Greater global demand for fresh water is placing a strain on the natural resource, making a potential shortage one of the most worrying problems of the new millennium. And, as the balance between supply and demand for usable water becomes increasingly precarious, many experts are predicting that water will become the oil of the future, which could result in water and water-related investments having significant upside potential.

This increasingly important issue commanded attention at the World Water Forum in Mexico in March. In his opening address to the forum, World Water Council president Loic Fauchon noted that per-capita freshwater resources are declining steadily, shortages are becoming more frequent and natural disasters are more numerous. “Water is endangered, and with it, so are we,” he said.

Although it hasn’t reached crisis level, freshwater shortages lead to almost 250 million cases of water-related diseases and five million to 10 million deaths every year, according to estimates in the United Nations environment program’s Global Environment Outlook, 2000 report. Fauchon says lack of water or its poor quality “caused 10 times more deaths than all the wars waged on this planet” in 2005.

Ironically, 70% of the Earth’s surface is covered in water, but 97% of that is salt water, which can’t be used for drinking or agricultural purposes. Three per cent of the world’s remaining water supply is fresh water, of which only 1% is readily available for human consumption. As well, scientific evidence indicates that dramatic changes in climate because of global warming will lead to droughts, floods and diminishing freshwater glaciers — changing the pattern and quality of water supply and leading to greater scarcity.

At the heart of the impending shortage is increased consumption of water “resulting from population growth and significant increases in industrial and agricultural demand,” says Chuck Bastyr, Toronto-based portfolio manager of BPI Global Asset Management’s BPI Global Discovery Fund.

Proof of this can be seen in the patterns of global bottled water consumption, which has more than quadrupled between 1998 and 2004 and is currently is growing at an average annual rate of 10%. Although mature markets such as Europe and North America account for 35% and 29% of bottled water sales, respectively, sales in Asia and South America, two regions with growing populations, are increasing at an annual rate of 15% — faster than any other region.

Industrial-led economic expansion in India, China and other emerging countries is also putting greater pressure on water resources, notes a January 2006 report from Hong Kong-based brokerage CLSA Asia-Pacific Markets. The report, entitled Remaining Drops: Freshwater resources, a global issue, notes the uneven distribution of freshwater supply and demand in China, which has 22% of the world’s population but only 7% of its fresh-

water resources.

“In some parts of India and China,” Bastyr adds, “use of water for agriculture and industry is beginning to affect availability for human consumption.”

As a result, human use of available fresh water may rise to 90% by 2025, from its present 50%, giving rise to the need for regulation and controls over use, according to the CLSA report: “Growing demand is increasing competition for this fixed resource, raising new concerns about water quality and contaminants, and fostering greater levels of public participation about local control and participation.”

The World Health Organization estimates more than one billion people do not have reliable access to clean drinking water, while 2.6 billion lack adequate sanitation. To meet the UN’s millennium development goals, the number of people with access to clean drinking water globally must increase by 32% and those with access to greater sanitation by 59% by 2015. But to achieve these goals, substantial investments in water are required.

Irrigation water withdrawals in developing countries will also grow by 14% by 2030, the UN predicts. However, scarcity is already a problem in many of these nations. For example, 10 of the 93 countries surveyed by the UN indicate that they are using more than 40% of their renewable freshwater resources for irrigation — a problematic situation that requires making the difficult choice between using water for agriculture and using it for urban development.

Even in Canada, which has an abundance of water, supply is a problem in some regions. “We tend to take water for granted,” says Richard Tanner, a partner of Calgary-based Investment Advisory Group, part of Raymond James Ltd. “The major infrastructure that supports potable water supply in several parts of Canada is decaying. But because it is out of sight, it is out of mind.”

@page_break@“In Canada, we’re seeing water conservation in the midst of water abundance,” says Duncan Ellison, executive director of Ottawa-based Canadian Water and Wastewater Association, which indicates an awareness of scarcity. Several parts of the country, such as the Waterloo region in Ontario and in Charlottetown, P.E.I., have already experienced water shortages.

Ellison says there is scope to develop very sophisticated, modestly priced water-treatment technology that is capable of treating low-quality water to potable standards. He believes Canadians may see “twin plumbing” in the future, wherein reclaimed waste water will be used for non-drinking purposes, along with other conservation measures, such as six-litre toilets, which use half the water of regular toilets.

Given all this concern about fresh water, it may now be prudent to consider investment opportunities in businesses that produce products and services related to clean water. Among such companies are those involved in residential, industrial and municipal water and wastewater treatment, filtration and purification; production and sale of bottled water; monitoring and testing equipment; conveyance and storage infrastructure, such as dams and reservoirs; production of pumps, valves and automation systems; irrigation systems and equipment; engineering and consulting services; and services for water utilities such as operation, maintenance and management.

“Now is a good time to be looking at water,” says Bastyr. “The industry has attracted the attention of global conglomerates such as General Electric Co., Siemens AG and Danaher Corp. in recent years, resulting in consolidation and opportunities for investors.”

The entry of major multinational corporations — Connecticut-based GE, Minnesota-based 3M Co. and Germany-based Siemens, for example — into water services and related technology will continue to drive consolidation in this field, CLSA reports. In March, GE acquired the Oakville, Ont.-based water filtration firm Zenon Environmental Inc., which was one of few remaining publicly traded water-related companies in Canada. And, in 2005, Danaher Corp. acquired London, Ont.-based Trojan Technologies Inc., another domestic water-treatment company.

“There are few remaining ‘pure’ water plays of significance in Canada,”says Paul Gardner, portfolio manager at Toronto-based Avenue Management Inc.

Publicly traded companies to consider are Calgary-based Arrowhead Water Products Ltd., which sells and rents water coolers and delivers distilled and spring water, and Vancouver-based Clearly Canadian Beverage Corp., which markets flavoured and oxygen-enhanced water.

However, new regulatory requirements in North America for drinking water and wastewater emissions are “driving growth in companies that provide filtration, separation and other forms of treatment,” says Lawrence Casse, senior research analyst at Toronto-based full-service investment bank M Partners Inc.

Montreal-based Groupe Laperriere & Verreault Inc. — which produces intake screening equipment for filtering cooling water used in nuclear power plants, liquefied natural gas plants and municipal water plants — is an example.

Bastyr says strong, global companies with economies of scale will probably be the primary beneficiaries of the increased demand for water. The Dow Jones U.S. water index lists 21 such companies, the largest of which are France’s Veolia Environment SA and Britain’s United Utilities PLC, the world’s largest and second-largest water companies, respectively.

Investors can also participate in water by investing in exchange-traded funds such as PowerShares Water Resources Portfolio, listed on the American Stock Exchange. The portfolio is based on the Palisades water index, which is designed to track the performance of companies that focus on providing potable water, water treatment, and technology and services related to water consumption. IE