A century of falling commodity prices undone in eight years, and the next 20 look no better: McKinsey

Just looking at a new article (free registration required) from global consultancy McKinsey about the state of world commodities and the outlook looks bleak, to say the least.

“Our research shows that during the past eight years alone, (commodity prices) have undone the decline of the previous century, rising to levels not seen since the early 1900s,” according to McKinsey. “In addition, volatility is now greater than at any time since the oil-shocked 1970s because commodity prices increasingly move in lockstep. Our analysis suggests that they will remain high and volatile for at least the next 20 years if current trends hold—barring a major macroeconomic shock—as global resource markets oscillate in response to surging global demand and inelastic supplies.”

The report talks of the surging demand for energy, food, metals and water as 3 billion new middle-class citizens emerge over the next two decades. In India calorie intake will rise 20 per cent per person, while in China per-capita meat consumption is expected to rise 60 per cent. While such dramatic growth of consumption isn’t unusual historically, and while we have managed to accommodate that growth in the past, McKinsey says things are very different this time around:

There are three differences today. First, we are now aware of the potential climatic impact of carbon emissions associated with surging resource use. Without major changes, global carbon emissions will remain significantly above the level required to keep increases in the global temperature below 2 degrees Celsius—the threshold identified as potentially catastrophic.

Second, it’s becoming increasingly difficult to expand the supply of commodities, especially in the short run. While there may not be absolute resource shortages—the perceived risk of one has historically spurred efficiency-enhancing innovations—we are at a point where supply is increasingly inelastic. Long-term marginal costs are increasing for many resources as depletion rates accelerate and new investments are made in more complex, less productive locations.

Third, the linkages among resources are becoming increasingly important. Consider, for example, the potential ripple effects of water shortfalls at a time when roughly 70 percent of all water is consumed by agriculture and 12 percent by energy production. In Uganda, water shortages have led to escalating energy prices, which led to the use of more wood fuels, which led to deforestation and soil degradation that threatened the food supply.

So where do we go from here? McKinsey, citing forthcoming research, says better resource productivity can maybe meet more than 20 per cent of the forecast 2030 demand for energy, steel, water and land. Higher prices over the long-term will also create incentives for “breakthrough” innovations that could reduce carbon emissions. But even then, a heck of a lot more needs to be done, the consultancy argues — and it won’t be easy. “Major policy, behavioral, and institutional barriers must be addressed,” it argues. “Yet as we enter a new era for commodities, there’s little choice but to act.”

Action. Now isn’t that a novel concept. Sure beats denial.

One thought on “A century of falling commodity prices undone in eight years, and the next 20 look no better: McKinsey”

  1. Gee, why have we had falling prices? Because the producer of the commodity doesn’t pay the real cost. How much is the degradation of water worth in the tar sands project area’s, how much was the timber worth, and it’s associated air cleaning, surrounding the big nickel stack in Sudbury, how much did the taxpayer subsidise the health problems in the same area and this is saying nothing of the 3rd world costs such as child labour by Nike, environmental destruction in the shipbreaking area of Alang India, Coca Cola’s usurping water supplies globally for it’s product, oil spill in the gulf, off Nigeria, S. America etc with limited liability and so on. Commodity prices have fallen because these costs have been born by the people of these regions so that industries can wax rich. About time for a bit of balancing don’t you think?

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