Waiting For Blue Gold to Sparkle
NOVEMBER 27, 2009, 7:51 A.M. ET
By MATTHEW CURTIN
online.wsj.com
Water looks likely to become one of this century's scarce commodities. Without massive investment in more efficient water use and making seawater drinkable, there won't be enough to go round.
Global water requirements could rise 53% to 6,900 billion cubic meters over the next two decades, 40% above current accessible, reliable supplies, according to research by McKinsey. That ought to offer the prospect of rich returns for investors. Yet so far "blue gold" has failed to live up to billing.
Money is flowing into the sector. California, for example, is to launch an $11 billion water bond to fund better storage, recycling, and drought relief. Yet returns have proved far from sparkling. Pictet, the Swiss private bank, was among the first to identify the opportunity. Its water fund has generated a 6% return in the past 10 years, inferior to the total return on the S&P 500.
Why so meager? Many people, particularly in poorer countries, are reluctant to pay for what they see as a basic necessity not a service, crimping investment if the main source is the private-sector or municipalities, argues Credit Suisse. More than a third of private-sector water contracts in emerging markets between 1990 and 2008 were canceled or under stress compared with 4% for telecommunications and 8% for energy and transport.
But the greater the deficit in water infrastructure investment grows, the greater the long-term opportunity for investors. Rapid industrialization, urbanization and population growth are already putting strains on water resources, forcing water-intensive companies to take action. Emerging market brewer SABMiller, for example, aims to reduce the 4.6 liters of water it needs to make a liter of beer by 25% by 2015.
For investors, building modern water systems, not owning and operating them, may generate the best returns, argues Credit Suisse, except in countries like France and the U.K. where infrastructure and pricing-mechanisms are well established. Desalination is an obvious way to increase available supplies but the high associated energy costs limits its appeal except in the driest of places, like the Gulf and Australia, where there is no alternative.
Investment in recycling water may grow faster. There are also opportunities in limiting leaks with new pipelines and improved storage and reducing demand through drought-resistant crops and efficient irrigation. Among the five biggest investments of Pictet's fund are companies with specialist water-treatment divisions, ITT Corp., Danaher, and Kurita, which Credit Suisse also likes. Credit Suisse's top picks include water-treatment chemicals company Ashland and pump, valve and seals supplier Flowserve.
Write to Matthew Curtin at matthew.curtin@dowjones.com
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