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Key Resource Constraints

We will see economic, physical and political shortages of key materials that will result in major changes in our perspectives.

In 2020, the world will be demanding and consuming more of nature’s finite resources. Delays in investment in infrastructure and the inability of legacy infrastructure to cope with changing demand will result in supply and demand gaps, market opportunities and price volatility. Countries will no longer be concerned just about energy security but also about resource security – land, food, water, metals and so on. While resources will not yet have physically run out, the perception of ‘peak’ resources will drive political and commercial behaviour.

The sad news is that resource supply over the short term is fairly inelastic compared with demand. By 2020, this will result in supply struggling to keep up with demand, increasing supply security concerns and higher prices. This is will be particularly relevant as the trend towards urbanisation increases because cities require resources to be ‘imported’, leading to greater demand on the existing infrastructure.

Getting richer, using more

Economic growth is coupled to resource consumption – as people become more wealthy they use more energy (eg, for air conditioning, heating, computing, mobility), eat and waste more food. They also use more water (think of all those thirsty golf courses). So far, many efficiency gains have been offset by ‘the rebound effect’, where the improvements have led to greater consumption. For example, improvements in fuel efficiency have been offset because we now drive further or faster than before.

The trouble is that it has taken the industrialised world over a century to develop the infrastructure to supply natural resources to the point of use (pipelines, sewage farms, ports, rail and road links, electricity grids) and making significant changes to this infrastructure will take decades. This is particularly true because resources tend to be geographically concentrated – often in areas that are ‘difficult’ in terms of physical accessibility or ease of doing business. The situation will be made worse by the fact that the resources that were easier to get at have already been greatly depleted and those that are left are more technically challenging and expensive to acquire. In turn, business investment in the supply side requires confidence in the financial returns, particularly because projects are highly capital intensive and require specific skills to develop which are often in short supply. Furthermore the risk of failure is significant, particularly given that price volatility regularly leads to on/off investment cycles.

Resource constraints and rising costs

As with many things, there is a high level of interdependence between resources and a rising price of one resource has knock-on effects. For example, the energy industry is resource intensive, using large quantities of steel for construction of oil rigs, refineries and pipelines, and it also uses large quantities of water. Higher steel prices therefore drive up the costs of producing energy; as aluminium production from bauxite requires large amounts of energy, the higher steel prices in turn increase the cost of aluminium. And even when those challenges are overcome, there are also very real concerns about the long-term availability.

More people and bigger challenges

Growing populations and economies are placing increasing pressure on many natural resources as we collectively consume more and need more food, water, materials and land. This is placing major demands on the system with some areas now well recognised as pivotal – think of oil, water and arable land. An increasing number of experts believe that within the next twenty years some of what are now considered basic supplies will either have run out or be politically or economically beyond the reach of many. Credible people are making depressing predictions. For instance, John Beddington, Britain’s chief scientific adviser, forecasts that by 2030 the world’s population could rise by up to a third, demand for food and energy will rise by half and demand for fresh water will increase by 30%. To make matters worse, the spectre of climate change looms, with all its associated challenges, and furthermore some poorly thought-out government policies are making the situation even more difficult to manage.

Even those who were previously sceptics acknowledge that the crunch will come and that we cannot continue on the current consumption growth trajectory. When you consider that BHP Billiton estimates that the world could consume more copper, aluminium and steel in the next twenty-five years than it has done throughout history, this viewpoint almost feels like a statement of the obvious. The question is, of course, what should be done to mitigate the damage?

Who can blame emerging nations, which for years have suffered from relative poverty, when they embrace economic development? How can the countries that have already profited from exploiting global resources now try to curtail the use of the same resources by the next generation of growth economies? The answer surely is that they can’t. The growing economic power of China and India, the world’s most populous countries, has brought millions of people increased wealth and an improved quality of life which previous generations could only dream of. But this new found prosperity has knock-on effects on the demand for resources, and especially for the countries that are traditionally the big consumers.

Energy

Energy has been top of many political agendas for the past century and, in many eyes, has been the resource over which we have been fighting many of the recent wars. In terms of oil, the US currently consumes one-third more than the whole of the European Union, around twice the volume of China and seven times as much as each of India and Russia. Equally, for natural gas, US consumption currently outpaces that of the whole of the EU, is 50% greater than that of Russia and is eight times that of China. No question, then, as to which country is the big oil and gas consumer: the US currently consumes around 22% of the world’s oil and 20% of the world’s gas. Alongside the now widely recognised obvious issue of unsustainable consumption in itself, there are two key problems here. First, overall global oil and gas demand is growing faster than new reserves are being found and, second, most of the oil is in the Middle East and most of the gas is in the Middle East, Europe and Russia. Today, US energy demand is well outpacing its domestic supply and so it is hugely dependent on imports. Going forward, unless behaviours shift fundamentally or polices on arctic and offshore drilling are changed, the US will continue to need to try to secure more of an increasingly constrained resource. Add in increasing demand from China, never mind other growing economies, and the geopolitics of oil and gas are all too evident. Oil, which quite literally drives the world forward, is in crisis, with the chief economist of the International Energy Agency (IEA) predicting that ‘the output of conventional oil will peak in 2020 if oil demands grow on a business-as-usual basis’. Globally, oil and gas supplies are both physically and politically constrained resources. Or, to put it another way, in the language of the energy sector, the ‘days of easy oil are over’ and from now on it gets more difficult. There are more known resources out there but they are in deeper waters, in more environmentally sensitive areas, in more complex geological structures and in less secure regions of the world. But that has not stopped our increasing demand.

Coal

In terms of other energy sources, the next big one on the list is coal. Here the US faces less of a supply problem, as it has around 30% of the world’s reserves compared with Russia’s 19%, China’s 14% and Australia’s 9%. In the coal arena, faced with limited oil and gas supplies, it is China which is already the No 1 consumer and its consumption is growing quickly. In 2008, China produced and consumed over 42% of the world’s coal (compared with 17% in the US). The one thing the US has plenty of at current rates of consumption is coal – the problem is that it is a very dirty fuel and a major source of carbon emissions. You can see the important role of coal in China when you look at electricity consumption, as this is an area where China is already using more than anyone else. At the moment most of China’s power is coming from coal. Going forward this has to change but this is a problem given the steadily increasing demand. According to the Economist Intelligence Unit and BP, while the US accounts for 20% of total primary energy consumption, Asia is already consuming 35% of the worlds overall energy (up from 26% in 1995) and has accounted for two-thirds of the increase in world energy demand since 2000.

The alternatives

There are clearly alternatives – renewable energy from hydro, geothermal, wind, wave and solar generation, and also nuclear power. However, over the next ten years, the challenges of scaling these up to make a significant contribution are considerable. Hydroelectricity accounts for less than 6.4% of the world’s current energy supply and nuclear for less than 5.5%. While there are now a large number of projects underway to construct new dams and new reactors around the world, the timescales required to construct and commission many of these facilities are too long to have a significant impact over the next decade. It is true that, looking fifty years out, the energy scenarios mapped out by the likes of the IEA and Shell reflect a greater share for renewable supplies, but right now the view is that energy supply is still primarily fossil fuel based and hence under increasing not decreasing constraints. As BP and others state: ‘Although renewable energy continues to play only a small role in the world’s energy mix, the share is rising rapidly in some countries and there are the beginnings of a material impact.’ As highlighted shortly, bio-fuels are evidently also on the increase, but, at the moment, not without some serious stresses on the food chain.

Looking ahead to 2020, energy demand and supply from fossil fuels are clearly going to be stressing the system. There are a number of well-regarded scenarios for the future of energy, some of which factor in action on climate change, some not. Some make assumptions about huge investments and government subsidies in renewable energy schemes and others make assumptions about the speed at which, for example, the world will shift to electric mobility. To ground our views in a more probable world, the best place to see the baseline view of the future is the International Energy Agency’s Reference Scenario.

The IEA Reference Scenario

The IEA Reference Scenario proposes that, over the next twenty years, global energy demand will increase by around 40% – so an average of 1.5% a year – with the vast majority of the growth coming from non-OECD countries such as China, India etc. Oil will remain the largest single fuel, providing 30% of the total energy mix, with more and more transport accounting for 97% of the increase in its use. Gas supply will also increase by around 45% by 2030 to provide just over a fifth of the world’s energy needs. World electricity demand will grow at an average of 2.5% a year, adding a supply equivalent to around five times the current capacity of the United States. In 2009, 13–14% of the world's electricity came from nuclear power and its use is expected to grow in most regions except Europe. However, its overall share of electricity generation is expected to fall. That said, technical innovations around nuclear fusion might mean that different sources of nuclear energy become commercially available in the future. In absolute terms, however, the biggest increases in demand will be met by coal-based power generation. The growing use of renewable energies – wind, wave, solar, hydro and geothermal – will start to make an impact but, in comparison to the other energy sources, their individual shares of the mix will still be in single figures at the end of this decade.

To provide all of this extra capacity will require huge capital investment – around $26 trillion – and over half of this will occur in developing countries. The financing of this by the energy sector and governments is, therefore, not straightforward and the cost of energy will continue to rise. In terms of spending on energy imports, China will overtake the US around 2025 while India will take over from Japan as the world’s third largest importer by 2020. If we think energy is an issue now, just imagine what it will be like in 2020!

Carbon emissions

Associated with this type of view, there is a continued rise in carbon emissions. By 2020, an additional 5,000 million tonnes will be being emitted annually, and double that by 2030. So, without a massive and fundamental global shift in energy consumption behaviour, any chance of slowing CO2 emissions is years away. While the US and Europe have finally started to talk about levelling off, if not reducing, carbon emissions, the challenges elsewhere are considerable. For instance, in 1990 the combined emissions for China and India accounted for 13% of the world’s total, and, because they are the world’s fastest growing economies, their emissions will continue to rise markedly. In 2008, non-OECD primary energy consumption exceeded OECD consumption for the first time and further growth of 34% can be expected by 2030 – of which China will account for 29%. Although Copenhagen failed to get any significant agreement on climate change, it is clear that, over the next decade, new agreements on climate protection will variously come into place, whether regionally or globally. According to the IEA 450 Scenario, to limit the probability of a global average temperature rise of 2oC even to a 50/50 bet requires all OECD+ countries to take on emission reduction commitments from 2013, with everyone else joining in by the end of the decade. This impetus to reduce carbon emissions will place another restraint on the use of oil, gas and coal and so add to the constrained supply of these fundamental energy resources.

Metals

Alongside energy, the growth in consumption of many of the world’s main metals is also on the rise. As mentioned above, according to BHP Billiton projections, between now and 2030 we will consume more copper, more aluminium and more steel than we have in history. But who will be responsible for what consumption? Today China consumes around 25% of the world’s refined copper, 16% of the world’s nickel, 25% of the world’s aluminium and 45% of the world’s iron ore. So, in comparison to other economies, China is already consuming eight times as much refined copper and steel as the US and almost four times as much steel as the EU.

With all the construction underway and planned, as well as increased production of vehicles and domestic appliances, China’s demand for steel is expected to double by the 2020s, while in India the government’s target for steel production in 2020 is four times the levels of 2010. Driven by demand from the construction industry, global cement supply is also on the up, rising at just over 4% a year despite the recession. India, the world’s second largest cement market, is expecting ‘some of the most rapid advances of any country in the world’. Other fast-growing markets for cement in Asia include the Philippines, Taiwan and Vietnam, all with growth rates exceeding 6% per year.

So far we have not started to reach peak production of these core metals but, given the escalating growth in demand, current reserves will not last for ever. Although industry experts estimate that there is another 1,000 years’ worth of aluminium available around the world, for nickel we are talking about 90 years and for copper the projection is down to only 60 years. When you consider the large amounts of copper required in each wind turbine as well as in connections between wind farms, this starts to place growth constraints on some renewable energy options.

The recycling option

The difference between metals and hydrocarbons, however, is that metals can be recycled and reused. But, historically, wealthy economies are not very good at recycling. Take aluminium as an example. Every three months, Americans discard enough aluminium to completely rebuild every single commercial aircraft in the USA. Aluminium can be recycled over and over without loss of performance. In theory, we have an inexhaustible supply of it in circulation right now. In fact, if we recycled all our aluminium, we’d never have to make more.

Compared with primary production, recycling aluminium requires only 5% of the energy and produces only 5% of the CO2 emissions as well as reducing the waste going to landfill. Aluminium is also the most cost-effective material to recycle. Similarly, every tonne of steel packaging recycled makes the following environmental savings: 1.5 tonnes of iron ore; 0.5 tonnes of coal; 40% of the water required in production; 75% of the energy needed to make steel from virgin materials; 1.28 tonnes of solid waste; reduction of air emissions by 86%; and reduction of water pollution by 76%.

Other metals such as copper, gold, silver and brass are less frequently land-filled as their value is more generally recognised and consequently the recycling infrastructure is more developed. That said, handling large quantities of electronic equipment in order to recover precious metals has led to the exporting of equipment to places where little regard is paid to the health of workers and the environmental consequences of poor treatment of this waste stream.

Rare metals

While the increasing focus on climate change is, in itself, proving problematic for many concerned with resource supply and demand, the focus on green technologies has meant that we may have overlooked other equally important and increasingly scarce commodities. Take, for example, worldwide demand for rare earth minerals, covering fifteen elements on the periodic table. Unless major new production sources are developed and there is a significant shift in the global balance, the US Geological Survey expects demand to exceed supply by some 40,000 tonnes per year within the next decade. This matters not only because they are vital to the production of advanced electronics equipment – cell phones, batteries, plasma screens – but also because they are part of the ‘green technology revolution’, being essentials in the construction of hybrid cars and wind turbines. Thus, for companies focusing on green technology, securing a supply of rare earth metals – or developing replacement materials or technologies – is crucial. In the same way as many people have been focused on the date of ‘peak oil’, others are now starting to talk about ‘peak minerals’ as the supply/demand balance is tipped more towards constraint.

Platinum

As another example, consider platinum. As well as being used for jewellery, platinum is also a primary material for catalytic converters and fuel cells for cars. The majority (88%) of the world's platinum is produced by just two mines in South Africa and most of the rest comes from one other mine in Russia. Platinum is recovered at a rate of about 200 tonnes per year. Say we wanted to use all of it to increase the number of cars powered by fuel cells, then this is only enough to produce 2 million such vehicles by 2030, which is only around 5% of the world’s current car fleet. So, given the growth in demand for transport, as well as competing requirements for platinum, any major plans for the mass introduction of vehicles running on fuel cells are significantly constrained not just by lack of investment and political will, but more fundamentally by a limited supply of a pivotal material.

Water

Unlike most of the resources we consume, there is no alternative for water. As GDP per capita rises, so does water demand and by 2025 two-thirds of the world’s population are expected to be living in water-stressed regions. This problem is not new, as over 1 billion people currently experience water scarcity, having less than the minimum 50 litres a day recommended by the UN. In Europe, we use around 300 litres a day and the average US citizen consumes twice that.

Over the next ten years, industry will have to change its water use; agriculture will have to adapt; and governments will have to work out ways of ensuring the general public are more aware of the problem. To be fair, major steps have already been taken. Led by the likes of Australia and Singapore, national governments have been paying increasing attention to their water supply and use and, in doing so, several are now implementing major water strategies. Singapore, with a clear reason for reducing its dependency on neighbouring Malaysia for water, is focused on four tasks: 1) increasing the water available from the local catchment area, 2) reclaiming and treating waste water so that it can be reused by industry, 3) managing the importation of water and 4) building new desalination plants. In some countries where water stress is already evident, regulation concerning water usage is coming into force to limit fresh water consumption, shift some primary users from blue to grey water and increase water overall recycling. Emerging design standards are seeking to move government and corporate facilities towards water neutral status and so preserve precious resources.

With 20% of the population but only 7% of global water supplies, China is particularly vulnerable. The World Bank reports that half of China’s 660 cities suffer from water shortages, affecting 160 million people. Worse, it seems that about 90% of cities’ groundwater and 75% of the rivers and lakes are also polluted. Small wonder that China has a strong interest in Tibet, the source of ten of Asia’s largest rivers.

The politics of water

Water issues are also becoming increasingly political. Dan Smith, the Secretary-General of the British-based peace-building organisation International Alert, said: ‘Water is a basic condition for life. Its availability and quality is fundamental for all societies, especially in relation to agriculture and health. There are places — West Africa today, the Ganges-Brahmaputra river system in Nepal, Bangladesh and India, and Peru within ten years — where major changes in the rivers generate a significant risk of violent conflict. Good water management is part of peace building.’

Water scarcity is not only a social challenge but a commercial one. Materials companies such as Dow, DuPont, Alcan and Corus are therefore all looking at ways in which they can innovate more in relation to the water they use as part of their production processes. Equally, the automotive industry, the IT sector and the food and drinks industry are also concerned about both future ‘security of supply’ issues as well as emerging consumer sentiment. Everything that people have been worried about regarding energy can evidently be applied to water – price, security of supply and scarcity. In these companies, concern about managing water use is seen as a priority for both internal resource risk and external reputation risk. They are busy getting accurate views of their individual water footprints so that they have the data to track and guide improvements going forward.

The need to educate and understand

Looking ahead, better education and understanding will be critical. While consumers are easily able to see the water we use for drinking, cooking and washing, we are often less aware of the water used throughout the supply chain to produce the goods and services that we consume. Expect to see more awareness-driven initiatives such as water footprinting and labelling in the future. When you consider that Ford, on average, uses 400,000 litres of water to make each of its cars and the manufacture of a kilogram of microchips (which require constant cleaning to remove chemicals) consumes about 16,000 litres, you can better understand the problem.

Despite all of the bad news, water is still however a renewable resource: we are not running out of it. A significant part of the problem is the huge and often deeply inefficient use of water – the UK loses about 3.3 billion litres of clean water a day through leakage, for example. Thankfully, much of this will be returned in various forms to the system – although not necessarily in the right location or in a quality that can be effectively reused. In addition, throughout many parts of the world, rainfall and river flows are strongly seasonal, with too much water arriving during monsoon periods followed by maybe seven or eight months of water scarcity. Climate change will exacerbate this and we ‘will increasingly get the wrong water in the wrong places and the wrong times of year’. To address the scarcity problem, supply can often be increased through storage during wet periods or the use of technology – drilling boreholes to access groundwater, for example. Reservoirs and big dams have their opponents, but they can also aid development and store monsoon runoff.

The value of water

One last point about water: it’s a fact that the price of water does not reflect its true economic value in most countries, which distorts our understanding. Government subsidies are therefore creating the wrong behaviours. One only has to look at cities such as Las Vegas or Dubai to realise this cannot continue long term.

Land and food

To a certain extent, government interventions are also having a negative effect on food supplies. While growing – and, more specifically, supplying – food to feed ever more people is in itself a major challenge that has already led to riots and government changes in places such as Madagascar, the bigger immediate challenge concerns bio-fuels and associated regulations that have been passed in recent years. The worst example of this is perhaps America’s support programme for home-grown corn ethanol, which is coupled with tariffs on cheaper sugar-cane ethanol from Brazil. The programme has raised global food prices and consequently increased malnutrition among the world’s poorest. It has also tarnished the reputation of policies to cut carbon emissions – and cut little carbon. The EU’s decision to set a target for bio-fuels to make up 10% of all transport fuels by 2020 is proving equally disastrous for the poor. Subsistence farmers in countries such as Bangladesh can barely support a household and have little if any extra production to sell, which means they do not benefit from higher prices for corn or wheat. In addition, poor slum-dwellers in Delhi and Nairobi, for instance, produce no food at all and need to spend as much as 90% of their meagre household incomes just to eat.

“In March 2009 there was a coup in Madagascar where it was announced that South Korea’s Daewoo Logistics leased half the island’s arable land from the government to grow food. The deal was that the company would get the land rent-free; existing farmers would not be compensated; all the food would be exported. When news of this seeped out, the reaction gave impetus to a surge of opposition that swept the government from power. The new president’s first act was to quash the deal. It was a salutary lesson, as other parts of Africa and Asia have signed similar deals”. (the Economist)

The good news is we are we are already working on solutions, including improvements in farming efficiency and new fuels. Ashok Gulati of the International Food Policy Research Institute points out that an additional rupee spent on agricultural research yields 9.5 rupees of output. Better storage and transport facilities would also allow farmers to profit from growing fruit, vegetables and flowers. These offer better prospects than staple cereals, like wheat and rice, which preoccupy policymakers. According to the World Bank, transporting grapes to the Netherlands from India costs more than twice as much as transporting them from Chile, even though Chile is twice as far away.

To summarise

So, whether energy, metals, water or food, the next decade is clearly a challenging time for management of some of the key resources that keep the world going. While there are real physical shortages of some resources discussed above, the reasons for apparent shortages of the majority of resources – shortages that will have an impact on commodity prices around the world – are more geographical, economic and political. The main resource constraints in the next ten years are largely the result of a number of influential countries wanting to secure their own supplies, or continue to use above their equable share; a number of influential companies seeking to either profit from higher prices or else ensure that they control the supply of resources in demand; and, most significantly, a huge number of us wanting more.

As economies grow, the demand for energy, food, protein, water and metals all pretty well scale linearly: increasing GDP per capita is largely directly linked to per capita resource consumption. If you have no money, you can access few resources. However, once you, whether an individual or a country, start to create more wealth, then you can spend it and this is usually on food, homes, transport and possessions. As you continue to grow, you continue to want more and this relationship keeps on going. Of course, the big challenge going forward is to decouple resource use from economic growth by essentially using less and yet continuing to allow economies to grow. This is where innovation will have an essential role. Already some countries have levelled off demand – as with average energy consumption per capita in Japan and Europe – but in most and for most resources this has yet to occur. As in other areas, such as mobile money, perhaps the first places to deliver real change will be in emerging economies unencumbered as they are by existing infrastructures and industry models.In an expanding world with more people and increasing economic growth, our demands are already pushing hard against supply limits. As we move forward over the next decade, some of these resource constraints are going to generate a host of problems. We don’t know exactly when and where, but we do know it is a question of when, not if.

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