Blue gold, the new el dorado

Due to a strong increase in global demand combined with limited resources, the water market has a bright future ahead of it. Currently worth more than $800 billion, the sector is expected to grow by at least 6% per year.

By Bertrand Beauté

April 12, May 13, July 15... Although the date has changed depending on the calculation, one thing is certain: in the first half of 2018, the city of Cape Town came close to "Day Zero", the day when not a single drop of water would come out of the tap. Suffering from three long years of drought, the South African city of 4.5 million inhabitants was on the verge of collapse. "Day Zero" was eventually averted thanks to drastic restrictions – water was limited to 50 litres per day per person. It was a close call.

"The example of Cape Town is emblematic," says Professor Frédéric Lasserre, a specialist in water geopolitics at Laval University in Quebec. "Geographically, the city is surrounded by water, and yet it experiences water shortages. It’s the same thing on a global scale: there is plenty of water in the oceans, but usable fresh water accounts for less than 1% of the planet’s water." The Earth’s supply of water does not vary, while consumption is growing rapidly. The use of fresh water worldwide has increased sevenfold since 1900, according to the 2030 Water Resources Group. This increase is largely the result of population growth, but also of economic development.

"Water consumption is closely correlated with population growth and GDP," says Xavier Regnard, an analyst at the investment bank Bryan, Garnier & Co. "When a population emerges from poverty and gains greater comfort, it shifts towards a more water-intensive lifestyle, for example, eating more meat and using more manufactured goods."

For example, making a pair of jeans takes between 7,000 and 10,000 litres of water, or nearly 285 showers, and a kilo of beef nearly 16,000 litres. Over the next few decades, water use is expected to continue to grow by 1% per year, rising to 20% to 30% above current levels by 2050. If no action is taken, the world population will lack 40% of the water it needs by 2030, according to the latest United Nations World Water Development Report published in March 2021.

"Global warming will also impact available supply, leading to an increase in extreme events such as droughts, as well as floods that degrade water quality," says Antonio Celeste, ESG investment specialist at Lyxor ETF. "All of this will create a global water crisis." This crisis will be felt most in urban areas, like Cape Town, where more and more of the world’s population is concentrated. According to a study published in 2018 in the Nature Sustainability Journal, a hundred megacities around the globe could run out of water by 2050, including Los Angeles, Bangalore, Sao Paulo, Beijing and even London. But the entire global economy will be impacted.

This predicted shortage is whetting the appetite of some traders, who see water as the new El Dorado, also referred to as "blue gold". As far back as 2011, economist Willem Buiter made an impression when he announced that the water market would soon eclipse oil. "I expect to see in the near future a massive expansion of investment in the water sector... I expect to see pipeline networks that will exceed the capacity of those for oil and gas today. I see fleets of water tankers (single-hulled!) and storage facilities that will dwarf those we currently have for oil, natural gas and LNG," Buiter, Citi’s top analyst, wrote, before imagining that blue gold would be traded on a global market like any other commodity.

Nearly 10 years later, some of Buiter’s predictions are clearly coming true. In December 2020, the Nasdaq and the Chicago Mercantile Exchange – one of the world’s largest commodity exchanges – launched California water futures contracts that allow large California water consumers (cities, industries, farmers), investment funds, banks and hedge funds to buy and sell millions of litres, paving the way !for speculation on water prices.

While those in favour of water markets believe that they provide a way of attributing value to a rare and precious substance, many others are worried about seeing blue gold traded like any other commodity. "We can live without copper or oil, but not without water. It is a vital and irreplaceable resource," says one analyst, who feels that water markets are dangerous.

But we should not get carried away. "Water is being ‘financialised’," says Arnaud Bisschop, co-founder of Thematics Asset Management. "But based on the example of California and the Chicago Mercantile Exchange, I think these markets will remain local. There won’t be a global water market like there is with oil, simply because transporting water does not make economic sense at the present time."

So while the opportunities to invest directly in water, like buying gold ore, remain limited, a myriad of companies active in the water sector are nevertheless taking advantage of the growing gap between demand for and supply of fresh water. "Due to the forecast crisis, water has become a hot topic. And this will continue for several decades," says Antonio Celeste of Lyxor ETF. "Companies active in the water sector will benefit from the situation, because massive investment is needed to avoid shortages." To reduce water stress, coastal regions like South Africa are investing heavily in seawater desalination plants. This is generating business for water specialists such as the American company Essential Utilities or the French group Suez.

Other regions need to develop better infrastructure. "And that doesn’t only concern developing countries," says Bisschop. "Infrastructure is often old and in need of repair." Cities like New York, London and Rome have a network leakage rate of more than 40%! Massive investment is therefore needed to save water. "Today, by installing connected systems (sensors, smart meters, etc.), we can monitor networks and detect losses more easily," Bisschop adds. "Unlike what most people believe, a lot of innovation is happening in the water sector."


What is the water market? Although the sector is not altogether clearly defined, three main sub-areas generally emerge: infrastructure management, waste treatment and pollution control. Other players active in the sector include companies that work to improve water efficiency (sensor manufacturers, watersaving toilets, artificial intelligence, etc.).

Taken as a whole, this market is currently worth between $800 billion and $1,000 billion, depending on where the boundaries are set. "The water market has been growing steadily since 2010, and like the rest of the economy, it has only been interrupted by the pandemic, with a 17.7% decline in 2020," says Antonio Celeste, ESG investment specialist at Lyxor ETF. "Once the health crisis is over, growth will return to an average of around 5% to 6% per year." And those prospects have caught the attention of investors. Over the past five years (31 March 2016 to 31 March 2021), the Lyxor World Water ETF has risen by more than 70%. "Water is particularly interesting for investors," Celeste says, "because it allows them to build highly diversified portfolios." These portfolios can include utilities, suppliers of all sorts of parts (pumps, filters, valves, pipes, membranes), or even waste treatment specialists.