Sector Focus: Water

The convergence of climate change and rapid decay of old infrastructures is creating the perfect storm for water, no pun intended…

While our attention, as of this writing, is captured by the disastrous consequences of hurricane Ian, the reality is that water is becoming a scarcer commodity in most corners of the world.  The United Nations published a report indicating that droughts are 29% more frequent and last much longer.  This occurs at a time when demand for water continues to rise as more people move up the social ladder and more economies increase their agricultural and industrial footprint. In fact, leading consulting outfit McKinsey predicts that by 2030, global demand for water will outstrip supply by 30%.  The World Resources Institute actually believes that gap will be even more significant at 56%.

Here in California, we have grown accustomed to the desertification process of our land but as the situation becomes more untenable, restrictions are now being put in place.  As regular citizens, we may complain about our lawns getting brown, but the real damage is in agriculture.  Indeed, 70% of water usage is consumed by agricultural activities.  The inability to water crops can cripple economies and obviously make food prices skyrocket.

To compound the risk brought forward by climate action, we face crumbling infrastructures.  The average life of water pipes is about 50 years and the current average age of our pipes in the US is just over 40 years.  We witness similar conditions in water treatment plants where the average life is 40 years, and the current average age is already beyond at 45 years.  It does not get any better when we focus on dams, which carry an average life of 50 years and currently have an average age of 60. To put things in perspective, an estimated 6 billion gallons of treated water is wasted daily in the US alone due to undetected leakages.

Congress is waking up to the dangers we face and, in a rare show of bipartisanship, in 2021 passed a law that earmarked $55 billions dedicated to repair water infrastructures.  Specialized organizations have set the required amount of funds to fully modernize our water system at $129 billion.

At THALASSA CAPITAL, we have been active in investing in the space for years. We see the current correction in prices driven by macro-economic dislocations that do not impair the long-term positive elements we continue to expect in the space.  From smart pumps to meters and leak detectors, from purification technologies to turn-around stories for underperforming utilities, we believe that an investor with a five-year horizon should have a pro-active investing approach.