Water on The Board
Is water the next big asset class? Reuters’ John Kemp shares his views.
TRADING FIRMS HAVE long dreamed about global markets in water (spot markets, futures, options and swaps) sending the stuff around the world in pipes and tankers from areas of abundant rainfall to make the deserts bloom and run the mega- cities of the future. It would be the biggest, most fundamental market of them all, far exceeding existing markets in energy, metals and grains. More than ten years ago,
Enron, the most innovative and pioneering trader of all, bought
a water utility in south-west England (Wessex Water) and put it at the heart of entire new division, Azurix, to realise its vision of a worldwide market in water (I was briefly an Enronaut for nine months before the company was engulfed in bankruptcy). Wessex has survived as a utility, and Azurix continued in a zombie existence – among other
It would be the biggest, most fundamental market of them all, far exceeding existing markets in energy, metals and grains
Forecast Increase in Global Water Demand 2000 – 2050e (Cubic Kilometers)
800 600 691%
things pursuing legal claims against the Argentine Republic – but the dream of creating worldwide markets in water died with Enron. Marketisation nonetheless remains a
400 372% 200 345%
tantalising prospect for traders and thought- leaders. Supporters argue putting a price on water would encourage efficient use, avoid over-exploitation, and avert the prospect of water wars. Pricing is a means to avoid a repeat of the
“tragedy of the commons” and Malthusian rationing by epidemics, pestilence, war and famine.
0 Urban Industrial Source: International Water Management Institute Water – Global Themes Thirsty Cities — Urbanization to Drive Water Demand
• Big cities getting bigger — The world’s urban population is growing at an exponential rate. 70% of the world’s population is forecast to
live in urban areas by 2050, up from 50% in 2010.
• Rising water demand in urban areas — As urban areas increase in size and become more affluent, changing diets and sanitation
requirements can cause the demand for water to increase five-fold beyond the “basic water requirement” needed for drinking, cooking, and personal hygiene.
• Pressures on water supplies — Excessive pumping of aquifers and increased pollution are among the factors pressuring water supplies
globally.
• The global water market, worth $480 bn – includes $175 bn of municipal and industrial water and wastewater capital expenditure,
services, engineering, maintenance and chemicals – and is growing at an annual rate of 6%, according to the 2011 Global Water Report by Global Water Intelligence.
82 September 2011 Irrigated Agriculture
Perilously Peering Into the Future Citigroup’s research department is
the latest organisation to contemplate how investors might benefit from the marketisation of water. In a thoughtful essay, Citigroup Chief Economist Willem Buiter concludes, “Water as an asset class will, in my view, become eventually the single most important physical commodity-based asset class, dwarfing oil, copper, agricultural commodities and precious metals.” (Water as Seen by an Economist, 20th
July 2011). Buiter envisages “a globally integrated
market for fresh water within 25 to 30 years. Once the spot markets for water are integrated, futures markets and other derivative water-based financial instruments – puts, calls, swaps – both exchange-traded and OTC will follow.” Buiter argues convincingly that water should be seen as a private good. But he
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