Water….the next oil ?
SUNIL KEWALRAMANI
October 22, 2008
Underappreciated, mispriced, growing scarce and under-owned, that’s the fundamentals of water for you. While oil as a commodity play has attracted attention from all corners of the globe so much so that it is beginning to suffer from the ill-effects of over-ownership, water seems to be having all the fundamentals enjoyed by oil six years ago and it is under-owned; thus, making it a great commodity play. The growing population, climate change, waste and pollution have jointly put pressure on the 1 per cent of the world’s water mass that is both fresh and available. Water is indeed scarce. Writing in the 1950s, the prescient American geologist M.King Hubbert had predicted that the production of U.S. oilfields would peak in the early 1970s. What came to be called the ‘peak oil hypothesis’ and what is believed to have been behind the vertiginous rise in price of oil over the last six years (commonly called the ‘Hurbert Theory’) is bound to be replaced by ‘peak water hypothesis’ as fears of scarcity of water begin to crystallize.
Mostly owned by governments, water is heavily subsidized in many agrarian economies especially the developing ones, where farmers compose a majority of the electorate.
This leads to waste and inefficiency and acts as an impediment to the ‘true discovery’ of the economic value of water.
Merrill Lynch estimates that by 2025 two-thirds of the world’s population could be living in conditions of what they call “water stress”, with concomitant impact on farming (which uses 70 per cent of the world’s fresh water), industry (22 per cent) and day-to-day living (8 per cent). Canadian hedge fund Sextant Capital Management has bought 95-year water rights to three glaciers in northern Europe, all close to ports. One glacier will be used to create bottled water; the other two will provide bulk water transported to customers in 24000 litre containers or supertankers. Mr Otto Spork, CEO of Sextant, is planning to float his glacier-owning companies in the next few months, and is also believed to be in talks with leading commodity exchanges which he hopes will set the stage for the creation of a global market in water futures, with his glaciers being the underlying commodity to begin with. Legendary oil investor T.Boone Pickens has spent $ 100 Million buying water rights in Texas and building a 25-mile pipeline in the city of Dallas, where he hopes to sell it.
According to commodities guru Jim Rogers, water is the single most important resource because without water, there is no agriculture and no industry. He believes that one can survive war and famine and plague and epidemics but one cannot survive without water. Since it is free, it is misused and hence the need for a free market for water to enable it to realize its potential. Currently water is not traded as a global commodity, but needs to be traded to realize its true economic value. According to Christopher Gasson, publisher of the journal ‘Global Water Intelligence’; until now, the price of water has been set primarily by social concerns. Now, the wheels are in motion towards ‘scarcity’ becoming the chief determinant of water prices. Any trading system will however, have to be coupled with government regulation, control and protection of the masses. Trading so far is unregulated but various national and international groups are now working on developing water derivatives. As trading in water commences, the true price discovery in price of water will also begin to take concrete shape and municipalities may have to hike water rates the world over on determination of water’s inherent valuation. Most municipalities of the world currently subsidize the price of water, as they consider it to be a social good or necessity.
Australia as a precedent : 25 years ago, the Australian government instigated a water trading system after it realized that farmers had been over-allocated water and were depleting the country’s water reserves. It made it mandatory for farmers who wanted permanent water rights or annual allocations to trade with each other, analogous to the trading in Carbon Credits which is beginning to acquire global prominence. According to national water broker Waterfind; in 2007, $ 1.3 Billion in permanent and temporary water rights (the market is growing at an average 20 % per annum) were traded across specialized exchanges in Australia.
Just as crude oil needs to be refined before it can be put to use; water needs to be purified before it can be consumed or put to application. Various methods of purification of water have emerged. Till now, the ultraviolet method of purification was considered the best method of water purification. However, the process of reverse osmosis has emerged as the more advanced method of purification today. In India, Kent RO Systems has perfected the RO (Reverse Osmosis) method of water purification. The size of the water purification market in India is about Rs 700 crores in the organized sector alone, what with companies like Ken RO Systems, Eureka Forbes and Phillips vying for a piece of the pie.
Water is however, the most inelastic of commodities and a consumer will pay any price for it. Most inflation benchmarks take into account price of oil and agricultural commodity prices. The day is not far when water will take its place in inflation data released by central banks and which influence respective countries’ monetary policies.
Analogous to the entry of major business houses in crude oil refining, the day is not far when the scarcity of water will cause many business houses to enter into water procurement and purification as the next area of business investment. Similar to petroleum refineries, water purification laboratories are all set to emerge across the globe.
The water-rich Himalayas, apart from their tremendous appeal of latitude, aesthetics and natural beauty is about to transform India into a hot destination for availability and purification of an increasingly scarce water. The till-now almost-free commodity is about to be transformed into a cool place for generating alpha and exotic beta returns.
Note : Mr Sunil Kewalramani is a Wharton Business School MBA and CEO, Global Capital Advisors. He may be reached at worldequity@sunilkewalramani.com.
Source: http://www.ArticlePros.com/author.php?Sunil Kewalramani
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