What Makes Water a Commodity? The Big Drivers of Demand and Price in 2021


The Essential Guide
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In this commodity guide, we explain the relevance of water as a commodity and why it’s the most important yet illiquid commodity in the economy.

We also explain what makes water valuable, how it’s treated and purified, and what drives the prices of water as a commodity.

Interested in how water is traded? See our full guide, or if you want to get started trading right now, here are options available in to consider:

Disclaimer: Availability subject to regulations.
Between 53.00%-89.00% of retail investor accounts lose money when trading CFDs.

Read on to find out what experts think about the water market.

What Is Freshwater Used For?

The main uses of freshwater are:

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.

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 matter 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 a valuable commodity.

What Does Global Water Distribution Look Like?

Although over 70% 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, ice caps, 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 the industry comes from deep underground aquifers, which are underground layers of porous stone.

About a third of the earth’s freshwater is found in aquifers, while the rest 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.

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.

When Did Water Filtering And Purification Begin?

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 a 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.

What Methods Of Water Purification Were Discovered?

In 1800, British chemist William Cruikshank discovered that chlorine could disinfect water.

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 Manny Broussard, Public domain, via Wikimedia Commons

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.

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 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 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 Purified & Distributed?

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

  1. 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.
  2. Disinfection: 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.
  3. 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.
  4. Settling: Settling tanks separate flocs from the partially cleaned water.
  5. Filtering: The partially cleaned water is filtered further using sand and pulverized coal.
  6. Adsorption: Some plants use an additional filtration process to trap more impurities.
  7. Aerating: In areas with large amounts of manganese, iron, or dissolved gases, water treatment plants use an aeration process to remove these impurities.
  8. Fluoridating: In some areas, fluoride is added to the water to prevent tooth decay.
  9. Neutralizing: Some treatment facilities add other chemicals to reduce the corrosion of plumbing pipes and fixtures.
  10. 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.

Biggest Renewable Water Sources By Country

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

RankFlagCountryTotal Renewable Water Resources*
#1Flag of BrazilBrazil8,647
#2Flag of RussiaRussia4,525
#3Flag of USAUnited States3,069
#4Flag of CanadaCanada2,902
#5Flag of ChinaChina2,840
#6Flag of ColombiaColombia2,360
#7Flag of IndonesiaIndonesia2,019
#8Flag of IndiaIndia1,911
#9Flag of PeruPeru1,880
#10Flag of VenezuelaVenezuela1,325

*in billion cubic meters per year (2017 figures)

Statistics for water usage vary by country, but in the United States, nearly 85% of the water withdrawn from natural sources is freshwater.

Excluding the thermos-electric industry, which utilizes both fresh and saline water, the amount of water withdrawn from freshwater sources is over 99%.

What Drives the Price of Water?

Unlike most commodities, there’s a lack of well-developed water futures markets in most regions of the world.

However, the lack of liquidity in futures markets makes a physical trade in water moot for most areas of the world.

The main factors that drive water prices include:

  1. Climate variation on water prices
  2. Agricultural demand for water
  3. Electricity demand

Climate Variation On Water Prices

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.

climate change drought
Image via chiller virus via Pixabay 

Agricultural Demand For Water

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 over 1,500 gallons of water to produce one pound of beef and over 500 gallons to produce a pound of pork.

By comparison, the water usage for a pound of corn and soybeans is just over 200 gallons and over 100 gallons, respectively.

Electricity Demand & Water Prices

Electricity demand is a function of overall economic activity, so water prices should react favorably to a strong economy.

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.

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

ETFs stand for exchange-traded funds. These are baskets of stocks that can be traded.

What Type OF Businesses Impact Water Prices?

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 trades.

Complicating this analysis further is 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.

What Impacts Water Utilities The Most?

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

  1. Interest Rates: Waterworks companies constantly trade in infrastructure and rely heavily on bond issuance to fund these projects.
  2. 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.

Expert Opinions on Water

Waterfall

Leading experts believe water-related trades could produce profits in the years ahead. Water crises are considered as one of the greatest threats that global civilizations face:

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

via the World Economic Forum Annual Report

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

“Demand for freshwater – 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

Where Can You Trade Water?

If you are looking to start trading water and other agricultural commodities, here’s a list of regulated brokers available in to consider.

IMPORTANT: CFDs are not available in the USA due to local regulation, and regulated brokers do not accept US citizens or US residents as clients.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. <b>Between 53.00%-89.00% of retail investor accounts lose money when trading CFDs.</b> You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Further Reading

To learn about different ways you can trade water as a commodity, see this Water Trading Guide.

If you’re interested in agricultural commodity markets heavily impacted by water, see these guides on:

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