Don’t (just) drink water. Invest in it.

This is my second piece (of eleven) on the themes we invest in at Absolute Return Partners. Last month, I covered uranium and why nuclear energy is a vital part of the green transition (you can find it here). Today, I will cover another topic close to my heart – water.

I am sure you know what water is, but do you also know what virtual water is? The term was coined by the British geographer, John Anthony Allan, some 30 years ago to describe the unseen trade in water that happens every day, i.e. the total amount of water consumed or polluted?whilst producing goods and services along the entire supply chain – as opposed to the physical water delivered to your doorstep through pipelines, lorries, bottles, etc. Mr. Allan claimed that large food imports serve as an indicator of water scarcity. Countries that import large amounts of food do not have enough water to be self-sufficient, food-wise, he argued. High exports of food, on the other hand, are indicative of water abundance, he said.

According to Irrigreen, global freshwater consumption should reach about 4.3 trillion m3 in 2024 with 70-75% of that expected to be drawn by the agricultural industry. That is over 500 m3 of freshwater consumption per capita worldwide! Most of that is virtual water. I happen to know how much water was used in 2016. Back then, total freshwater consumption stood at about 2 trillion m3. In other words, in only eight years, water consumption has more than doubled.

Bitcoin is a major sinner, as bitcoin mining absorbs enormous quantities of water. It is estimated that, in 2021, bitcoin mining consumed 1.6 billion m3 of water. To put it into perspective, every bitcoin transaction consumes 6.2 million times more water than the water used per credit card transaction (source: theregister.com).

Water is the most important commodity on the planet, partially because humans won’t survive for more than a few days without it, and partially because it is embedded in virtually everything we produce. We wouldn’t be able to produce any agricultural products without it, and it is rather concerning that key food-producing areas in Europe, Australia and USA are becoming drier.

According to the World Meteorological Organisation, 3.6 billion people – i.e. almost half of all people on the planet – have inadequate access to water at least one month every year. That number is expected to rise to over 5 billion by 2050. Apart from the water needed to keep eight billion people alive, the biggest risk associated with dwindling water supplies is the risk it poses to food security. Today, over 60% of the world’s irrigated agricultural land face extreme levels of water stress. By 2100, with a projected population of about ten billion combined with higher living standards, the world will need to produce?at least 50% more food calories than it does today — and that shall require massive amounts of water.

The University of Maryland has provided one of the most provocative forecasts on water. The researchers at the university project that, in the years to come, most of the world’s virtual water exports will come from along the Amazon basin, the central US, northern India and parts of southern Canada and Russia, as that is where freshwater supplies are still plentiful. This means that much of the world’s food production could migrate to those areas. Should that forecast prove correct, the implications for international trade are enormous. New trade alliances will be established, and new trade patterns will emerge.

To many, desalination is the obvious solution to water scarcity, but with desalination follows numerous problems. Within 10-20 years, water scarcity will become so extreme that many regions become uninhabitable. With that in mind, there will almost certainly be an influx of refugees into areas with less water scarcity. Europe is likely to be more affected by this than North America because of its proximity to Africa.

Before going into the argument against desalination, I need to explain that there are in fact two types of desalination – seawater desalination and groundwater desalination. Many Europeans assume that all desalinated water is sea water, as we don’t desalinate much groundwater in this part of the world, but that isn’t correct. More and more desalination plants remove salt from inland, brackish groundwater – not from seawater.

Let’s start with seawater desalination, which is a major industry in Australia, the Middle East, costal parts of the US (mainly California and Florida), South Africa and the Mediterranean. When you desalinate seawater, only about half is converted to freshwater. The other half is a byproduct called brine, a highly salty mixture that is disposed of by discharging it back into the ocean, which has proven a major problem for nearby marine life. In South Africa, several desalination plants have been dismantled in recent years, as they destroyed nearby aquatic life. In California, more and more applications to build seawater desalination plants are being rejected.

Desalinating inland groundwater causes fewer environmental problems, mostly because the water is less salty. Adding to that, it is far less expensive, making it an economically viable solution in relatively poor communities. The biggest inland desalination plant worldwide is in El Paso, TX – a plant which is capable of producing 27.5 million gallons (104 million liters) of freshwater every day. Texas is the global leader in groundwater desalination, but it is a fast-growing industry worldwide.

Groundwater desalination is not without its fair share of challenges, though. As per APM Research Labs, “while there are fewer dissolved particles to remove from brackish [ground]water, it can be harder to dispose of the leftover waste. And though less energy is required to pump the brackish water through filters than sea water, more energy is sometimes required to pump it from its source.”

Groundwater desalination is growing faster than seawater desalination, partially because of the reduced environmental impact and partially because of the lower financial costs. In terms of how expensive seawater desalination is, a good example is the relatively new facility in Carlsbad, South California, which opened in late 2015. It ended up costing about $1 billion – more than four times the budgeted cost. For that price, only 7% of San Diego County’s freshwater needs are covered.

Given the significant environmental and financial costs associated with desalination, one could argue that authorities should instead prioritise water conservation, efficiency of water-use, stormwater capture and recycling of wastewater, and that is precisely how I prefer to invest in water. If you buy a water ETF (as many do), you end up with a disproportionately high share of water utility companies in your portfolio, which is no good if you are looking for solutions to this problem.

I suggest you look at water technology companies instead, i.e. companies that offer solutions, and there are many of those. It may be companies that offer various water conservation technologies, companies that offer technologies to enhance the efficiency of water-use, companies that offer technologies which will allow us to capture stormwater, or companies that offer wastewater recycling technologies. At some point, when the energy used to generate electricity is entirely green, the dynamics might change in favour of desalination, but we are not at that point yet. I have admittedly invested in one desalination construction company and, of all seven water companies in my portfolio, it has delivered the lowest returns. Point proven!

Let me finish with a simple example. Given the scale of the water supply problem, it is shocking how many households do not yet have a water meter installed. I expect water meter companies to have many years of robust growth ahead of them.? In order to avoid total havoc, authorities are left with no choice. They must improve the discipline amongst users (whether households or businesses) and, in that respect, water meters have proven useful.

It is grotesque how much water is used to keep gardens looking pretty. According to Statista, in the UK, daily water consumption is 351 litres per capita (128 m3 per annum). The corresponding number in the US is 3,750 litres (1,369 m3 per annum). I know the US climate is drier but …? Companies that provide a technology which can reduce water consumption are looking into a golden future, which is why water is high on my list of attractive themes to invest in.

Niels

Latest!

According to New Scientist, the US government is considering taxing crypto mining. This is on the back of new data suggesting that 2.3% of all electricity used in the US in 2023 was due to just 137 cryptocurrency mining operations. Given how much water is consumed during crypto mining operations, it is only a question of time before the government adds that argument to its list of reasons to tax (or even prohibit) crypto mining.

Having said that, in the bigger scheme of things, taxing crypto mining is not necessarily optimal unless the prohibition is worldwide. . Take for example the Chinese crypto industry’s response when crypto mining was banned by the Chinese government. Most Chinese crypto mining now takes place in Kazakhstan, a country where most power stations are coal-fired, i.e. moving the industry from China to Kazakhstan has led to an increase in CO2 emissions.