Water: The World’s Most Expensive Commodity

The global shortage signals major investment opportunities, says Mark McFarland, chief investment strategist, Emirates NBD Private Banking.

I filled up my car’s fuel tank the other day. Ordinary gasoline costs Dhs1.72 per litre. I have a box of inexpensive locally-produced bottled water in my office priced at Dhs1.75 per litre. This makes the cheapest water in my world more expensive than the fossil fuels that power my car.

Who would have thought it? And that’s after gasoline prices have risen 400 per cent in the last 10 years.

At Emirates NBD Wealth Management, we believe that water is one of the great long-term investment opportunities. It’s a key component in creating food, it’s widely used in industry and it’s a source of cleanliness for billions of people. Oil is replaceable. Water isn’t.

A recent study by McKinsey/IFC projected that the world will have a 40 per cent deficit in usable water by 2030 – only 17 years from now. So where is the world’s water deficit coming from and how do we invest in it?

As a starter, there’s the sheer scale of increasing demand for water. One of the most important changes that are occurring in our world is the increase in global population. It has risen from three billion in 1960 to seven billion people and is set to hit nine by 2050 (UN). Two thirds will live in cities, away from water resources and where water usage is much higher than in the countryside.

The amount of disposable wealth has also exploded since the emerging markets boom began in the 1980s. It’s a well- known phenomenon that when people get wealthier they prefer to eat protein. And when people want to eat meat the amount of water required to feed them goes up – a lot.

For example, Mekonnen and Hoekstra (2010) found that an average of 1,600 litres of water goes into producing a kilogramme of cereals. Chickens need about 4,300 litres per kilo and sheep 8,700 litres. Bovine meats hit an incredible 15,400, partly because about a third of all cereals produced worldwide go into feeding cattle.

By the way, the water used to create a kilo of beef would fill my car’s fuel tank over 220 times and I normally only fill it up twice a month. And vegetarians out there shouldn’t gloat. Eggs and butter average about the same as chickens in water usage terms. The nuts in that politically correct nut-loaf need 9,000 litres, more than the mutton in a curry.

In Europe, concern about global water use has been headline news for 10 years and legislation has been discussed to make it mandatory that food packaging describes the full extent of water use. Water is not only set to become an expensive commodity but its use is also likely to become political.

The second is supply. Only one per cent of the world’s water supply is fresh water, and much of that is located far from agricultural lands.

Many of the world’s agricultural lands are facing production strains because of over-use of water resources as population increase, the absence of properly defined property rights and often engineering schemes that have negative implications for irrigation in neighbouring countries.

The third is investment opportunities. The options for investment in water are already substantial. According to Bloomberg, the S&P global water companies index has out-performed the clean energy index since 2008 by an impressive 85 per cent.

There are ETFs and funds that invest in sustainable agriculture. Fertilizer producers will become more important, in particular Potash, as farmers will need in increase yields again as water resources become more expensive.

As the climate changes, particularly in Siberia, farmland close to water resources will become ever more usable and valuable. Private venture capital funds are investing in technology to enhance the sustainable life of aquifers. And there are opportunities in water distribution companies.

For the Middle East, with its own water issues, the major source of power for water desalination plants is oil and gas. Desalination will itself become a major theme over the next 20 years.