Investors who have seen energy prices rocket due to scarce supplies are starting to wager that forecasted shortages will cause the value of water to skyrocket, offering big gains to companies active in the sector.

Unlike globally traded commodities like oil, gold or wheat, water tends to be priced locally by authorities who provide it as a public good, generally drawing from nearby sources such as lakes or river basins.

Water is not treated like oil because you usually do not transport it over very long distances, said Wolfgang Grabs, who heads the water resources division of the World Meteorological Organisation (WMO), the United Nations weather agency.

In the absence of a futures market in water, speculators have bought shares in utilities and water related companies such as Waste Management, ITT Corp., American States Water and Suez, expecting them to profit from intensified efforts to tackle water scarcity.

Investors can also track stock market water indices like the Dow Jones U.S. Water Index, the International Securities Exchange ISE B&S Water Index and the Palisades Water Index.

Philippe Rohner, who manages a 1.7 billion euro (1.1 billion pound) water equity fund for the Swiss bank Pictet, said water had been essentially overlooked during the recent commodities boom, despite clear warnings over shortages that would require sizeable investments to overcome.

It is an industry that requires capital, and where the returns can be quite attractive for investors in equities, he said in a recent interview at Pictet's Geneva headquarters.

MAJOR INVESTMENTS

According to United Nations estimates, one third of the world's population lives in areas with water shortages and 1.1 billion people lack access to safe drinking water.

Climate change has also provoked more frequent and intense droughts in sub tropical areas of Asia and Africa, exacerbating shortages in some of the world's poorest countries.

The WMO's Grabs said big investments will be required to improve the way households, manufacturers and farmers use water.

Without substantial changes, he said hot spots for water scarcity including parts of the United States, Spain, China, India, Pakistan, Somalia, Namibia, Botswana, and elsewhere will stretch existing water resources to the limit.

From a financial perspective, this could translate into more business for the companies that maintain, fix and improve water pipelines and storage systems, as well as specialists in dams, irrigation and desalination technologies.

The price of fresh water which the bank Pictet has estimated at 0.2 percent its equivalent volume in crude oil may also need to rise to discourage waste, Grabs said.

We may need to find a better water pricing system to make people conscious of the value of water, he said.

One of the inevitable consequence of water scarcity is that its price in monetary terms will go up, said Achim Steiner, executive director at the United Nations Environment Programme. South Africa's tariff system may be a model for other countries, because it is designed to discourage heavy water use but guarantee minimum supplies for the poor, he said.

Some countries may also need to stop making water intensive products like cotton, steel, paper and cement and instead import these goods from countries with more plentiful water resources.

Others could be forced to restrict agricultural activity or stop using energy from water demanding sources such as nuclear power to ensure household and other priority needs are met.

Those living in poor nations are likely to be squeezed most by any shift toward more expensive water, Grabs said, as they have the least scope to cut already low water consumption.

The biggest competition will be in countries where agricultural production for food security is directly in competition with other areas, he said.

Pakistan Botswana China India