Turning Water Into Wine

by John Myers, available on http://www.dailyreckoning.com/home.cfm? (“The Daily Reckoning”) 14 Feb 2001

The nation's wastewater treatment market alone is worth $82 billion and set to get bigger. The nation's water and wastewater treatment infrastructure is failing - a victim of antiquated systems. Many water utilities are using pre-WWI technology. That is just the tip of the iceberg. There are more than 54,000 municipal water systems serving an average of 4,000 customers each.

"Nobody knows the value of water until the well runs dry." - Benjamin Franklin

The general public thinks of water as a ubiquitous resource whose supplies stretch beyond exhaustion. But what many will soon realize is that water is a troubled resource, and they simply aren't making any more of it. Every 15 years the world adds another billion people, yet the amount of fresh water has remained pretty much consistent. Worse yet is that the rate of water use is growing at double the rate of population growth.

Even in the United States water is not as plentiful as it once was. California has faced several years of drought. In the Midwest, water tables continue to fall. In the Southwest once-rich rivers now run dry. By the time the Colorado River reaches its mouth in the Sea of Cortez, it is a hardened bed of mud.

There is little doubt that America faces a future with less than abundant water. And while this reality will challenge the economy, it also presents opportunity to smart investors. But before we jump into our investments, let's review the crisis in water and understand how it is part and parcel of the revival in real assets.

Demand Colliding With Supply

Throughout history man has utilized free and limitless water to drive economic growth. But that is changing. Some regions of the world have already reached their water limits. It is easy to see why: aqueducts and dams carry almost every drop of water for human use.

The situation is worse in the Middle East, where water shortages could force a war. Sound like nonsense? Consider this from World Bank Vice President Ismail Serageldin, "Wars will be fought over water this century." Around the globe water is a resource in crisis. These are just a few bare-bone facts:

Fresh water represents less than 1% of the world's total water stocks.

31 countries are facing water shortages.

More than a billion people lack access to clean water.

By 2025 as much as two-thirds of the world's population will be living with a scarcity of water. It is estimated that by 2025 the world will need up to 3 times the amount of water that is currently available. If this scenario plays itself out, one-fourth of the world's population - between 2.8 billion and 3.3 billion people - will suffer from lack of water.

The water situation could develop into a national security issue. According to the Los Angeles Times, "China is facing an impending water shortage that has the potential to undermine its food production, boost world grain prices and precipitate political instability in many developing countries."

The problem has become so severe that 80% of China's major rivers no longer support fish, while half of China's 617 largest cities face water deficits. China depends on irrigated land to produce 70% of the grain for its huge population of 1.2 billion people, but it is diverting more and more irrigation water to supply the needs of fast-growing cities and booming industries. Beijing is one of the most troubled cities, stealing irrigation water from farmers and over-pumping its ground-water supplies.

Chinese reports show that the water tables beneath the North China Plain - a region responsible for nearly 40% of China's grain production - has declined 5 feet each of the last five years. Shandong (a province that produces one-fifth of China's corn and one-seventh of its wheat) is now deprived of part of its irrigation water for several months out of each growing season.

As rivers run dry and aquifers are depleted, China's swelling demand for water is colliding with its limited supply.

And while China is not the first nation to suffer water shortages, it is the first nation with a large standing army backed by nukes to see its water supply run dangerously close to dry.

There is an acute shortage of water in another political hot spot. At present, most of the countries in the Middle East are in need of twice as much water as is presently available to them. And this shortage of water could be a point of contention in the not-too-distant future. Consider the Jordan River, one of the main Middle Eastern waterways. It supplies Jordan, Syria, Lebanon and Israel. In fact, every major water source in the region crosses international boundaries, making it impossible to determine what water belongs to which country.

And even if the water is available, can we guarantee that it's safe to drink?

From the Rio Grande to Tierra del Fuego, almost all wastewater in Latin America is released into lakes, rivers and streams without being treated at all. Raw sewage is simply returned to the water supply. And we're setting the stage for a public health catastrophe. Consider that:

South Africa, the wealthiest country in Africa, is dealing with a cholera epidemic. Nearly 20% of the population doesn't have access to clean water and must draw it from polluted rivers and streams.

In May 2000, nearly 600 people became ill and five died in Ontario, Canada when the water supply became contaminated with E. coli.

And most recently, the U.S. Marines announced that some families living on base had been exposed to contaminated drinking water for over 17 years!

This is just the short list, and I could go on and on. But the fact is, worldwide, 500 million people cannot get clean drinking water. In developing countries, 80% of all diseases are caused by contaminated water.

Wellspring of Profits

Even America's water supplies are becoming troubled. According to the American Society of Civil Engineer's (ASCE) most recent report, the nation's public drinking water and dams were rated a "D." Wastewater received a "D+."

The nation's infrastructure as a whole received a "D." And it will require more than $1 trillion to fix. As usual, things are in worse shape than most of us are willing to admit. The water supply is no different. According to ASCE President Luther W. Graef, "twelve-hundred people die each year from drinking tap water" in the United States.

Nevertheless, the strain on water is more a case of opportunity than catastrophe. The reason is that after decades of failure, governments understand that for-profit companies offer the best solution to the water problem. New laws have been written to allow privatization of the management of water utilities. Currently over 1,000 municipalities across the United States are involved in the privatizing of water and wastewater services.

The nation's wastewater treatment market alone is worth $82 billion and set to get bigger. The nation's water and wastewater treatment infrastructure is failing - a victim of antiquated systems. Many water utilities are using pre-WWI technology. That is just the tip of the iceberg. There are more than 54,000 municipal water systems serving an average of 4,000 customers each.

Government regulation (mostly as a result of the Clean Water Act and Safe Drinking Water Act) is providing strong incentives to the water treatment industry. Municipalities and industries are being forced to clean up drinking water and wastewater like never before. About 25,000 gallons of municipal wastewater are treated for each of the 250 million people living in America... a clear growth avenue for companies that supply water and wastewater treatment services and equipment.

As the water boom comes into full swing, you can expect to see more consolidation and privatization in the industry. And with the technology sector in retreat in the market, this sector is going to attract attention in the coming years.

-- Andre Weltman (aweltman@state.pa.us), February 14, 2001

Answers

Thank you Andre- excellent, and frightening article! Swissrose.

-- Swissrose (cellier@azstarnet.com), February 15, 2001.