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.
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.
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
|Tap water||Municipal water treated to kill bacteria and remove sediments and odors. Often tap water contains other chemicals such as fluoride.|
|Hard water||Contains 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 water||Contains low amounts of calcium and magnesium salts.|
|Mineral water||Contains 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 water||Contains 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:
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.
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.
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 tanks separate flocs from the partially cleaned water.
The partially cleaned water is filtered further using sand and pulverized coal.
Some plants use an additional filtration process to trap more impurities.
In areas with large amounts of manganese, iron or dissolved gases, water treatment plants use an aeration process to remove these impurities.
In some areas, fluoride is added to the water to prevent tooth decay.
Some treatment facilities add other chemicals to reduce corrosion of plumbing pipes and fixtures.
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 Resources
|Rank||Flag||Country||Total Renewable Water Resources 1,000 cubic meters per capita (2014 figures)|
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
|Thermoelectric||Electricity-generating equipment is cooled with fresh water.|
|Irrigation||Fresh water provides important nutrients to crops.|
|Public supply||Drinking, bathing and washing clothes and dishes comprise the third largest category of fresh water usage.|
|Industrial||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||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:
- Agricultural Demand
- Electricity Demand
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.
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.
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:
- 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.
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:
- Emerging Market Growth
- Climate Change
- 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.
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.
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 Investing||Complexity Rating (1 = easy, 5=hard)||Storage Costs?||Security Costs?||Expiration Dates?||Management Costs?||Leverage?||Regulated Exchange?|
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:
- Emerging Market Growth
- Climate Change
- 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.
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.
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.
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.”
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.
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 Resources||Summit Water Infrastructure Multifactor ETF||Guggenheim S&P Global Water Index ETF||First Trust ISE Water Index Fund||PowerShares 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:
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 traders can have exposure to share prices without having to purchase shares, ETFs, futures or options.
One of the leading brokers for trading agricultural commodity CFDs 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 hundreds of CFDs
- Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission
Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.