Research report concludes that water is too cheap

The water industry will experience major changes over the next decade as trends in the industry coalesce, according to a new report, Investing in Water, by Progressive Investor, a research firm.

Over the past few years, concerns about diminishing, contaminated water supplies and an aging infrastructure have made the water industry one of the hottest areas for investors, which have pushed company valuations up to historically high levels.

Over the years, the $400 billion water industry ($100 billion in the U.S) has provided reliable, steady returns to investors —largely because of dividends paid by utilities—but the industry as a whole is growing at 4-6% a year (except for certain sub-sectors), not at the heady 15-20% investors expect, the report says.

The report cites two main reasons for the impending water crisis. First, the world is running out of fresh water because uncontrolled growth in population, industry and agriculture all demanding ever increasing amounts of pure water.

Fresh water, it notes, is contaminated with thousands of chemicals—whether they be from industrial processes, fertilizers and pesticides from farms, or from "xenobiotic" contaminants—human excretions of birth control pills, antibiotics or the remnants of chemotherapy. And climate change is changing water and weather patterns around the world.

Second, the report notes, an estimated $1 trillion is required to repair, upgrade and build infrastructure worldwide. The 100-year old US & European water and wastewater infrastructure consists of pipes which are eroding and leaking. In the developing world, new infrastructure is needed to serve the billion people who currently lack access to fresh water.

The root of the problem is that water is ridiculously cheap, says the report.

Water utilities can't afford to upgrade, the infrastructure continues to decay, and individuals, businesses and farms have little incentive to conserve and change their extremely inefficient practices, the report continues.

"How can an investor place capital in a company that's developed an advanced membrane to remove 'xenobiotic' contaminants if no utility can afford to pay for it? Where's the return on investment for the $300 billion dollars needed to prevent the infrastructure from literally collapsing under our feet?" asks Rona Fried, CEO of Progressive Investor.

"A few niche segments are experiencing rapid growth," observes Fried. "Ultraviolet radiation and membrane filtration are growing 15% a year, as they replace chlorine for disinfection. Metering and monitoring are strong growth areas, as is desalination."

Progressive Investor is a monthly newsletter. Its water report is available to subscribers for $79.

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