Report explores how to meet growing demands for natural resources over the next twenty years

TORONTO, Nov. 22, 2011 /CNW/ - A complete rethink of resource management—a resource revolution—will be needed to keep pace with soaring demand for energy, water, food, and basic materials as up to three billion new consumers are added to the middle classes over the next 20 years, according to new research by the McKinsey Global Institute (MGI), McKinsey & Company's business and economics research arm, and McKinsey's Sustainability & Resource Productivity (SRP) Practice.

The report, Resource Revolution: Meeting the world's energy, materials, food, and water needs, examines how the world's growing demand for natural resources can be met. It also looks at how policy makers and companies need to change their approach to resource management to avoid the risk that we enter a period of resource price spikes.

During the 20th century, progressively cheaper natural resources underpinned global economic growth. Higher supply of natural resources and increases in productivity with which we used resources offset growth in demand. But over the past ten years, surging demand in emerging markets has wiped out all of the price declines that had occurred in the previous century. Indeed, there has been a near 150 percent increase in real commodity prices since the turn of the century.

Up to three billion new consumers are likely to be added to the global middle classes over the next 20 years, leading to ever increasing demand for natural resources. Demand for steel, for example, is likely to rise by 80 percent. At the same time, finding new sources of supply, and extracting them, is becoming increasingly challenging and expensive. The average cost of bringing a new oil well on line has increased by 100 percent over the past decade. Meanwhile, the correlation between various resources and their prices is now higher than at any point over the past century, increasing the risk that shortages and price changes in one resource can rapidly spread to others. Moreover, environmental effects such as climate change and over-exploitation of groundwater resources, themselves driven by growth in resource consumption, also appear to be increasing the vulnerability of resource supply systems and acting as a constraint on production.

Without action both to expand the supply of natural resources and to achieve a step change in the way we extract and use resources—resource productivity—the global economy could enter an era of higher and volatile resource prices.

"A radical rethink of how we manage our global resources is needed to meet resource challenges over the next 20 years, on both the supply and productivity sides. The good news is that there is an opportunity to achieve a resource productivity revolution comparable with the progress made on labor productivity during the 20th century. The question is whether the private sector and governments can implement the steps needed to deliver these opportunities quickly enough," says Richard Dobbs, a director of MGI.

Measures to boost resource productivity—from improving the energy efficiency of buildings to a shift to more efficient irrigation and reducing food waste—could meet 30 percent of total demand for resources in 2030. These opportunities would deliver around $2.9 trillion of savings to society in 2030. The value of the opportunity would increase to $3.7 trillion assuming a $30 per tonne price for carbon and the removal of energy, agriculture, and water subsidies, as well as energy taxes. Just 15 of these productivity opportunities represent over 75 percent of the potential resource benefits.

The research finds that 70 percent of productivity opportunities have an internal rate of return of more than 10 percent at current prices. This would rise to 90 percent if adjusted for subsidies, carbon pricing, energy taxes, and a discount rate of 4 percent.

The supply of resources would need to grow alongside improvements in resource productivity. For example, energy supply would still need to expand by 420 quadrillion British thermal units (QBTU) from 2010 to 2030, almost entirely due to the fact that sources of existing supply are declining.1

However, even capturing available supply and productivity opportunities would not put the world onto a carbon pathway that would prevent likely global warming above two degrees Celsius. Nor would it alleviate the resource poverty that affects so many citizens.

"By increasing supply and driving productivity, the world's immediate resource needs can be met. But more targeted action is needed to reach climate change and energy-access objectives. To achieve a 450-ppm carbon dioxide pathway, a greater shift to low-carbon power combined with further abatement of emissions tied to land use would be required. Action on these fronts would entail a further annual investment of roughly $300 billion, but would potentially accelerate the clean-energy revolution and reduce adaptation costs. Providing universal access to modern energy would cost an additional $50 billion a year over the next two decades—but that's a fraction of the $410 billion currently spent globally on fossil fuel subsidies," says Jeremy Oppenheim, a director of SRP.

Tackling the resource agenda must start with new institutional mindsets and mechanisms that can generate more coordinated approaches to the challenge of resources, reflecting the stronger interconnectedness of resource systems. Beyond this shift to a more integrated approach, policy makers might consider taking action on three broad fronts.

First, they should strengthen, not dampen, price signals so as to unleash the next wave of investment, innovation and resource conservation. Unwinding more than $1 trillion of subsidies on resources today would, for example, encourage more efficient use of resources; so too would ensuring that resource prices capture the cost of their impact on the environment. Second, tackling a range of non-price barriers would help reduce investor risks and increase the flow of capital into resource-intensive sectors. Policies that create a more predictable long-term framework for investment are particularly important in resource sectors, given their long-term asset structures. The resource revolution would require investment to increase by 50 to 75 percent or to $3.1 trillion to $3.5 trillion per annum. Finally, action needs to be taken to increase the resilience of society in the face of resource-related shocks and price volatility, including more public education to change consumer and businesses behavior, together with stronger safety nets to mitigate the impact of resource and environmental risks on the poorest.

This new era also presents opportunities and risks for business. Resource-related trends will shape the competitive dynamics of a range of sectors in the two decades ahead. Resource-intensive sectors are exposed to much higher risk of either increased resource prices and/or of restrictions on their licence to operate. These risks will be particularly acute in the fastest-growing markets where constraints on access to resources and accelerating environmental degradation are most acute. Resource-supplying companies may appear to be positioned for an era of windfall profits. However, they face an increasingly complex set of portfolio investment challenges, especially given a rapidly changing technology and regulatory landscape. In general, businesses will need to rethink how resources might shape profitability across their operations, produce new growth opportunities, and pose new challenges for risk management.

Read the executive summary or download the full report at www.mckinsey.com/mgi and www.mckinsey.com/en/Client_Service/Sustainability.aspx

The McKinsey Global Institute (MGI), the business and economics research arm of McKinsey & Company, was established in 1990 to develop a deeper understanding of the evolving global economy.

McKinsey & Company's Sustainability & Resource Productivity practice (SRP) works with leading institutions to identify and manage both the risks and opportunities of an era with new resource challenges, integrating the sustainability agenda into better operational performance and robust growth strategies.

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1 1 QBTU is enough energy to power all of the cars, trucks, buildings, homes, infrastructure, and industry of New York State for more than three months)


SOURCE McKinsey

For further information:

Dorothée D'Herde (Dorothee_dherde@mckinsey.com; +44 (0)20 7961 6432) or Rebeca Robboy (Rebeca_robboy@mckinsey.com; +1 415 318 5107) with any questions or to speak to the authors of the report. 

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