Quenching A Thirst With Desalination Plays

By Aaron Levitt | January 07, 2011 AAA

With the planet's population continuing to rise at exponential rates, more pressures are being placed on a variety of natural resources. Most investors chose to focus on the need for more energy, food and basic materials. Funds like the iShares S&P North American Natural Resources (NYSE:IGE) have become popular investment destinations. However, more precious than them all could be the need for clean potable water. At current population growth rates, analysts estimate that the demand for water will grow by 6% annually. In spite of this demand growth, global water supplies are dwindling.

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Not a Drop to Drink
The planet is quickly moving forward towards a water crunch. Both developed and emerging markets are facing shortfalls in the amount of clean water available for their citizens. The World Bank estimates that China's population growth coupled with its pollution problems are expected to produce a supply shortfall of nearly 200 billion cubic feet within the next decades. The World Health Organization calculates that 1.1 billion people cannot easily find clean drinking water. Another 40% of the planets population lives in areas without adequate sanitation.

Projections by private-sector consortium, the Water Resources Group, point to a global deficit of 40% between the supply and demand for water by 2030 under a business-as-usual, zero population growth scenario. Water tables across the United States mid-west are sinking and Australia is still recovering from a drought that has lasted over a decade.

Spending on water infrastructure and related water treatment plants is expected to jump dramatically. One report from the Organization of Economic Co-operation and Development shows that nearly $15 trillion will be needed to be spent by the 20 OECD member nations. Governments worldwide will be given the daunting task of finding new solutions to this water crisis. While the gap between supply and demand will have to be closed, the real question is how.

Australia may have one of the answers to the problem. The nation has begun one of its largest infrastructure projects in its history; Australia's five largest cities are spending $13.2 billion on desalination plants capable of turning millions of gallons of seawater into fresh. Desalination has traditionally been quite expensive due to the massive energy inputs it requires. However, many of Australia's plants run on renewable fuels such as wind and solar. Low natural gas prices are also helping fuel the shift towards using desalination.

A Desalination Portfolio
Tackling the up and coming water crisis will cause a massive flood of investment into the sector. Funds like the PowerShares Water Resources (NYSE:PHO) and Guggenheim S&P Global Water Index (NYSE:CGW) provide good overviews of the water sector. Both Siemens (NYSE:SI) and General Electric (NYSE:GE) have billion dollar water desalination divisions, but for investors wanting straight desalination plays, there are some choices.

Reducing the energy requirements is critical in order to make desalination possible on a wide scale. Energy Recovery (Nasdaq:ERII) designs and manufactures products that allow plants to capture lost power, often with up to 98% efficiency. This can help reduce energy costs up to 60%. This puts desalination as an affordable option for smaller water authorities and utilities.

Providing, engineering, construction and technical services for various infrastructure and environmental projects, Tetra Tech (Nasdaq:TTEK) is one of the go to names in water treatment plant construction, including desalination. The company has been designing desalination facilities in Florida since the 1990s and developed California's first plant.

Finally, operating several desalination plants across the Cayman Islands, Bahamas, Belize, the Virgin Islands, and Bermuda, Consolidated Water (Nasdaq:CWCO) offers investors a way to play the utility angle on desalination. Shares of the company yield 3.40%.

The Bottom Line
As our planets population continues to expand at its rapid pace, more pressure is being placed on our water resources. Finding solutions to treat and boost our dwindling supplies is paramount. Desalination offers one such solution. Investors with longer timelines may want to consider the previous water stocks or a water fund like the First Trust ISE Water Index (NYSE:FIW) for portfolio positions. (For related reading, see Water: The Ultimate Commodity.)

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