Resources revolution will boost opportunities

That means huge new opportunities for Asia,” Richard Dobbs, director of the McKinsey Global Institute, told a high-level breakfast meeting on the margins of the World Economic Forum on East Asia last week.

The meeting, hosted by McKinsey & Co, drew business and government leaders from across the region, including participants in the World Economic Forum meeting as well as the CEOs of several major Thai companies. The president and CEO of PTT, Thailand’s national energy company, also addressed the gathering.

In its recent report, “The Resource Revolution: Meeting the world’s energy, materials, food and water needs”, McKinsey examined how the world’s growing demand for natural resources can be met. It also looked 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 offset growth in demand. But over the past 10 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-per-cent increase in real commodity prices since the turn of the century.

Over the next 20 years, demand for steel, for example, is likely to rise by 80 per cent. At the same time, finding new sources of supply, and extracting them, are becoming increasingly challenging and expensive. The average cost of bringing a new oil well on line has increased by 100 per cent over the past decade. 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 labour productivity during the 20th century,” Dobbs said.

Assessing opportunities across all four key resources – energy, land, materials (steel), and water – McKinsey found that available productivity measures could address up to 30 per cent of total demand in 2030.

The total value to society associated with these opportunities is up to US$3.7 trillion (Bt111 trillion), with 70 per cent of these opportunities having returns above 10 per cent, even based on today’s prices, and without considering any carbon taxes. Adjusting for subsidies, taxes and pricing carbon at $30 per tonne increases the amount of opportunities that are “in the money” to around 90 per cent.

Just 15 opportunities represent 75 per cent of these benefits. These include everything from improving building energy efficiency, to reducing food waste, to fixing leaking water pipes.

 

Implications for Asean

“There are large resource productivity opportunities available in Asean countries. Up to 15 per cent of the global productivity opportunities for some resources are in Asean countries,” said Heang Chhor, senior partner of McKinsey Southeast Asia.

Improving building efficiency in residential and commercial buildings could deliver 19 per cent of the total benefits that could accrue from boosting resource productivity globally. If captured in full, raising the energy efficiency of buildings would reduce energy demand by 31 QBTU (quadrillion British thermal units) – 20 per cent more than the global use of energy by shipping and air transport combined.

This includes improving the energy efficiency of new builds, retrofitting existing buildings and switching to efficient lighting, appliances and electronics.

According to Shatetha Terdprisant, managing partner of McKinsey Thailand, this is particularly important in Asean countries given the speed of urbanisa-tion, resulting in increasing demand for new construction.

Another area in which Asean has significant opportunities is agriculture.

There is a large opportunity to boost crop yields both on large scale – above 2 hectares – and smallholder farms, which is going to be highly relevant to Asean countries given the importance of the agricultural sector to these economies. While this is well-known territory, there will need to be a combination of adapting technology to local conditions and mechanisms to help smallholder farmers achieve critical scale, as being explored in Morocco, Ghana and other countries.

And Asean corporations can do their bit to address global resources challenges through supply additions:

_ Thailand is the world’s No 1 exporter of rice, shipping out more than 6.5 million tonnes of milled rice annually. Thailand has the highest percentage of arable land, 27.25 per cent, of any nation in the Greater Mekong Subregion.

_ Indonesia has extensive natural resources, including crude oil, natural gas, tin, copper and gold.

_ Vietnam is the world’s largest producer of cashew nuts, with a one-third global share; the largest producer of black pepper, accounting for one-third of the world’s market; and the second-largest rice exporter in the world. Other primary exports include coffee, tea, rubber and fishery products.

_ Malaysia is the largest producer of tin, rubber and palm oil in the world.

Tackling the resource agenda must start with new institutional mindsets and mechanisms that can generate more coordinated approaches to the challenge of resources in Asean, reflecting the stronger interconnectedness of resource systems.