’s why:

  • No commission on trades (other charges may apply)
  • Free demo account
  • Easy to use (mobile-friendly) platform
  • Industry-leading risk management tools
  • Trade water and hundreds of other markets
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

Start Trading at Plus500.com Important: Your capital is at risk. CFD services are suitable for experienced traders only.

Further Reading

Water.usgs.gov
Madehow.com
Ngwa.org

Lawrence Pines is a Princeton University graduate with more than 25 years of experience as an equity and foreign exchange options trader for multinational banks and proprietary trading groups. Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts.