Natural Resources declining fast
By Ben Schiller
Meeting spiralling demand for resources will be the defining global
challenge of this century. Finance professionals can play a key role in
the solution.
With the world's population rising and countries such as China and
India undergoing rapid industrialisation, many commentators are
predicting an age of scarcity where resources we now take for granted
are increasingly expensive or, in the worst case scenario, not available
at all.
A recent UK government report, prepared by the consultancy AEA, warns
that 25 resources are most at risk: notably phosphorus (used in
agriculture), aggregates (construction), fish indium (electronics),
lithium (automotive and batteries), and various rare earth elements
(renewable energy and defence).
Last, June the European Commission published a similar 'critical
list' of 14 raw materials it sees as vital for sustaining the EU
economy, including cobalt, magnesium, tungsten and graphite.
And numerous studies point to potential problems with water, food and
fuel supplies.
By 2025, 1.8 billion people will be living with 'absolute' water
scarcity, and two-thirds of the world could face water 'stress'
conditions, according to the UN.
The World Bank says the global demand for water is doubling every 21
years.
Food prices have recently risen dramatically, raising the prospect of
protests in Algeria, India, China and other markets.
The UK Government Office for Science says prices could go up by 50
percent over the next 40 years unless there is a 'revolution' in
agricultural production.
Similarly, oil exceeded $100 a barrel in February and the price looks
likely to remain high.
World demand could grow by as much as 49 percent by 2035, according
to the US Energy Information Administration.
The UK Energy Research Centre says production will peak before 2030,
if not by 2020.
Professor John Beddington, the UK government's chief scientific
adviser, has said the world could face a 'perfect storm' of food, energy
and water short-ages over the next 20 years.
Facing the challenge
Of course, some think such predictions are over-blown. Technological
advances such as genetic engineering and green energy could change the
dynamics of commodity markets, making sourcing easier and cheaper.
Others point out that Malthusian night mares have been forecast before.
In the 1960s academics said a 'population explosion' would lead to
worldwide hunger.
And in the 1970s widespread energy shortages were predicted following
the oil crises during that decade.
In each case the reality turned out to be less apocalyptic than
advertised.
Still things may be different this time. Not only is the world's
population rising (the UN's 'medium estimate' is for nine billion by
2050, up from about seven billion this year), it is also becoming better
off and consuming more per head.
To take one indicator, China's oil demand will triple by 2035
(according to the World Energy Outlook), driven partly by an 800 percent
rise in car ownership. That sort of jump is unheard of and increases the
risk of future shortages.
Certainly, consultants such as AEA recommend that companies prepare
for a resource constrained world.
Its report says firms should develop better tools to assess supply
chain threats, factor potential resource shortages into their decision
making and work more closely with government to understand future
challenges.
"There are some major challenges ahead for both government and
businesses that require a coordinated approach.
Even businesses that don't consider themselves affected by resource
scarcity may be vulnerable through their supply chain. It is imperative
that organisations look at how they will manage resource risk to ensure
their future prosperity" says Phil Dolley, AEA's resource efficiency
director.
Dolley says awareness of potential resource shortages is greatest in
industries such as automotive and hi techwhere the issues are most
pressing.
"I would say some sectors are aware of the need to focus on this. In
others the awareness is more patchy.
The key thing is to work out what resources you are going to be short
of and to go through the supply chain to work out where that resource is
coming from."
Some companies are taking radical steps to secure what they need.
Last year Toyota announced a plan to develop a lithium mine in
north-west Argentina. Lithium is a key ingredient in lithium-ion
batteries found in electric and hybrid cars.
And Hitachi is developing a 'mineral harvesting' machine that it
hopes will make it easier and quicker to recycle rare earth magnets from
discarded hard-disk drives, while wind-turbine manufacturer Vestas has
adapted its latest designs to reduce the use of neodymium-a rare earth
element in increasingly short supply.
Water is also moving up the agenda, having previously taken a back
seat to other resource issues such as energy.
A report last year by Deloitte said that most of the world's largest
food and beverage companies had set water reduction targets. More
companies have joined initiatives such as the Water Disclosure Project
and the UN's CEO Water Mandate, both of which help in the measurement,
reporting and reduction of water use.
The new focus on water is partly because of societal pressure, but
also to financial reality.
Deloitte notes that organisations such as JP Morgan have asked
companies to assess the water-intensity of their activities, and the
risks posed by pollution and shortages.
At the same time, the Norwegian Pension Fund ($415bn under
management) has said it will assess the water risk faced by all the
1,100 companies in which it has stakes.
From immediate shortages to long-term trends, then, resource
management is likely to become an ever more pressing issue.
It will also be one that finance professionals are likely to become
more involved with - for example, in measuring potential resource risks,
reporting and reducing resource use and mitigating potential damage from
over use, devising alternative sourcing strategies and redirecting
product development to reflect changing consumer and business needs.
Cocoa-Cola
Higher prices for commodities such as sugar and packaging materials
are forcing companies such as Coca-Cola to think of sustainability as
directly relevant to the bottom line.
"We've come to see that anything in the green agenda space is
absolutely hard-nosed business," says CIMA member Doug Bonthrone, CFO of
the company's $15bn-a-year bottling investments division.
In the past decade Coca-Cola has committed to reducing its water use,
seeing its availability as a long-term risk, both to its own operations
and to the communities in which it operates.
Since 2004 it claims to have reduced its water use by 13 percent (it
still uses more than 300 billion litres globally every year). And the
company aims to be 'water neutral' (returning as much water to the
environment as it uses) by 2020.
Faced with big commodity price rises in the past four years,
Coca-Cola has also tried to cut its use of sugar and packaging.
It is using some fructose (made from corn) and artificial sweeteners
instead of sugar; "light weighting' plastic bottles and aluminium cans,
reducing packaging cost, and exploring low-sugar lines that have the
dual benefit of being cheaper to produce and more attractive to the
health-conscious.
"With the lack of pricing opportunity, but with the huge increases in
resource costs and in some cases shortages, it's basically being a call
to action: to really do all the things we should have been doing when
times were good," Bonthrone explains.
The company is also working with farmers to ensure the supply of
special products, such as Alfonso mangoes, which are essential for the
production of one of the company's juice products.
Bonthrone says that under normal conditions the company would steer
well clear of active participation in the agricultural production
process, but times have changed.
"In the old days it would have been, 'no, focus on your core
capability.' But when you suddenly find that you are unable to secure
the products that you need at the quantities and prices that you want,
then you start looking at other options."
In the past four years, Bonthrone has also overseen a stepped up
commodity hedging effort to secure consistent year-to-year pricing and
predictability in the budgeting process, and he has stream-lined some
back office functions.
One positive outcome of the higher resource costs is that they have
allowed the finance function to play a greater role in strategic
decision making.
"When things are going well, finance tends to be pushed out. But with
the crisis, finance has been welcomed much more," he says.
"What started as a discussion about resource shortages and pricing
has mushroomed into other areas, giving the finance function a bigger
role to play in partnering with the rest of the business."
That is likely to continue. As Bonthrone says, prices are likely to
remain high and costs will need to be kept down on an ongoing basis.
"Once the whole world is growing again, it is going to be consuming
more commodities. People will plant more, but it's going to take time.
We think we are in a permanently high-price environment."
Unilever
It is a cliche of management to say "what gets measured, gets
managed' (the phrase belongs to the management thinker Peter Drucker).
But in the case of Unilever's sustainability drive, it is true. Its
efforts to understand its products' life-cycle impacts is leading to new
lines and enabling a greater role for finance professionals.
Unilever recently studied 1,400 products, looking at their
cradle-to-grave impact across three areas: greenhouse gases, water and
waste-products that represent 70 percent of the group's turnover.
The study threw up some revealing data. For example, most of its
carbon footprint (68 percent) comes from the 'consumer use' portion of
the cycle.
This is because many of its products (eg. detergents and shampoos)
require heated water - a big contributor of greenhouse gases. Unilever
therefore realised it needed to focus on helping consumers reduce their
impact at home.
It is now trying to persuade consumers to switch to concentrated
liquids instead of traditional powders, which are more energy and water
intensive and more expensive to transport. Given that a third of the
world's households use its laundry products, that could equate to a CO2,
saving of four million tonnes a year.
Thomas Lingard, Unilever's external affairs director and a CIMA
member, says the study is also informing the product development
process, allowing sustainability to become a core metric alongside
things such as potential turnover, size of opportunity and time to
market.
That, in time, will facilitate more hard-headed business decisions,
he says.
"Because we have built a way of analysing products in terms of their
likely life cycle impacts, people who like to make fact-based decisions
can now do so. So it's not a whim, but something where they can study
the date.
Any finance person recognises that the more quality date you have the
easier it is to make these decisions."
Unilever has also committed to sourcing all materials from
sustainable sources by 2020 - for example, from NGO - certified
suppliers.
And it is aiming to reduce emissions from its freezers by switching
from hydroflourocarbon gas units to propane-based ones. Lingard says
Unilever managed to persuade manufacturers to build the previously
unavailable freezers by making an up-front commitment for two million
units, rather than taking a more piece-meal approach.
"That is the difference between toe-in-the-water piloting of
sustainability and making a business shift. If you make a shift,you can
bring the full weight of the business behind that and the economics
follow."
Financial Management
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