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Is Water The New Gold?

By : Ziad K. Abdelnour| 6 July 2010
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It is a fact that water use is today rising at double the rate of global population growth owing to urbanization, more water-intensive agricultural products, growing industrialization of emerging markets and the impact of climate change. The supply of fresh water is relatively static; hence, the rapid rate of demand growth is, not surprisingly, causing some stress.

An estimated 1/3 of the world’s population currently lives in water-stressed or water-scarce countries. On the current trajectory, it is estimated based on most recent population projections (according to the Food and Agriculture Organization of the United Nations and the Geneva Conference) that by 2025 countries will have water demand in excess of supply and 64% of the world’s population will be under significant pressure.

The Middle East (and North Africa) has the greatest absolute and relative water supply problem, in fact classified as ‘high’ stress compared to the rest of the world which is classified as moderate (Asia) and low (all other regions). It is estimated that the Middle East’s population of 314 Million will rise by 34 Million within 30 years, with an annual water requirement of 470 Billion cubic meters annually – 132 Billion more than the total available supplies based on current level of consumption from both renewable and non renewable sources and on the assumption that there will be an improvement in conservation of about 2 percent annually. Arab Gulf states water needs jumped from 6 Billion cubic meters in 1980 to 22.5 Billion cubic meter in 1990 and estimated to reach 35.5 Billion by the end of this year.

Given these alarming statistics, we at Blackhawk strongly believe that water is in fact turning into the “New Gold” for this decade and beyond.

No wonder “smart money” is aggressively moving in this direction.

Take a close look for example at legendary investor Warren Buffet last year’s buyout of a water treatment provider, Nalco Holdings Company, adding to other water-related investments in his wildly successful portfolio.

The move sent ripples through the investing community: a clear signal that investing in water is an untapped opportunity. Once again, remember that water, like oil, is finite. There is only so much ocean saltwater, glacier freshwater and water in the air, while global consumption is growing twice as fast as the world’s population.

Climate change affects how and where this resource is delivered around the world, with more intense rainfalls and dry spells impacting everything from the food cycle to manufacturing to drinking supplies. Climate change is expected to account for about 20% of the global increase in water scarcity in coming years. The World Bank estimates water availability will change dramatically by the middle of this century, leading to what some have called “water wars.”

New water management technologies are the key to managing water scarcity. Buffet’s investment in Nalco, which had $3.7 billion in sales in 2009, is one example. The company helps its industrial customers reduce water and energy use. For example, it claims it 3D TRASAR® cooling water technology has saved more than 200 billion gallons of water. Nalco is also teaming up with organizations like the World Wildlife Fund to help develop ways to conserve water. The company’s stock price has doubled over the past year.

Water quality is indeed a concern in the U.S. and around the world as well. The New York Times recently ran a series called “Toxic Waters” that exposed the worsening pollution in U.S. water systems and lax regulatory responses – despite the Clean Water Act, which helps regulate 100 pollutants. The fact remains that most of the pipes in the U.S. are over 100 years old; the American Water Works Association (AWWA) estimates that domestic water utilities will need to invest $330 billion over the next 20 years to replace aging pipes and treatment plants.

The rest of the world faces even direr water problems. China has 21% of the world’s population but only 7% of the renewable water resources. The country’s spending on water infrastructure reached $250 billion in 2008. By some accounts, the lack of clean water and sanitation slows the world’s economic growth by $556 billion each year.

We believe companies that can fix broken water systems are set to benefit from President Obama’s stimulus dollars, which are finally expected to flow this year. The plan divides $21.4 billion to water and environmental infrastructure and $30 billion to building infrastructure, which should be allocated within the next four years.

Putting our money and brainpower where our mouth is, we are actually involved in the recapitalization of a major water bottling facility in Iraq as we strongly believe that the Middle East at large; as mentioned earlier, will need double the amount of water it used in the past. As it is, per capita water consumption in such comparatively Arab countries as Jordan is only about 80 liters and Israel is 300 liters, on a par with the European average. Meanwhile, unless other projects are implemented, water available in Israel would be half of what was available in the past. Some countries -like Oman- have already trimmed its development program to take account of high population growth, and other countries will soon be forced to follow suit.

No wonder that the bottled (packaged) water industry; worth roughly $85 Billion in annual revenues, has been growing at an average rate of 8% by volume per annum over the last decade.

The penetration rate of bottled water is quite mixed, for instance, in China the consumption per capita is 10% that of Italy. US consumption is nearly 30% lower than Europe. The industry outlook for growth continues to be very strong for water worldwide, mainly due to health benefits of drinking water for developed market consumers, and to avoid ill-health for the emerging market consumers.

The market drivers are different according to each region, with growth in the developed markets driven by health benefits, by contrast emerging or developing markets increasingly seeking water to avoid health issues as local municipal suppliers have fallen short of the quality required. Consumption levels within each market varies markedly from region to region with the more affluent groups within each market willing to pay a premium for water based on the source.

The main growth is understandably coming from those countries where per capita consumption is very low and pollution high, notably the emerging markets.

According to the price/earnings vs. earnings per share growth chart, the outlook for the industry for 2009 was conservative, as real growth in the water industry is expected to continue to beat global averages. There appears to be plenty of scope for continued outperformance in this sector. If the water sector P/E moved up to 20x and earnings growth were 15%, the sector would be up 27% on an absolute basis.

Bottom Line:

Annual water use is up six-fold over the last century, more than double the rate of population growth. Growth in water usage has significantly outstripped population growth for 3 broad reasons:

(a) Rising real incomes have increased the demand for more expensive (and water-intensive) food groups,

(b) Advances in technology have brought water and sanitation into the home, making it more convenient to use in greater quantity, and

(c) Growth in industrial processes and agriculture has added to greater demand for water.

We believe packaged water has been and is expected to continue to be, one of the most attractive long-term growth industries in the consumer market. P/E ratios remain compelling, with industry leaders such as Nestle and Danone showing P/E ratios of 14.6x and 19x, respectively.

What do you say?

Your feedback as always is greatly appreciated.

Thanks much for your consideration.