Water is the new oil
Although not widely known, the world faces a dire water shortage. Despite its apparent abundance, salt water accounts for over 97% of earth’s supply with 2.5% of the remainder frozen at the poles. Of the meagre 0.5% available to living creatures, roughly 70% is used by agriculture and 22% by industry, leaving 8% for drinking water.
The West
Somehow, the average American uses 580 litres of water a day; in China the average is only 90 litres and less than 50 in most emerging countries. This leaves the West facing huge investment to replace aging infrastructure. This has seen the rise of ‘smart grid’ technologies which Morgan Stanley now estimates to be worth $100bn p.a. by 2030. Elsewhere, massive investment is also underway in desalination thanks to falling costs.
The rest
By contrast, China’s water deficit is forecast to reach 80% by 2050, threatening to derail long-term growth. Chinese industries such as cotton, semiconductors, mining and electricity are extremely wasteful and create torrents of toxic water. Like other developing economies, China’s agriculture consumes most water but the huge increase in demand for meat that has accompanied rising living standards is creating an exponential increase in water demand and huge investment opportunities.
Agricultural efficiency
Food ‘security’ remains fragile. In the past year, grain fires in Russia, a draught in Australia and floods in Pakistan have all impacted grain prices pushing the UN’s Food Price Index to a new high.
Agriculture is subject to exponential increases in demand because, as living standards rise, so too does meat consumption. This places a proportionally greater demand on grains for use as animal feed. Chinese meat demand is forecast to increase 60% between 2000 and 2050 while the figure for other emerging markets is 20%.
Meanwhile, global food production is increasing at 2.2% p.a. but is projected to slow to 1.3% by 2030 and to 0.8% by 2050. Within this, production in Latin America, Asia and the former soviet republics is forecast to grow 75%, 53% and 58% respectively by 2018, which highlights that the global disparity in agricultural demand and food security are at least as significant as the potential global shortfall in agricultural production.
Brazil has set the standard for what can be achieved through sustained investment. It has increased its agricultural surplus by 400% since 2000 by engineering new strains of bacteria, grass and seeds better suited to the local ecology. It’s expected to increase its surplus by another 50% in the next decade meaning that its most pressing agricultural concern is actually its crumbling transport infrastructure.
Renewable energy
Energy consumption is forecast to increase 40% over the next 20 years, with electricity demand forecast to rise 76%. Emerging markets account for 90% of this, with 77% of demand forecast to be met by fossil fuels. Oil demand is forecast to increase 24% with natural gas demand to rise 42% and coal demand to rise 53%.
Renewable energy offers few answers in the short term. For now, the world will continue to be powered by fossil fuels. The International Energy Agency forecasts a 40% increase in energy consumption over the next 20 years with 90% of this coming from emerging markets. Over the same period, oil demand is forecast to increase 24% with natural gas demand rising 42% and coal demand rising 53%.
Currently new renewables, which includes solar, wind and hydro, account for only 0.4% of world energy supply.
What growth there is in this sector is likely to come from emerging markets. China has ambitious plans to generate 15% of its energy from renewable sources by 2020 and 30% by 2040. The Chinese government is more likely to hit its targets than OECD countries. Several huge, government-funded developments are under way. However, renewable technologies’ reliance on subsidies means that the investment focus here has now shifted towards ‘adaptation and mitigation’ (i.e. adapting the efficiency of existing products from houses to cars and mitigating for the expected effects of climate change. These are potentially lucrative areas for investors as these technologies are already well established.
There are numerous ways for investors to access specialist investments into these areas including the many hundreds of exchange-traded funds and exchange-traded commodities now available from major providers such as ETF Securities and iShares.
But be warned – investing in wheat prices or pork bellies is not for the fainthearted! First time investors will usually be better served by investigating via the numerous specialist funds on offer.
This article will appear in full in Bestinvest’s client newsletter – ‘Bestinvestor’ – towards the end of July.
