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Natural Resources declining fast

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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