High and volatile commodity prices for foreseeable future means most resource-productive corporations will be market leaders

I touched on this McKinsey report earlier, but my most recent Clean Break column delves a  bit deeper into the consultancy’s analysis of commodity trends past and future, and how this will impact the way corporations operate.

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Tyler Hamilton

Has the global economy entered a long period of persistently high, volatile commodity prices?

That’s a question asked recently by international consultancy McKinsey & Co., which analyzed a century of data and found that the trend – for at least the next 20 years – doesn’t look good.

The previous 100 years told a different story. Since 1910, it found that the average combined price (inflation-adjusted) of food, agricultural raw materials, metals and energy reached its lowest historical level in the late 1990s.

Sure, there were big dips during the post-World War I depression and the Great Depression a decade later. But major technological advancements in areas such as exploration, extraction and cultivation allowed us during prosperous times to satisfy the demands of a growing global population, while keeping commodity prices at record lows.

“This ability to access progressively cheaper resources underpinned a 20-fold expansion of the world economy,” according to McKinsey’s analysis.

But that same analysis shows that the past decade has bucked a century-long trend. The commodity price decline achieved over the previous 90 years has, in just eight years, been completely wiped out, says McKinsey. Pre-WWI peak prices were surpassed in 2010, and all of this is happening during extremely trying economic times.

Shouldn’t commodity prices, like during past recessions and depressions, be falling?

Not this time around, the consultancy says. “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.”

There are many reasons why this time is different. Our world population surpassed seven billion in 2010 and of that, three billion will join the ranks of middle-class consumer over the next two decades, putting immense stress on those natural resources that give us energy, food, metals and fresh water.

McKinsey, which says we are entering a new era for commodities, throws out a few sobering stats: by 2030 the global vehicle fleet will double, per-capita calorie intake in India will jump 20 per cent, and Chinese consumption of meat — production of which is energy- and water-intensive — will rise 60 per cent.

Technology, no doubt, will continue to help us boost the supply of the commodities we have come to depend on, but the concern is that it can’t do it fast enough to meet rapidly growing demand.

Meanwhile, attempts to do so will require more expensive approaches and access to more remote locations — for example, drilling for oil in the Arctic — adding cost and putting more pressure on the fragile ecosystems we depend on.

On the issue of environment, there’s also the parallel need to rein in carbon emissions to avoid catastrophic changes to the climate by the end of this century. In other words, what we’re faced with today is unprecedented, and it will require an unprecedented response.

Of interest is that some corporations are already responding, and in doing so are positioning themselves as leaders of their respective packs over the long run.

A recent Harvard Business School study that tracked the performance of 180 corporations over nearly two decades found that the most progressive companies with respect to sustainability policies and practices outperformed their peers.

A big part of this is about resource-productivity. As commodity prices increase those companies that can best minimize waste and be most efficient with the consumption of energy and water are also the ones that will be most competitive.

In addition to cutting costs and reducing their exposure to volatile commodity prices, they’ll reduce their greenhouse-gas emissions and avoid paying future prices placed on carbon.

McKinsey says the future will be all about “squeezing greater productivity” from natural resources. “Better resource productivity could single-handedly meet more than 20 per cent of forecast 2030 demand for energy, steel, water and land,” it estimates.

This bodes well for the many clean technology companies I have written about in this column over the years.

Never has there been a greater need for technologies that can help us, for example, reuse scarce water resources, reduce the carbon footprint of the products we consume and services we use, and turn what has traditionally been considered waste into valuable products or sources of energy.

These may be trying economic times, but the companies that test drive and ultimately embrace these technologies will be much better off in the long run. There will be short-term risks, but they must be measured against the longer term risks of not acting.

This is something investors may want to keep in mind as we enter 2012.

Tyler Hamilton, author of Mad Like Tesla, writes weekly about green energy and clean technologies. Contact him at tyler@cleanbreak.ca

One thought on “High and volatile commodity prices for foreseeable future means most resource-productive corporations will be market leaders”

  1. I really enjoyed this article, Tyler- a very good summation comparing the past with a very different near-term future, in terms of commodoties. After these last few years of a bad economy, tied, in part, to fluctuating energy prices, I see a roller-coaster of energy, economy and employment for a long time. I think the only solution, or rather the solution begins, with a stable energy source that does not include fossil fuels, but, in my opinion, a combination of Renewable Energy generation and LFTR nuclear- reliable, cheap energy made posible by this combination could stabilize commodoties, being used for food production, and even increasing our water supply with affordable desalination plants, as well as fuel growth and a growing middle class in many parts of the world that currently struggle.

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