Water more valuable than oil

China needs to boost investment in water projects like the Xiaolangdi Reservoir in Henan. Picture / Reuters.

Jean-Marie Messier lost billions of euros turning the world's biggest water company into entertainment conglomerate Vivendi Universal. He should have stuck with water.

The lack of usable water worldwide has made it more valuable than oil. The Bloomberg World Water Index of 11 utilities returned 35 per cent annually since 2003, compared with 29 per cent for oil and gas stocks and 10 per cent for the Standard & Poor's 500 Index.

From hedge fund manager Boone Pickens to buyout specialist Guy Hands, the world's biggest investors are choosing water as the commodity that may appreciate the most in the next several decades.

The United Nations estimates that by 2050 more than 2 billion people in 48 countries will be short of water.

"There is only one direction for water prices at the moment, and that's up," said Hans Peter Portner, who manages a US$2.9 billion ($4.7 billion) Water Fund at Pictet Asset Management in Geneva.

The fund jumped 26 per cent last year, and Portner forecasts annual returns from water of 8 per cent through 2020.

General Electric chairman Jeffrey Immelt says "scarce" clean water worldwide will more than double the revenue he gets from water purification and treatment to US$5 billion by 2010.

"This will be a big and growing market for a long time," as governments struggle to bring water to 4 billion people who live in areas of profound shortage, Immelt, 50, said at the company's annual meeting in Philadelphia in April.

Belgium's richest man, Albert Frere, has a €2.7 billion ($5.6 billion) investment in water and energy through his stake in Suez SA, the world's second-biggest owner of water utilities after Veolia Environnement, spun off by Vivendi in 2000.

The signs of a shrinking water supply can be seen worldwide.

Many restaurants no longer provide a free glass of water to diners and some cities restrict its use for private pools and gardens.

More than 98 per cent of the Earth's water is saltwater, and most of the rest is locked in polar ice caps.

The world's lakes, rivers and streams account for just 1 per cent of the fresh water. Scientists say any shrinking of the ice caps may only intensify the supply problem by raising saltwater levels.

"Water quality, water availability and disputes over water resources are all going to be made worse," said Peter Gleick, president of the Pacific Institute, a research group in Oakland, California, in a telephone interview.

The cost of water is usually set by government agencies and local regulators. Water doesn't trade on commodity exchanges.

Pictet follows price trends in California, the most populous state, where increases have averaged 6.3 per cent a year from 1989 to 2005. Oil gained an average 7.7 per cent over that period based on futures contracts traded on the New York Mercantile Exchange.

About US$180 billion a year needs to be invested in water infrastructure in developing countries such as China and India, double the amount that's being spent now, according to the World Water Council in Marseilles.

"As the Third World gets richer, it eats more, particularly more meat," said Christopher Wyke, 51, who oversees US$63 million at London-based Schroders Investment Management, at a June 14 conference in Hong Kong. "To produce one tonne of meat takes 7 tonnes of corn. To produce 7 tonnes of corn takes [27,000 litres] of water."

The use of fresh water for human consumption, agriculture and industry may rise 22 per cent by 2025, compared with 1995 levels, according to the International Food Policy Research Institute.

"It's incomprehensible to ignore the importance of water as an asset class when deciding where to put capital," said Neil Berlant, 59, managing director of the water group at Los Angeles-based investment-banking firm Seidler Cos Berlant, who has been following the water industry for 20 years and expects annual returns of up to 10 per cent in the next three years.

Pickens, the Dallas hedge fund manager and oil billionaire, spent more than US$50 million for water rights around his 10,000ha ranch in North Texas. He says he has enough water to serve 20 per cent of the Dallas-Fort Worth area.

So far Pickens, 78, has failed to convince any Texas cities to buy his water, and he needs a commitment before he can build a US$2 billion pipeline system.

Water was a finite resource that would only become more expensive, Pickens said in a June 16 interview in New York.

He compared the demand for water to China's purchases of oil fields from Canada to Kazakhstan, saying, "I'd be the same way about water."

Guy Hands' buyout firm, Terra Firma Capital Partners in London, is one of several private equity investors interested in buying RWE AG's Thames Water unit, the Daily Mail reported without saying where it got the information.

Thames, the largest UK water company with 13 million customers in London and southeast England, might sell shares to the public as early as October, the newspaper said. Water already is rising in value faster than many commodities. The 35 per cent annual return over three years for the Bloomberg water index beats the 27 per cent return for the Bloomberg World Basic Materials Index, which includes 239 companies that produce commodities such as copper, aluminium, paper and steel.

Both indexes peaked in May. The water index is down 12 per cent since then, and the basic materials stocks are down 17 per cent.

"We think the way to play it is the companies that source, treat, distribute and monitor this resource," said Rod Parsley at Terrapin Asset Management in New York, who oversees a US$50 million hedge fund that invests only in water-related companies and in water rights.

Terrapin's Water Fund has returned 22 per cent since it was started in April 2005.

Parsley's fund holds companies such as Thailand's Eastern Water Resources Development and Management, which has returned 42 per cent in the past year including dividends, and Asia Water Technology, which has more than doubled.

The fund also holds SJW, a California water utility whose shares have fallen 6 per cent in the past year.

The water industry generates as much as US$450 billion in revenue each year, trailing only electricity and oil, according to Parsley at Terrapin. Most water supplies are owned by governments, reducing the chances for investments.

"It sounds like an exciting opportunity, but you have to have viable vehicles with which people can buy into the asset," said Stewart Aldcroft, a regional director with Noble Investments Hong Kong, part of Noble Group Ltd. "I think we'll have to wait a little longer before it becomes something that people understand."

- BLOOMBERG