Published: August 10, 2006

Everyone knows there is a lot of money to be made in oil. But a fresh group of big businesses is discovering there may be even greater profit in a more prosaic liquid: water.

Nic Bothma/European Pressphoto Agency

A United Nations study foresees 5 billion of the world’s 7.9 billion people in 2025 facing a scarcity of clean water.

China Photos/Getty Images

The water line in a Chinese village. Dow Chemical bought a Chinese company involved in water technology.

“You’ve got exploding urban populations, increased pollution and a need to address those things in a meaningful way,’’ said Ian Barbour, general manager of Dow Chemical’s Water Solutions unit. “Of course, we’re investing significantly in the water business.”

Most analysts expect the water market in the United States to be worth at least $150 billion by 2010. And it may happen even sooner than that. Arid cities like Los Angeles and Phoenix already grapple with sporadic water shortages. New York City’s water — once lauded for its purity — is getting cloudy, and the American Society of Civil Engineers has given the pipes and other parts of the country’s creaky water system a D minus.

Globally, water problems are even more immediate. Many experts estimate that water-related equipment and services already make up a $400 billion global market.

“Water is a growth driver for as long and far as the eye can see,’’ said Deane M. Dray, who follows many water companies for Goldman Sachs.

Lots of others agree. Last month GE Energy Financial Services announced its first investment in water: $18 million in a wastewater reclamation plant in Atlanta. Alex Urquhart, the unit’s president, said he wanted to be holding $1 billion in water assets before long. General Electric’s industrial executives have even higher aspirations. In the last few years, G.E. has bought four water companies: Betz Dearborn in 2001, then Osmonics, Ionics and, most recently, Zenon Environmental Systems, which makes ultrafiltration membranes.

“Our water portfolio now runs the gamut of technologies that industrial customers, the Chinese government or the New York municipal water authority could need,’’ said Jeff Garwood, president of GE Water and Process Technologies. Siemens, the German conglomerate whose units often compete with G.E., makes the same claim. It bought U.S. Filter, once a premier stand-alone water company, for nearly $1 billion in 2004, and has acquired six smaller companies since.

“There isn’t a water treatment platform that we don’t now have the technology to address,’’ said Roger Radke, president of Siemens Water Technologies, which accounted for about 1.9 billion euros of Siemen’s 75.4 billion euros in revenue last year.

Chemical companies are taking an interest, too. Last month, Dow, which has made water-softening resins and membranes for treating water for 20 years, bought Zhejiang Omex Environmental Engineering, a Chinese company that adds three more technologies to Dow’s portfolio. In late July, Dow held a news conference at the United Nations, announcing its sponsorship of the Blue Planet Run, an event scheduled for next June, to raise money to tackle global water shortages.

“We’ve doubled our capacity for water-related products in every one of the last five years,” Andrew N. Liveris, Dow’s chief executive, said, adding that water-related revenue went from “less than $100 million” in 2001 to “hundreds of millions” today.

For now, the opportunities for would-be water industry players seem most ample outside the United States. The United Nations Population Fund projects that in 2025, if present rates of water consumption are maintained, 5 billion of the world’s 7.9 billion people will live in areas where safe water is scarce.

Many already do. According to the World Bank, the Middle East, so awash in oil, has about 5 percent of the world’s people but less than 1 percent of the world’s renewable fresh water. Siemens recently joined forces with Mekerot, Israel’s biggest water utility, to explore new technologies to reuse scarce water in Israel, and ultimately sell it to other parched nations.

Eugene P. Corrigan Jr., an entrepreneur in Charleston, S.C., has mapped out the logistics for sending empty oil tankers back to the Middle East with their ballast tanks full of excess water. He has yet to get a Middle Eastern country to adopt his idea — “I sense a real reluctance to be dependent on a source beyond their borders for a water supply,’’ he said — but he continues to try.

Rampant industrialization in the East is also attracting Western water players. “Industrial complexes are igniting in China and Russia, and there is a huge need for companies to help them manage their water effectively,’’ said William J. Roe, chief operating officer for the Nalco Company, a water treatment company in Naperville, Ill., that has stepped up sales efforts in emerging economies.

The United States, too, has the potential to become a big customer for water technologies. According to the Environmental Protection Agency, Americans use nearly 100 gallons of water per person per day. If that goes unchecked, 36 states will be enduring water shortages by 2013, the agency warned.

“You are going to see a growth in membrane technologies, in monitoring systems, in many parts of the water technology industry as we put in place stronger and more protective drinking water standards,’’ said Benjamin H. Grumbles, assistant administrator for water at the E.P.A.

For now the water industry remains fragmented, with no company commanding more than 5 percent of sales. But it is consolidating rapidly, as big companies like Siemens, G.E., Danaher and ITT continue their buying sprees. In 1999, there were 60 companies in the Palisades Water Index, a list of water company stocks put out by WaterTech Capital, an investment bank in Plano, Tex. Today, the list is pared to 38, and Stephen J. Hoffmann, president of WaterTech, expects it will soon be fewer.

Paradoxically, as conglomerates snap up water companies, it has become harder for investors to capitalize on the water industry’s growth.

“This industry has an awful lot of potential, but Pentair and Nalco are pretty much the only pure plays left,’’ said Timothy M. Ghriskey, chief investment officer at Solaris Asset Management, which owns shares of Pentair.

There’s Money in Thirst

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Published: August 10, 2006

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But water-based funds are filling the breach. In December, PowerShares Capital Management introduced the PowerShares Water Resources Portfolio, an exchange-traded fund that invests in the companies included in the Palisades Water Index. In addition, three European mutual funds specialize in water-related companies and William S. Brennan Sr., portfolio manager for the Praetor Global Water Fund in Paris, said he was setting up a similar fund in the United States.

“Whenever you flush a toilet, take a shower, drink a glass of water, someone is making money,’’ he said, noting that the water stocks he tracks went up 10.65 percent in 2005, compared with a rise of about 3 percent in the Standard & Poor’s 500-stock index.

Still, picking the right water stock is not simple. For now, no treatment technology is a panacea.

The cost of reverse osmosis membranes, which lie at the heart of most desalination projects, has plummeted, but desalination still remains capital and energy intensive, and creates its own troublesome sludge. Moreover, many of the regions that are prime desalination markets— the Middle East, for one — are also political powder kegs.

“You’ve got to understand the politics, the financing, a lot more than just making the widgets,’’ said Arthur L. Goldstein, the retired chairman of Ionics, a desalting pioneer now owned by G.E.

Ultraviolet radiation, an increasingly popular means of disinfecting water, is rendered less effective by sediments and sludgy particles, often present in water that needs treatment. Systems to treat and reuse wastewater are generally the least costly and most efficient, but they have yet to overcome the gut-level aversion many people have to deriving water from sewage.

And water-short nations may be competitors as well as customers. China, for example, has shipped so much activated carbon, a water purification material derived from coal, to the United States that the Calgon Carbon Corporation has filed antidumping charges against it.

“A Chinese entrepreneur doesn’t face the environmental regulations we do, and they have been eroding the profitability of this industry since the mid 1990’s,’’ said John Stanik, chief executive of Calgon, which had $335 million in revenue last year, all from water treatment technologies.

Still, most water companies say that the market is big enough so that small companies can readily avoid competing with better-heeled rivals.

For example, the Met-Pro Corporation, a Harleysville, Pa., company that gets most of its $85 million in revenue from air pollution equipment, formed Pristine Water Solutions this year to sell pumps and treatment chemicals to industrial customers and smaller municipalities.

“We’ll go to places that wouldn’t represent enough money for the bigger players,’’ said Raymond De Hont, chief executive of Met-Pro.

Pentair, once primarily a tools company, sold that business in 2004, the same year it bought the water treatment company Wicor, and now derives nearly 75 percent of its revenue from water-related sales.

“We let the big dogs focus on large construction projects, while we sell them the pumps and tubes and housings that they need,” said Randall J. Hogan, chairman of Pentair. Mr. Hogan sees no reason to switch strategies. “Ten years ago we were a $100 million pump company,’’ he said. “We’re now doing $2.13 billion in water alone.’’