By Gerard Wynn
LONDON (Reuters) - As liquidity is drained from credit and money markets and pours into oil and gold, another asset class that could offer long-term returns to the discerning investor is water.
Water shortages are on the rise -- stemming from soaring demand, growing populations, rising living standards and changing diets. A lack of supply is compounded by pollution and climate change.
Investors are mobilizing funds to buy the assets that control water and improve supplies, especially in developing countries such as China where urban populations are booming, further tightening supply.
"Many of these cities have tripled in size in the last 10 years so there's just an unaddressed need, there's an enormous opportunity for investment," said Kimberly Tara, chief executive of commodities investor FourWinds Capital Management.
FourWinds will this year start raising global funds initially of up to 3 billion euros ($4.68 billion) to invest in water, Tara said.
Water shortage is already a serious problem in many regions of the world, as underlined in a December report from Zurich-based Sustainable Asset Management (SAM), which manages about 8.5 billion Swiss francs in assets.
These include southern Spain, the Maghreb, the Middle East, Central Asia, Pakistan, southern India and northern China. In the Americas, the U.S. mid-west, Mexico and the Andes are the worst-hit areas. Eastern Australia is also badly affected.
China is a particularly strong example. It has a fifth of the world's population but just 7 percent of the water.
Most of the length of the country's five main rivers is unsafe for direct human contact, and the country will have to build 1,000 wastewater treatment plants between 2006 and 2010 to meet national pollution targets, Citigroup analysts say.
But not everyone will benefit. While some Chinese cities are now investment hotspots, rural areas are being by-passed, underscoring a trend of under-funding in poorer regions and countries most vulnerable to shortages.
Large equipment suppliers for sourcing water and treating waste will not operate in parts of the developing world, said Merrill Lynch analyst Robert Miller-Bakewell.
"They're pretty selective about where they go. That means a lot of this need will not necessarily be addressed in the near-term," he said.
"The technologies exist. You and I and the World Bank and everyone else can identify the need. The big problem all along is about who's going to pay for it all."
Parts of Africa are especially dry -- both of clean water and cash -- at a time when prices are rising for the steel and concrete raw materials for treatment plants.
A combination of unsafe water and poor sanitation kills about 1.8 million children annually, a Merrill report estimates.
TREATMENT, NOT WATER
The FourWinds Capital Management investment approach is to go after projects in water treatment and desalination and companies which make meters, pipes and pumps.
Little money stands to be made from owning and charging customers for water itself, because governments subsidize this to ensure the vital asset is most under-priced when in greatest need.
"It's very intuitive -- you (the government) must have the water, and so you'll pay anything to anyone who will get that water to you, but the water itself you have to control. So the price of the water is not the place to invest," said Tara.
"We've been researching water for about two and a half years now, looking at different ways to invest," she added.
A warming world is expected to play havoc with the world's rainfall patterns -- with less rain in heavier bursts -- and is likely to melt mountain glaciers on which hundreds of millions of people in Asia and South America depend.
Some governments fret that the attention paid to fighting the causes of climate change, especially greenhouse gas emissions, has been at the expense of coping with the damage it is already wreaking, or that is around the corner.
A collapse of the Indian summer monsoon from as early as next year is one of the world's most immediate, serious climate risks according to research posted by Britain's University of East Anglia last month.
Drought is perhaps the most immediate of climate change threats, but even without global warming the aspirations of new middle-classes in Asia are a challenge.
An average European uses 150-400 liters of water daily for their personal requirements, the SAM report said. Consumption in the United States is almost twice as high but in China, the figure is only 90 liters per day on average, while in many developing countries it is below the 50 liters a day "critical threshold" set by the Food and Agriculture Organization (FAO).
Where there are customers who can afford them, new technologies may offer a profitable solution to excessive water extraction, for example by agriculture which is the biggest user by sector, mainly for irrigation.
The production of one kg of beef requires 16,000 liters of water, according to www.waterfootprint.org, a Web site run by the Dutch University of Twente and the UNESCO-IHE Institute for Water Education. That compares with 1,500 liters for a kg of grain.
Like FourWinds Capital, agriculture firm Monsanto has been swotting up on climate change, said its head of technology strategy and development David Fischhoff.
Along with other agriculture companies such as AGCO Corp, Monsanto's share price has risen recently on the back of spiraling grain prices and resulting higher farmer incomes, partly caused by droughts in Australia and south-east Europe.
Over the past 12 months it has tasked its top 20 experts to digest how the latest climate science will affect the company.
"Drought is our leading example of a problem to solve," Fischhoff said.
The recent discovery of new genes and other scientific advances have aided the first deliberate biotech targeting of drought-tolerance with new crops now in the pipeline, he said.
"The most advanced of these is now a drought-tolerant corn product ... commercializable within several years. We expect this to be the first generation of an ongoing stream."
Monsanto is currently trading at nearly 39 times its forecast earnings for the year to August 2008: almost double the valuation for an emblem of growth in another sector, Google, according to data from Reuters Estimates.
In industry, another major water user, innovation in water-recycling is exciting former dotcom entrepreneurs, in a trend mirroring Silicon Valley's recent enthusiasm for alternative energy to curb greenhouse gas emissions.
British-based entrepreneur Daniel Ishag made money as founder of e-Spotting, which prospered from selling Web search links to advertisers: he now sees an opportunity to clean up on waste water.
The key contribution of his new company Bluewater Bio, he says, is to keep alive and grow bacteria which munch their way through the waste that comes out of factories, homes and landfill sites, saving on chemicals and micro-organisms.
He compared the state of water-processing technology to driving an antique car: "There are better pumps and pipes but the process is the same. It's about continued access to water, and not a lot of money is going into technology to do that."
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(Reporting by Gerard Wynn; Editing by Sara Ledwith)