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Water Industry


Major Industry Trends

Water and the Global Economic Downturn

Water is an essential requirement of life, as well as of economic development. Given its essential nature, the provision of water is generally highly regulated in most countries. Some countries, the United Kingdom, for example, create social tariffs to reduce the charges of customers who would otherwise struggle to meet their bills. High levels of regulation remain a characteristic of the industry even though in many countries the water industry has been privatized. The industry in the United Kingdom was privatized as long ago as 1989.

Demand for water also tends to be fairly constant almost irrespective of the state of the economy. In stock market terms, it is therefore regarded as a “defensive” sector—i.e. the shares can be a safe haven during times of economic hardship since earnings remain steady.

The provision of safe water is a prerequisite of civilized society and of economic development and activity. Since demand is constant, usually with a slight upward growth curve, water utilities tend to be among the industrial sectors that are least affected by an economic downturn. This is partly because of the essential nature of the good that they supply, but also because water utilities tend to be heavily regulated by the state in most countries. Heavy regulation restricts entry to the sector, so the water sector tends to suffer from a lack of competition.

Although governments and regulators tend to exert strong downward price pressures, making investment in infrastructure problematic, utilities can rely on solid, regulated income streams even in times of economic hardship. On the negative side, high levels of regulation can also inhibit profit growth.

In the bastion of capitalism, the United States, water supply and wastewater systems are regulated by state and federal governments, and most Americans are served by publicly owned water and wastewater utilities. Only 11% of the population receive water from private utilities. In rural areas, cooperatives often provide drinking water, while up to 15% of Americans are served by their own wells.

At the state level, health and environmental regulation is overseen by the corresponding state-level departments. Public utilities commissions or public service commissions regulate tariffs charged by private utilities and in some states regulate the tariffs of public utilities.

At the federal level, drinking water quality and wastewater discharges are regulated by the United States Environmental Protection Agency, which also provides funding to utilities through state revolving funds.

In the United States, American Water is the largest water utility company, with a service base of approximately 15 million people across 30 states. In the southeast, American Water has locally managed utility subsidiaries in Florida, Georgia, Alabama, Louisiana, North Carolina, Tennessee, Arkansas, Virginia, West Virginia, and Kentucky.

Water Shortages Raise Geopolitical Tensions

From California to the Middle East, huge areas of the world are drying up and a billion people have no access to safe drinking water. US intelligence is warning of the dangers of shrinking resources and experts say the world is “standing on a precipice,” The Guardian newspaper of the United Kingdom reported in February 2014.

According to the World Water Council—which was established in 1996 on the initiative of renowned water specialists and international organizations in response to increasing concern about world water issues from the global community—“while the world’s population tripled in the 20th century, the use of renewable water resources has grown six-fold.”

The Council adds that “within the next 50 years, the world population will increase by another 40–50%. This population growth—coupled with industrialization and urbanization—will result in an increasing demand for water, and will have serious consequences on the environment.”

Already, more wastewater is generated and disposed off today than at any other time in the history of our planet: according to the World Water Council, more than one in six people lack access to safe drinking water—that is, 1.1 billion people; and more than two in six lack adequate sanitation—2.6 billion people.

The Council also warns that as the resource is becoming scarce, tensions among different users may intensify, both at the national and international level, pointing out that more than 260 river basins are shared by two or more countries. “In the absence of strong institutions and agreements, changes within a basin can lead to transboundary tensions. When major projects proceed without regional collaboration, they can become points of conflict, heightening regional instability,” says the Council, which cites the Río Paraná–Río de la Plata system, the Aral Sea, and the Jordan and Danube rivers as examples of where regional tensions may occur.

The Nile

Certainly, there has been concern for some years that lack of water could lead to conflict in the developing world. In 2005, for example, the BBC reported that former UN secretary-general Boutros Boutros-Ghali was warning that competition for water resources could provoke wars in Africa and the Middle East. An Egyptian national himself, Boutros-Ghali said that in his opinion military confrontation between the countries of the Nile Basin was almost inevitable. Indeed, it could only be avoided if they shared water equitably, he added. The BBC reported that while Egypt had long been the greatest user of Nile water, countries upstream—including Kenya, Ethiopia, and Tanzania, on both the Blue and White Niles—were increasingly demanding a greater share.

Certainly in 2013 there was growing tension between Egypt and Ethiopia over the use of water from the Nile. Egypt’s population of 84 million draws an estimated 95% of its water from the river, and the country fears that Ethiopia’s plans for a US$4.2 billion mega-dam on the Nile will reduce the its flow. In February 2014, Ethiopia turned down an Egyptian request that it suspend construction of the dam. Egypt has vowed to protect its “historical rights” to the Nile at “any cost.” Meanwhile, Ethiopia has said that the dam will have no adverse effect on Egypt and hopes that the ambitious hydroelectric project, planned to be completed in 2017, will boost economic growth significantly.

China

Meanwhile, China is facing an increasingly serious water shortage and is blaming global warming. However, independent analysts say that the country’s headlong drive to build its industrial capacity and huge hydro projects are also responsible. In 2013, China published a national “water census” showing that as many as 28,000 rivers logged in a government database had vanished since the 1990s, leaving just under 23,000. The census gave no reason for the disappearance, but China’s weather bureau said that several major rivers, including the Yellow River, a massive northern waterway linking nine provinces, had been dwindling since 1970 and that the trend was likely to continue. China has vowed to spend trillions of yuan to boost supplies, clean rivers, and protect water tables.

China is one of 13 countries with the poorest water resources per capita in the world. Freshwater resources per capita—now at 2,100 m3—are just 28% of the global average. As of the second half of 2005, the country had a water shortage of six billion cubic meters. Around 400 of the 660 cities in the country suffered from various degrees of water shortage, with the shortage in 136 cities classed as severe. In Beijing the figure for water resources per capita is close to those in Arab countries, where water is scarce. The groundwater in half of the cities in the country is also polluted.

Even if supplies remain steady, water resources per person are expected to decline further as the population grows. Reuse of water, at less than one-third that of developed countries, is still insufficient and groundwater is being overexploited.

In December 2013, American investor and author Jim Rogers said that the water shortage is China’s biggest problem. War, famine, civil war, or recession can be overcome—but drought cannot; people cannot build a society or a country without water, the investor said during an interview with the media.

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Market Analysis

The Global Market

According to Lux Research of the United States, water is a half-trillion dollar industry critical for life, agriculture, power production, and manufacturing. However, increasing water stress and creaking infrastructure pose a severe threat to future economic growth and human well-being around the world.

The global water services industry is set to double to US$1 trillion in annual revenues by 2020 as companies address the growing problem of water scarcity, according to a Bank of America–Merrill Lynch global research report entitled “A blue revolution—Global water.” The report, published in November 2012, is based on the collective views of 35 analysts, covering 60 companies from 18 countries. Water is on course to be scarcer than oil by 2030, with demand outstripping supply by 40%. Close to half the world’s population will be living in water-stressed areas. Insufficient freshwater, uneven distribution, and climate change are factors limiting the supply of water, while demand is growing in homes, businesses, and farms around the world. Unless more sustainable water management practices are adopted, 45% of projected 2050 global GDP at 2000 prices could be at risk—equal to US$63 trillion.

The Bank of America–Merrill Lynch (BofA–ML) report has identified the companies it believes are in the strongest position to benefit from the global dynamics of water supply and demand. The report highlights how Asia and South America are poised for the strongest growth. With public finances under pressure, the private sector will have to provide more funding. The report estimates that 30% of global investment will come from private sources by 2016, compared with only 16% today.

“By addressing the issue of water scarcity, companies can reduce the likelihood of social unrest and trans-boundary disputes,” says Sarbjit Nahal, equity strategist at BofA Merrill Lynch Global Research. “Together with our sector analysts, we are setting out in this report the 60 global stocks covered by BofA Merrill Lynch Global Research that are best-positioned to lead in addressing more sustainable water use and to more closely match supply with demand.”

The report outlines three themes of addressing water scarcity, explaining the challenges in each area and the potential solutions that companies are developing. The themes are: water treatment, water management, and water infrastructure and supply. The report identifies companies that have the greatest exposure to the megatrend of scarcity. The three themes are described in more detail below.

Water Treatment—Emerging Market Growth Driving Demand

The BofA–ML report says that rising water scarcity and growing demand from agriculture, housing, and industry will increase demand for water treatment. Agriculture accounts for 70% of water use, with rising demand as diets change. As industries across emerging markets expand, their demand for water rises. Municipal and residential water use is also growing on the back of urbanization. Wastewater reuse stands at only 2.41% of all water withdrawals globally.

The report outlines opportunities in areas such as producing drinking water, irrigation, or returning water to the natural environment. It focuses on sectors with heavy volumes and environmental constraints (such as utilities, oil and gas, and mining), those with strict water constraints (food and beverage, cosmetics), and those with variable effluents (petrochemicals, energy, and breweries). The report highlights how desalination could emerge as a US$25 billion industry by 2025.

Water Management—Smarter Irrigation is Key

Against the backdrop of growing water scarcity, fragmented water management and conflicting stakeholder interests are too expensive and unsustainable in the long term. There is growing recognition that the water crisis is as much a consequence of weak policies and poor management as natural scarcity. Effective water management enables users to cut their use of water. It also mitigates the risks associated with water shortage and reduces the need for capital expenditure-intensive solutions.

The report says that with up to 60% of water used in agriculture wasted, smarter irrigation is essential. Household water management has huge potential—if all US households installed water-saving features, the savings in money terms would be more than US$4 billion per year. Companies involved in areas such as drought-resistant seeds and crops and smart metering are poised to benefit from a need for water management.

Water Infrastructure and Supply—Growing Role of Private Finance

The report highlights the global need for water infrastructure. Developed markets need to replace crumbling and incomplete infrastructure, while emerging markets need to build infrastructure for the first time. Annual water investment needs are estimated to rise to more than US$770 billion for the OECD and BRIC countries by 2015. With public funding increasingly under financial pressure, the private sector will need to play an increasingly important role. Water infrastructure is currently a US$360 billion-plus market and is registering growth of up to 6% in some segments. Scope for growth is especially strong in Latin America and Asia. Companies involved in engineering, construction and consulting, pipes, pumps and valves, and sewage treatment will benefit.

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Further reading on the Water industry

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