Water, like they say, is life. But what most people do not know is that water is life in more ways than one. This is because water can be a commodity for trade and investment, just like gold and oil. It is a fact that most of the earth’s surface is covered in water, but the freshwater that is accessible to humans for use is getting scarce, thus giving rise to an opportunity for investment in water commodity.
There has indeed been global shortages in water, and countries that have been hit hard include China, Egypt, India, Israel, Pakistan, Mexico, parts of Africa and the United States (Colorado, California, Las Vegas and the East Coast), to name but a few. In 2016, the World Economic Forum ranked water crises as the third-greatest risk now facing the world, and the Pacific Institute has noted a fourfold increase in violent confrontations over water during the past 10 years.
This trend is getting intensified by urbanization as people all around the world are moving into cities and demanding more water in concentrated locations. With 60 per cent of the world’s population predicted to live in cities by 2025, up from just 15 per cent in 1900, water demand is poised to grow at more than 3 per cent annually over the next decade.
Another intriguing reason why some traders find water attractive is global warming. As the planet heats up, it could reduce the volume of available water sources and raise commodity prices. Investors see these inflections in water availability as a good business opportunity, thus giving rise to water investments. If you want to own a portion of the earth’s water resources, here are ways you can invest in water.
How to Invest in Water Commodities
There are a few ways an investor can invest in water commodities and they include; direct stock purchases, ETFs, mutual funds and unit investment trusts (UITs) and dividend reinvestment plans. Firms that usually seek to profit from water-related businesses include beverage providers, utilities, water treatment/purification firms and equipment makers, such as those that provide pumps, valves and desalination units. These methods are explained thus;
- Water ETFs
One of the most popular ways to invest in water commodities is to acquire water ETFs. The emergence of water-specific exchange-traded funds continues the trend of commodities being viewed as a dedicated asset class within portfolios. There are a number of exchange-traded products that offer exposure to companies in the water industry. The most popular ETF is the PowerShares Water Resource Portfolio (PHO) which is roughly comprised of 30 companies that focus on the provision of potable water, the treatment of water, and the technology and services that are directly related to water consumption.
The second largest offering is the PowerShares Global Water Portfolio (PIO), which offers similar exposure as PHO, except with a more diversified portfolio of international holdings; top allocations by country include the U.S., France, United Kingdom, Japan, Brazil, and Singapore.
Most commodity-focused ETFs hold futures contracts, but there isn’t a future market on water yet. That leaves investors to focus on equities that are involved in this space. Water ETFs invest in companies that create products or build infrastructure to purify or conserve water, or embrace new technologies within the water industry’s wastewater, desalination and potable water sectors.
- Buy Water Stocks
Another way to invest in water commodities are to buy the stocks of companies that invest in water. There are a lot of companies that rely on water for a substantial portion of their revenues. Demand for water services tends to be relatively stable and grows alongside population and the economy, thus water utilities typically generate a growing stream of cash flow, which enables publicly traded water stocks to pay steady dividends.
That growing income stream has been in high demand by investors in recent years. In fact, they have bid up the stocks of large water utilities American Water Works (NYSE:AWK), Aqua America (NYSE:WTR), California Water Services (NYSE:CWT), and American States Water (NYSE:AWR).
- Buy water rights
Transporting water is impractical for both political and physical reasons, so buying up water rights makes a lot of sense. You could buy water rights, and not use the water, but rather hold them because you expect them to increase in value. If you can get the water rights in the right place and at the right price, it could well turn out to be a good investment. Companies with water rights prosper as water rates rise.
Water rights are, however, highly controversial. Everyone thinks water should be free, so they are politically unpopular. Another problem with water rights is that they’re not transferable, meaning that the water rights you buy in New Jersey can’t be used to get water in California … unless you want to pay to transport the water.
- Invest in water treatment companies
There are a lot of companies innovating in the water and wastewater treatment sector. These companies gather waste water and refine them into usable water. Some of these companies also sell water and wastewater treatment facilities, and also operate them as utilities. When they operate them as a utility, they often own the rights to resell the clean treated water. You can invest in some of these companies.
5. Invest in the shares of water companies
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.
6. Invest in water utility companies
Water utilities is another market segment that has the potential to generate some decent returns. Water utility companies often hold a monopoly in their particular area, with larger companies absorbing smaller ones.
7. Invest in water desalination and reclamation companies
All water requires treatment before drinking it, making this a high-growth area. One sub-sector within water stocks that’s especially appealing is desalination, which takes salt out of seawater. Currently, there are more than 7,500 desalination plants operating worldwide, mostly in the arid Middle East.
The portion of the water supply that has been desalinated is poised to notch 9.5% in growth annually this decade, reaching 54 billion cubic meters by 2022, according to Boston-based Lux Research. So desalination will be increasingly important in the future, though the process of desalination can be quite expensive.
Factors that move the water market
- Climate change
Severe drought conditions, which are more common in dry countries, can cause major spikes in water demand, while periods of excessive rainfall can reduce demand. This can cause exceeding fluctuations in the water market.
- Agricultural Demand
The agriculture sector is one of the largest users of water. In addition to irrigation for crops, livestock farmers use an enormous amount of water. It is estimated that 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
Electricity demands so much energy, and water is used to cool electricity-generating equipment. As such, 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.
Risks of investing in water
Your investment is prone to financial crisis: A quick look at some of the water ETFs will show that even this sector of ETFs went through corrections especially during the 2008 – 2009 financial crises. It suffices to say that investing in water based financial products such as ETFs might be a safe bet but that doesn’t make them immune to financial crisis.
Government regulations: Another risk to bear in mind is government regulations which can change. Do not rule out the fact that governments can effectively seize private property especially if it has to do with abundance of fresh water in a specific region or area.
Climate change: Climate change is one of the reasons for water scarcity and it could very well be the reason for volatility as well. Seasonal patterns can often bring about changes which could see seasonal shifts in demand for the natural resource.
When investing or trading water, an important distinction to make is that unlike gold or crude oil or other commodities where you can directly invest in the price of the commodity, you cannot do the same with water. In other words, speculators cannot bet on whether the price of water will rise or fall and thus eliminates any possibility of cornering the water market, for now at least. Investors also need to know that investing in water is a long term issue and you cannot expect to see big returns overnight.