As the world’s population continues to grow, countries urbanise and economies expand, demand for water is continually rising, exerting pressure on how this increasingly scarce global resource is managed.
The private sector is responding to these challenges – companies are at the forefront of improving water management systems, alleviating supply constraints and ensuring that the water keeps flowing when and where it is needed.
Water – and its use in industry, agriculture and the home – is a universal investment theme that offers opportunities across diverse supply chains, industries and geographies. Although water is a renewable resource, the rate of water use and demand growth is increasingly threatening to outpace the rate of water renewal. Ground water stores and river basins can become depleted and polluted through intensive use, urbanisation and mismanagement. The challenge for the global water industry is to mitigate and manage the risks that can threaten water supply, devastate communities, interrupt production or energy generation, and undermine the prospects for economic growth.
Companies in the global water industry, which is estimated to be valued at over $300 billion,1 provide essential services and products. Where water is scarce, companies process seawater at desalination plants to make it fit for drinking, others recycle wastewater for industrial applications, while others seek to capture rainfall. Engineers
and scientists are collaborating on myriad innovations – such as water-efficient seeds
and crops in the field of agricultural technology – to ease the pressures on water demand.
Water is a long-term investment theme that has demonstrated its potential to outperform other assets. Chart 1 shows that the S&P Global Water Index (grey line) has outperformed global oil & gas, global commodities and the S&P 500 by a considerable margin over the last 10 years. This outperformance by water industry stocks reflects the pressure on water availability in the context of rising demand and the innovative solutions being developed by companies.
Water has outperformed oil & gas, commodities and S&P 500 stocks
UNDERSTANDING THE WATER SCARCITY CHALLENGE
Measures surrounding water security, which aim to minimise the effects of water scarcity, are increasingly being treated on a par with food and energy security. Maintaining a high-quality and sustainable supply of water is one of the core social, political and economic challenges that all countries face. However, there is real concern that water scarcity will intensify between now and 2030 because of the unsustainable use of water and the mismanagement of its supply.
Chart 2 shows where in the world water scarcity is most pronounced (red areas) because demand for water largely exceeds supply. The yellow areas, notably in sub-Saharan Africa and northern India, illustrate economic water scarcity, which is largely due to lack of infrastructure, such as irrigation for agricultural lands and also a lack of extensive water utility companies, and not simply because of drought conditions or excessive demand.
The number of people living in areas of severe water stress is set to increase by 33% to four billion people by 2030, based on 2005 levels.2 Water stress occurs when the demand for water exceeds the available amount during a certain period or when poor quality restricts its use. People living in the BRIC countries – Brazil, Russia, India and China – will be most affected by an increase in severe water stress, followed by the rest of the world outside of OECD countries, and then people in OECD countries.3 In addition to the increased global consumer demand for drinking water, many industries are demanding higher volumes of water to realise their growth ambitions. The shale oil and gas industry, for example, uses a very high volume of water to extract the hydrocarbons.
Areas of physical and economic water scarcity
“Danaher does a lot of work on water quality with a high degree of recurring revenues due to sales of consumables. I like businesses which have a high degree of recurring revenues.”
Amit Lodha, Portfolio Manager, Global Equities
While water is renewable, many uses of water degrade its quality to such an extent that much of our ‘available’ water supply becomes practically useless. Improving the quality of water for potential reuse requires the input of energy, technology, biological treatment or dilution with even more water.5 This challenge requires serious investment and innovative research; an area where the private sector has a key role to play.
When considering water scarcity in the context of global population growth, the OECD estimates that by 2030 (see chart 3) nearly half the global population will be living in conditions of severe water stress, which means water withdrawals as a percentage of total renewal of water resources is above 40%.The right-hand section of chart 3 shows that severe water stress is set to be acute in the BRIC countries, which are among the fastest-growing economies worldwide. This growth, however, will consume vast volumes of water. While India and China account for just under one-tenth of the world’s freshwater reserves, the two countries combined account for one-third of the world’s total water consumption.6
Nearly half of the global population will suffer severe water stress by 2030.About 60% of the additional people living with high water stress levels will be in the BRICs by 2030.
The expansion of the middle class in many emerging markets is shifting consumption patterns towards more water-intensive products as purchasing power increases. This is noticeable in the food industry where consumers are increasingly demanding more protein in their diets. Meat production is particularly water-intensive: beef requires on average 15,500 cubic metres of water to produce just one ton while pork requires 4,900 cubic metres. But soy takes just 2,000 cubic metres and maize requires 900 cubic metres to produce a ton of each crop.7 It is clear that the move to a Western-style, meat-rich diet comes with a high water cost.
To manage these dietary changes, many water-scarce nations have effectively engaged in ‘virtual water’ trade, reducing domestic agricultural water use by importing water-intensive products from water-rich countries that can support this production.8
There is increasing global demand for water as many types of energy require water-intensive processes – from fuel production to energy generation. Among fossil fuels, the production of crude oil tends to require the largest amounts of water.
The extraction of shale gas is estimated to require about 100 times the amount of water needed for conventional gas extraction on a per-well basis.9 While Canada and the US have an abundance of water resources (see chart 2), which is helping to facilitate the expansion of the shale oil & gas industry in North America, shale exploration in China and Mexico, where there are also ample reserves, could be limited by water scarcity.
Arid countries, such as those in the Gulf region, and island states with very limited freshwater resources, such as Singapore, have invested heavily in desalination plants to process seawater, which makes up over 97% of the world’s total water. Desalination is an energy-intensive process of removing salts and minerals from seawater to make it fit for drinking or for agricultural, commercial or industrial applications.
Improvements in desalination processing have made it a more appealing option today where once it was prohibitively expensive. The cost of processing a cubic metre of seawater has fallen from $1.50 in the 1990s to 60 cents today.10 Concerns over the volume of fossil fuels needed to operate desalination plants has led to research in renewable energy-powered plants, which use solar power for example.
It is estimated that Saudi Arabia has about 25% of the global desalination capacity, which provides roughly 70% of the country’s water used in cities and by the industrial sector.11 Singapore has estimated that its fourth desalination plant – known as its Fourth National Tap – will meet 25% of the country’s water demand by 2060. Opened in 2005, the plant is a public-private partnership between PUB, Singapore’s national water agency, and SingSpring, a private entity that operates the plant.
“I am finding some attractive opportunities in sectors that benefit from China’s policy focus on environmental protection and pollution control. One such area is wastewater treatment. Currently the water industry is highly fragmented, but there will be consolidation as the sector grows in size. This growth will benefit companies with experience, access to superior technology and strong project execution skills as they should be able to get the most profitable projects.”
Allan Liu, Portfolio Manager, Asia Pacific Equities
Although Singapore has the highest water stress ranking, according to the World Resources Institute Aqueduct project, the country is consistently held up as an exceptional water manager. Singapore invests heavily in technology, international agreements, and responsible management, allowing it to meet its freshwater needs. Advanced rainwater capture systems contribute 20% of Singapore’s water supply, 40%
is imported from Malaysia, grey water (relatively clean wastewater from domestic appliances) reuse adds 30%, and desalination at present produces the remaining 10%
of the supply to meet the country’s total demand.
China’s South-to-North Water Diversion Project is one of the largest water infrastructure projects in the world. It aims to divert 44.8 billion cubic metres of water a year from southern China to industrialised northern China, where there is less rainfall and rivers are running dry. This will be achieved by diverting the Yangtze River to the Yellow River and Hai River to feed the parched northern territories. The project, which is not without geopolitical sensitivities, is estimated to cost $62 billion – twice as much as the cost of the Three Gorges Dam hydroelectric project, which is the world’s largest power station in terms of installed capacity.
Extreme water scarcity became a key turning point for Israel around 30 years ago. Faced with overused water sources and growing demand for food because of population increase, Israel made water security a key goal and invested heavily in this area. Its success offers a beacon of hope for other countries. More than 80% of household wastewater in Israel is recycled for use in agriculture, according to the environment ministry. Israeli companies have developed water-saving technologies that amount to $1.5 billion worth of exports a year.12 Comparable investment in water management systems and technologies in Africa and India would no doubt go a long way to alleviating some of the world’s most pressing water scarcity issues.
There are wide-ranging potential beneficiaries of innovation in water management and control that are worthy of consideration by investors. These can be directly involved in the water industry or simply industrial users of water seeking efficiency gains.
For example, China Everbright International has invested in more than 70 projects in 20 Chinese cities in environmental energy, environmental water anfd alternative energy. The company has become a one-stop integrated environmental solutions provider. It has developed an integrated business model for environmental project investment, construction & engineering, operational management, technology & development and equipment manufacturing. The company has a strong project pipeline with local authorities in China.
GE Water is a global leader, offering chemical and equipment solutions and services, helping industry and governments to manage and optimise their water resources and processes. GE helps customers meet increased water demand, overcome scarcity challenges, enhance their environmental stewardship and comply with regulatory requirements. GE delivers an international portfolio of water and process technologies, including equipment, chemical, and knowledge management solutions. One of GE Water’s specialist businesses offers industrial clients services to remove mercury, lead and other heavy metals from industrial waste streams. As metals in waste streams do not naturally degrade and are toxic to aquatic life, even at low concentrations, the environmental consequences could be wide-ranging and could run into regulatory compliance issues.
Austrian conglomerate Andritz Group’s businesses use water on an industrial scale in their production and manufacturing processes. Andritz supplies plant, equipment and services to the hydropower, paper and pulp, metalworking and steel industries as well as solid/liquid separation in the municipal and industrial sectors. The group also offers technologies to other industries as diverse as the production of animal feed and biomass pellets to machinery for steam boiler plants and gasification plants for energy generation.
Water purification represents a long-term strategic growth goal for Johnson Matthey, a specialist chemicals company. The company is currently investing around £1 million a year of its £6 million a year new business development expenditure on water purification and the management forecast sales from water purification products of around £10 million a year by 2017.
Food companies have particularly water-intensive processes, so any water-management efficiencies benefit their bottom line. ConAgra is a US food company that has reduced its water use by 4.8% and its water intensity – amount of water used per kilo of food production – by 2.7% compared to 2008 levels. ConAgra has also started a water-related-risks audit at its major suppliers worldwide and is working to integrate water-efficiency measures into its long-term sourcing strategy.
“Pentair operates across the shale industry value chain. In particular, it is a key provider of water recovery technology for the shale energy industry, giving it a large runway of growth as shale energy expands globally from the US. The company is well positioned to benefit from increased demand for energy, water, infrastructure and industrial processes in developed and developed economies.”
Chris Moore, Portfolio Manager,Global Equities
As demand for water increases globally, this will precipitate its natural depletion through accelerated withdrawals over time. The scarcity factor will motivate governments, industry and businesses to more effectively manage water supply through innovative technologies, improved infrastructure and smarter conservation to make water a sustainable and viable investment theme for many years to come.
1 Goldman Sachs, Sustainable Growth: Taking a Deep Dive into Water, May 2013.
2 OECD Environmental Outlook to 2030, published 2008.
5 The World's Water Volume 8: The Biennial Report on Freshwater Resources, Peter H. Gleick, Pacific Institute, January 2014.
6 Goldman Sachs, Sustainable Growth: Taking a Deep Dive into Water, May 2013.
8 United States National Intelligence Council, UNESCO-IHE Institute for Water Education.
9 Goldman Sachs, Sustainable Growth: Taking a Deep Dive into Water, May 2013.
12 Arid Israel recycles wastewater on grand scale, Reuters, November 14, 2010.
This information is for Investment Professionals only and should not be relied upon by private investors. It must not be reproduced or circulated without prior permission.
This communication is not directed at, and must not be acted upon by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity/Fidelity International means FIL Limited and its subsidiary companies. Unless otherwise stated, all views are those of Fidelity. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes.
Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on an individual's circumstances.
Past performance is not a reliable indicator of future results. Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority. FIL Investments International is a member of the Fidelity International group of companies and is registered in England and Wales under the company number 1448245. The registered office of the company is Oakhill House, 130 Tonbridge Road, Hildenborough, Tonbridge, Kent TN11 9DZ, United Kingdom. Fidelity International’s VAT identification number is 395 3090 35.