TOKYO - Japan's trading houses, which made fortunes from heavy bets on coal and iron ore, see water as their next big investment target as industrialization and urbanization in emerging economies boost demand for clean water.

The nation's six big traders, including Mitsubishi Corp and Mitsui & Co, are aggressively vying for water supply and sewage treatment contracts, aiming to grab business from the dominant Veolia and Suez in a global water market that could top $1 trillion by 2025.

We're ready to invest. It's time we accumulated water assets, said Takahiro Moriyama, director at Sumitomo Corp, which plans to increase its water business portfolios 10-fold by 2020, offering drinking water and wastewater treatment services to 10 million customers, up from 1.3 million now.

Water shortages are a global problem as populations soar and cities explode. Some 900 million people around the globe currently have no access to safe drinking water, according to the World Health Organization, and it's commonly said that future wars will be waged over water rights and ownership.

Deterioration in water quality threatens to halt high-tech plants in China, while a serious drought in Australia triggered restrictions on water use and a spike in grain imports in many smaller countries.

Toray Industries, a leading maker of membranes used to clean water, says a new $500 billion market -- mainly in operating and maintaining water supply and wastewater treatment facilities -- will emerge over the next 15 years, more than double the size of the global chip market.

Companies from IBM, General Electric and Siemens to Spain's Acciona, South Korea's Doosan and Singapore's Hyflux are scrambling to join the fast-growth market.

Infrastructure is a buzzword for the big trading houses.

After pouring money into volatile natural resources, they are now bulking up in stable, long-term businesses to make up for sagging profits during recession.

When the economy is rapidly changing, investment in basic infrastructure makes sense, said Minoru Kihara, general manager at Itochu Corp. Its steady cashflow will help protect the bottom line.

But a drive for capital intensive infrastructure means betting long-term funds on markets that carry a relatively high country risk, and lumping large assets on to balance sheets, eroding companies' return on assets (ROA).

FOCUS ON CHINA, LATIN AMERICA

Japanese companies are targeting markets such as China, Latin America and the Middle East.

There are some 500 sewerage BOT (build-operate-transfer) deals in China, while demand for desalination plants in the Middle East is strong, and we see favorable investment environments in Chile, Mexico and Colombia, said Yoji Ibuki, general manager at Marubeni.

Despite the government's generous spending on cleanups, degradation of China's water resources is having a serious impact on the costs and competitiveness of high-tech manufacturers operating there.

Sony Chemical and Information Device, a Sony group company producing printed circuit boards in central China, said it outsourced a process to produce pure water from recycled wastewater to a filter maker of Asahi Kasei group this year as it was unable to cope with rapidly degrading water resources.

We couldn't have carried on our business if we had maintained the status quo, said a company spokeswoman.

Marubeni last month took a 30 percent stake in China's 9th-biggest wastewater treatment company, and plans to expand its customer base five times to 10 million over the next few years.

Sojitz Corp said it is looking to provide wastewater recycling services to Japanese companies operating in China.

We also aim to win at least one concession contract in China a year, said Atsushi Kato, assistant general manager at Sojitz.

Mitsui last year bought a water engineering and treatment company in Mexico, while Itochu in August took part in a $3.2 billion desalination plant in Australia. Mitsubishi owns 50 percent of Manila Water Co in the Philippines.

But some officials see a long, tough road to becoming major international water players as the market has long been dominated by French groups Veolia and Suez. To date, only about 5 percent of the global water market has been privatized.

They say partnerships with global majors or acquisitions of local water companies are key to jumping into the business.

Filter makers such as Toray, Asahi Kasei, Nitto Denko and Mitsubishi Rayon, which own cutting-edge technologies in ceramic microfiltration membranes for desalination, are also keen to tap the market as plant operators rather than just parts suppliers.

(Editing by Ian Geoghegan)

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