May 2, 2007 / 11:14 AM / 11 years ago

Thirsty world captures investors' attention

CHICAGO (Reuters) - The need to feed up to two billion more people by 2025, booming industrialization in developing countries like China, and a warming climate seen threatening the world’s most precious natural resource has investors serious about water.

“Regardless of what happens to the economy -- you can bet and bank on a predictable demand for water. It is a product that is essential to life,” said Deane Dray, who analyzes water markets for Goldman Sachs in New York.

“People will largely pay ‘whatever’ because it is life-sustaining and there is no substitute. You put all those together, it is very clear why companies are enthusiastic about water.”

The United Nations Human Development Report for 2006 said that by 2025, if current global water consumption continues, more than 3 billion of the world’s 7.9 billion people will be living in areas where water is scarce.

Indeed, conflicts over water rights are already going on in dozens of areas from sub-Saharan Africa to the Middle East to Australia, India, eastern Asia and the U.S. Southwest.

One expert estimates that in the next 25 years trillions of dollars will be needed to upgrade fresh water and waste water technology and build new infrastructure to deliver water, with the bulk of that money to be spent in Asia.

“Infrastructure upgrades that are going to be required over the next 25 years on a global basis could be close to $20 trillion,” said John Balbach, managing partner at Cleantech Group, a venture capital research firm in green technology based in Ann Arbor, Michigan.

Such huge costs mean a budget nightmare for governments, a reality check that water companies also factor in. Eventually, they say, people in all countries will have to ration water use by price and realize it is not a free resource for the world.

“Governments globally are reaching a point where they’re not able to finance the delivery of cheap water, which is why the private sector is getting more and more interested,” said Balbach.

SKY‘S THE LIMIT FOR REVENUES?

Global private industry sales in water-related sectors are estimated at $400 billion annually, including water infrastructure, treatment plants and new technologies to purify water. Of that total, $50 billion are bottled water sales.

Big investors seem most focused now in higher-tech segments of water companies including filtration, desalination and purification systems. But venture capital is also gravitating toward innovative solutions to costly problems.

California-based Underground Solutions Inc. slips pipes underground to repair leaky pipes that were installed more than 100 years ago without ever digging up city streets.

“Investments in water-related technology will go up by at least 50 percent this year,” said Nick Parker, Cleantech’s co-founder and chairman.

A recent Goldman Sachs report said it was likely, though, that over the next five years water system solutions will continue to be dominated by global giants including GE (GE.N), Danaher (DHR.N), ITT (ITT.N) and Siemens (SIEGn.DE).

GE’s objective is to grow revenues by 8 percent every year “and we will definitely be north of that,” said Earl Jones, general manager of GE’s water and process technologies.

    Dow Chemical DOW.N saw revenues from its water solutions group reach $450 million last year, more than double water revenues five years earlier. Dow also bought a Chinese engineering company, Zhejiang Omex Environmental Engineering Co., last summer in an acquisition aimed at water technology.

    EVEN RICH GETTING POORER?

    Agriculture and industry now account for roughly 80 percent of all water use, with the rest consumed by households.

    But as industries and agriculture expand, the fight for and cost of water is likely to escalate, with pressure points seen rising in Asia, Australia and the Middle East, experts say.

    Even in the United States, traditionally the world’s top food producer and exporter, is caught in the squeeze.

    U.S. plans to cut dependence on foreign oil by switching to “green” fuels has ignited an industrial boom in the Midwest as ethanol and soy diesel plants spring up. But biofuel production consumes a huge amount of water, as do crops.

    U.S. fresh water supplies are also shrinking.

    The Ogallala, one of the largest underground U.S. aquifers, which runs from Nebraska to Texas, has seen water levels drop up to 30 feet in some spots in the last 10 years. A five-year old drought in the Corn Belt there also hasn’t helped.

    Water levels in the North American Great Lakes, one of the largest pools of fresh water on the planet, are also dropping.

    “It’s the most rapidly challenged critical resource in the world. It’s now almost a cliche: the 20th century was the century of oil and the 21st century will be the century of water,” said Henry Henderson of the New York-based Natural Resources Defense Council.

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