Hedge the Water Instead of Watering the Hedges

MELBOURNE AUSTRALIA 9 February 2007 - "Premiers leave PM high and dry" the News Ltd online news service announced yesterday evening.  Last week - or was it the week before - Alan Kohler in his Eureka Report quoted from the Blue Gold research report written by the Daily Reckoning's Chris Mayer saying "don't just buy a water tank, think about a water investment: it's the next, and greatest, commodity shortage."

And yesterday our own Dan Denning quizzed the world famous Jim Rogers about his thoughts on water, and received the response that the water purification technology being developed in Singapore could make it the "Silicon Valley of water."

It is perhaps apt then to pay closer attention to the water supply crisis and how you can hedge your exposure by considering some of the investment opportunities available - even if most of them are offshore.  Is it such a crazy idea to be hedging your water exposure?

Of course not.  The majority of Australian investors would have been very nicely hedged against the rising oil prices over the last four years by virtue of holdings in companies such as BHP Billiton (ASX: BHP), Woodside (ASX: WPL) and Santos (ASX: STO).  Although plenty of people had good reason to be grumpy about the price of petrol hitting $1.40, the fact is, for many people they were receiving much, much more in capital appreciation on their oil stocks than they were losing on higher petrol prices.

Why not do the same for water?  Although oil and water are clearly different, they have at least some similarities.  One of those, and perhaps the most important is that they are subject to that old economic phenomenon of supply and demand.  With one important difference, water is far less elastic than oil.  Water isn't a "nice to have" commodity, it is a "need to have", or a "must have" commodity.

If petrol prices rise what happens?  Well, for some people nothing, they just grin and bear it, put up with it, grumble a bit, but the reality is they can't do much about it.  For others they can do something about it.  Instead of driving all the way to work they can drive to a train station or car pool with a friend or colleague.  If petrol prices went to $2 or $5 a litre we would find some way of adjusting.

But is it the same for water.  We are told that we need to be more conscious about our water usage but how effective can that campaign be when the consequences are not tangible?  Not tangible that is until the consequences slap us in the face.  So far the inconvenience to us has been minimal: we can't turn sprinklers on to water the garden, and the car has to go without a wash - as if anyone enjoys washing their car anyway, big deal.

We are told that "Stage 3" water restrictions will be brought in?!  Who knows what that is anyway?  And does anyone really care?  We just carry on about our business without too much thought to it.

The big hit won't come until water is charged on a true supply and demand basis.  The problem won't hit home until there is a fully measurable indicator of available water.  Telling us that a particular reservoir is only 30% full is irrelevant, maybe it has always been a maximum of 30% full.  A real statistic would be to tell us that storage levels have fallen by X% each year and that we've only got 'Z' number of years of water left.

Maybe the general populous will only start to take it really seriously when water bills start to double, triple or quadruple.  But what are the chances of that?  Will a government really want to seek election on a platform that it will be rationing the water supply?  We don't think so.

So, instead what we can expect to see is more of the same in terms of half-baked non-solutions and arguing between federal and state politicians.  It will ensure that nothing is done, and the longer that nothing is done, the greater the opportunity and profits available to companies that can exploit it.

Instead of watering the hedges we should all be hedging the water.

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