the resource revolution
TRANSCRIPT
McKinsey Global InstituteSustainability and Resource Productivity Practice
October 19, 2011
CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited
The Resource Revolution: Meeting the needs of the next 3 billion middle class consumers
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Summary
▪ The next twenty years will see an 35% increase in resource demand, driven by 3 billion new middle-class consumers
▪ A resource revolution is needed with 3 main components1. Aggressively going after currently available productivity
opportunities2. Enhancing access to resource supply3. Accelerating the next frontier of resource innovation
▪ There are 7 priority areas for action to realize this resource revolution
– 4 areas relate to “classic” market failures – e.g., lack of property rights, pricing of externalities, capital market failures, dealing with the public good nature of innovation
– The other 3 areas go beyond standard market failures, and include the need for new, integrated institutional approaches toresource governance, building awareness of resource-related risks, and shaping mindsets and consumer behaviour
McKinsey & Company 2|
Since the turn of the century, commodity prices have significantly increased, offsetting all of the falls seen since 1900
40
60
80
100
120
140
160
180
200
220
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260
201120001990198019701960195019401930192019101900
World War I
Post-warDepression
Great Depression
World War II
1970’soil shock
MGI Commodity Index (years 1999–2001 = 100)1
Source: Grilli and Yang, 1988; Pfaffenzeller et al, 2007; World Bank Commodity Price Data; IMF primary commodity prices; OECD statistics; FAOStat; UN Comtrade; MGI Analysis
1 Based on arithmetic average of 4 commodity sub-indices of food, agricultural raw materials, metals and energy
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39
14
38
56
471513
212220
Resource price volatility is at an all time high, with the exception of energy in the 1970s Annual price volatility1
%
32
6
21
93
13171110
25
7
28
102120
89151514
87
26
131110917
11202424
15
89796959493929191909 201199
Energy
Food
Metals
Agricultural materials
SOURCE: Grilli and Yang; Pfaffenzeller; World Bank; International Monetary Fund; Organisation for Economic Co-operation and Development statistics; UN Food and Agriculture Organization; UN Comtrade; McKinsey analysis
1Calculated as the standard deviation of the commodity subindex divided by the average of the subindex over the time frame.
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The emergence of 3 billion middle-class consumers will drive future demandGlobal middle class1
Billions of people
Middle East and North Africa
Sub-Saharan Africa
2030
3.23Central and South America
4.88
3 billion
Asia-Pacific
North America
Europe
0.68
0.32
0.310.23
0.11
2020
3.25
1.74
0.70
0.33
0.250.170.06
2009
1.85
0.53
0.66
0.340.18
0.11 0.03
SOURCE: Organisation for Economic Co-operation and Development (OECD) Development Centre
1 Global middle class defined as daily expenditures between $10 and $100 per person in purchasing parity terms.
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0
50
100
150
200
250
Per capita energy consumptionMillion British thermal units/person, 1970–2008
Per capita GDPReal $ PPP/person
45,00040,00035,00030,00025,00020,00015,00010,0005,0000
Many countries have shown that as incomes rise, demand for resource increases—and a similar curve is likely in China and India
SOURCE: International Energy Agency; Global Insight; McKinsey analysis
Historical range for energy consumption evolution
China 2030 projected
India 2030 projected
India
China
South Korea
Japan
Germany
France
United Kingdom
Australia
United States
ENERGY EXAMPLE
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30
35
80
Land 10-15
Water
Energy
Steel
Demand is projected to grow by 10 to 80 percent across resources
Demand increase, 2010-30% 2030 projected demand
2,290 million metric tons of iron ore
664 QBTU
5.9 trillion cubic meters
1.715-1.755 billionhectares of cropland
60% of growth in energy demand to come from
India and China
McKinsey & Company 7|Source: McKinsey analysis
The high degree of linkages between resources means strong demand for one can spread to others
Relative claim on global resource
5% 50%
Energy
Water Irrigation
▪ Desalination▪ Ground water
pumping▪ Water transport
▪ Biofuels use<5% of glob-al cropland
▪ Land is ~28% of CO2e
▪ Afforestation▪ Reduced
deforestation
▪ ~70% of water withdrawals used in agriculture
Materials
▪ ~8% of waterwithdrawals used in energy
▪~13%
of
energy used in
mining
▪Rare earths critical for
Solar PV / steel critical
for offshore drilling
▪ Agriculture is <2%of energy demand
▪ <5% of water with-drawals used in mining
▪ Phosphates critical inputs into fertilizers
Carbon capacity of at-
mosphere
Land
Hydro-carbons
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IMF estimates that a 10 percent increase in the price of crude reduces global GDP by 0.2%-0.3% in one year
World Bank estimates that recent food price increases drove 44 million people into poverty
The world is currently subsidizing its resources by at least $0.9 to $1.3 trillion. At least 8 countries commit 5% or more of their GDP to energy subsidies
These resource trends pose several risks to global growth and welfare
Just four countries—Iran, Iraq, Saudi Arabia, and Venezuela—hold almost 50 percent of known oil reserves
The Stern Review forecasts climate change scenarios which could result in economic losses equivalent to a 20 percent reduction in current per capita consumption
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There are productivity opportunities that could meet 13 to 28 percent of resources demand
SOURCE: McKinsey analysis
WaterCubic meters
LandMillion ofcropland hectares
Primary energyQBTU
SteelMillion of tonnesof steel equivalent
146 518664
-22%494
1,9952,290
-13%2951,270
6,3505,000–5,200 -18–21%
1,150–1,3504,500
1,215–1,320 -25–28%
Remaining 2030 demand
Productivity improvements
435–500
2030 base case demand
1,715–1,755
2010 demand
1,535
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However, failing to capture these opportunities could result in a large increase in demand for resources - 175 million to 220 million hectares of additional cropland in the case of agriculture
Business as usual cropland demand1 by 2030Million hectares
30
2030 crop land demand6
1,710-1,755
1,535
180-220
1st gen. biofueldemand
10515
Energy infrastructure4
10
Urban expansion
Climatechange
0-45
Land degradation
30
Food/feed demand2
90
2010 crop landdemand
1,535
Impact of productivity loss3
Assuming 30 percent crop production increase with 1.0
percent per annum yield growth
SOURCE: International Institute for Applied Systems Analysis; UN Food and Agriculture Organization; International Food Policy Research Institute; Intergovernmental Panel on Climate Change; Global Land Degradation Assessment; World Bank; McKinsey Agriculture Initiative; McKinsey analysis
1 Defined as “arable land and permanent crops” by the UN Food and Agriculture Organization. 2 As 30–80 percent of biomass input for biofuel production is fed back to livestock feed, the cropland required to produce feed
crops would be reduced by about 10 million hectares.
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Developing countries account for 70 to 85 percent of the productivity opportunities
Latin America
Europe (OECD/ EU-27)
United States and Canada
Rest of developing Asia1
IndiaMiddle East
Russia and Eastern Europe
11
7
13
8
Global air and sea (energy only)
5
5
3
6 China
Developed Asia-Pacific
40
14
10
32
5
8
2
2
3
10
20
16
8
3
8
10
8
9
7
8
10
7
8
9
6
5
14
14
6
% of total productivity opportunity by resource and region
Developed Developing
Total opportunityPercent
28
27
72
73Steel
Water 16 84
Land 17 83
Energy
1
15
22
3Africa
1 Rest of developing Asia includes Central Asia (e.g., Uzbekistan), South Asia (e.g., Bangladesh), Southeast Asia (e.g., Laos), and North Korea.2 Includes water savings from water-specific levers as well as water savings from improved agricultural productivity.3 For steel, the chart represents all the demand-side levers and the scrap recycling lever, but excludes supply- and conversion-side levers.
SOURCE: McKinsey analysis
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15 key groups of opportunities represent over 70% of the resource savings
68
83
87
98
Improved irrigation techniques
Improved power conversion
Petroleum and gas energy efficiency
Reducing land degradation
Iron and steel energy efficiency 117
Improved energy extraction 120
Smallholder farm yields 127
High strength steel adoption 132
Alternative drive trains 152
Transport efficiency 154
Reducing leakage 166
Urban densification 171
Food waste 221
Commercial farm yields 236
Building energy efficiency 691
Other 902
Total resource benefit1 by opportunity area2010 USD billion
Average cost efficiency2 “Metrics that matter” for monitoring progress
SOURCE: McKinsey Global Institute analysis
1 Based on current prices for energy, steel, and food plus unsubsidized water prices and a shadow cost for carbon 2 Annualised cost of implementation divided by annual total resource benefit3 Includes feed efficiency, industrial water, air transport, municipal water, steel recycling, waste water reuse, and other industrial energy efficiency
0.7
0.3
0.4
0.6
0.6
0.2
0.5
0.4
0.4
1.7
0.6
0.2
0.5
0.6
0.5
0.5 Weather adjusted building efficiency, kWH/m2/degree day
Food waste in value chain (e.g., post harvest), %
Commercial farm yield relative to agro-ecological potential, %
Public transport use, % of commuters metro/bus
Smallholder farm yield relative to agro-ecological potential, %
High strength steel penetration, %
Net rate of land degradation, hectares per year
Energy efficiency of steel production, QBTU/tonne
Conversion efficiency of coal and gas fired power plants, %
Recovery rate of a given reserve, %
Penetration of key alternative drive trains, %
Energy efficiency of P&G production, QBTU/tonne
Fuel efficiency, litres/kilometre
Municipal water leakage, %
Adoption of micro-irrigation technologies, %
2030 potential savingsWater
Steel Energy
Land
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200 6000 1,4001,2001,000800
Cost efficiency of investmentUSD spent for implementation perUSD total resource benefit
3.0
2.0
2.5
-0.5
Total annualresource benefit1
2010 USD billions
3,4002,4002,2002,0001,8001,600 3,2003,0002,8002,600
0.5
1.0
400
1.5
0.0
Prevention of degraded land
Building envelope - retrofit, commercial
Water efficiency - Industrial
Appliances - residential
Leakage reduction
Appliances - residential
Enhanced oil recovery
High strength steel – construction, columns and beams
Improved commercial yields – developing, politically unstable, low infrastructure
Food waste reduction –processing/packaging/distribution
LDV gasoline plugin hybrid
Building envelope - package 2, residential
Efficiency package -new build, residential
Energy efficiency in other industries
Restoration of degraded land - Severe
These opportunities can be laid out in a integrated resource cost curve
SOURCE: McKinsey Global Institute analysis
1 Based on current prices for energy, steel, and food plus unsubsidized water prices and a shadow cost for carbon at a discount rate of 4% per annum
Water
Energy
Land
Steel
2030 total resource savings1
LDV electric vehicles
Lighting – switch from CFLs to LEDs
Improved feed efficiency
Electronics - consumer, residential
Smallholder yield improvement –politically stable, high infrastructure
Food waste reduction – post harvest, non-perishable crops
Savings can amount to up to $3.5 trillion with 90% having positive returns if the true cost of carbon and water are included
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Achieving the main productivity opportunities will require overcoming a multitude of barriers
158
Reducing leakage 166
Urban densification 175
Food waste 221
Commercial farm yields 236
Building energy efficiency 691
Other2 867
Improved irrigation techniques 68
Petroleum and gas energy efficiency 87
Improved power conversion 91
Reducing land degradation 114
Improved energy extraction 120
Smallholder farm yields 127
High strength steel adoption 132
Iron and steel energy efficiency 144
Alternative drive trains 155
Transport efficiency
Total resource benefit1
by opportunity area2010 $ billion
SOURCE: McKinsey analysis
1 Based on current prices for energy, steel, and food plus unsubsidized water prices and a shadow cost for carbon. 2 Includes feed efficiency, industrial water, air transport, municipal water, steel recycling, waste water reuse, and other industrial energy efficiency.
2030 potential savings by feasibility
Readily achievable
Some challenges
Difficult
Overall feasibility of implementation
Cap
ital i
ntensi
ty
Ret
urn o
n inve
stm
ent
Supply c
hain b
ottlen
ecks
Cap
ital a
vaila
bility
Reg
ulato
ry is
sues
/
proper
ty ri
ghts
Technolo
gical
read
ines
s
Entren
ched
beh
avio
rs
Key barriers
Agen
cy is
sues
Politic
al fe
asib
ility
Info
rmat
ion fa
ilure
s
McKinsey & Company 15|
Carbon emissions footprint, 2030
Gt CO2e
Additional investments for 450ppm pathway
SOURCE: McKinsey Global GHG Cost Curve Version 2.1; Team analysis
A shift in energy mix and pursuing additional land carbon abatement can be used to close the remaining gap to a 450ppm pathway
6
10
9
6 35
68
Required emissions for 450 ppmpathway
Additional agriculture and forestry abatement
Shift in power mix plus CCS
Scale up of sugarcane and 2nd
generation biofuels
EnergyCroplandSteelBAUemissions
1
1
Carbon abatement from “Productivity Response”
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Power mix shifts significantly in the climate change case, while mix assumed constant in productivity response
SOURCE: McKinsey analysis (carbon cost curve v3.0)
Share of global power production (TWh); Percent
Current state (2010)
2
100% =
2010
21,186
2 0
17
13
05
22
40
Supply expansion
21 21
42 43
25
100% =
2030
34,776
3 1
14
11
0 2
2020
28,114
14
15
12
0 3
Climate change response
Other RE
Solar
Wind
Hydro
Nuclear
CCS
Oil
Gas
Coal
Productivity response1
21 21
42 43
25
100% =
2030
29,363
3 1
14
11
0 2
2020
25,471
14
15
12
0 3
9
17
24
14
25
13
9
100% =
2030
29,363
7
15
18
61
2020
25,471
63
16
15
0 2
1 Production mix is based on total electricity demand and scaled in proportion to the BAU production mix
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Capital investment will increase significantly under all three cases
SOURCE: McKinsey Global Institute analysis
Water
Land
Energy
Steel
2030 cases
Average annual capital expenditure requirements1; USD billions; 2010-2030; 2010 dollars
310
Climate change response
420-480
Productivity response
385-445
Supply expansion
345-405
2010 capex
1 Does not include capex for BAU productivity improvements; includes impact of Capex flareups due to supply constraints
445-475445-475500-550350
270 400-510400-510510-600
1,000
1,840-1,9151,415-1,490
2,400-2,465
McKinsey & Company 18|
Price signals drive productivity: The 40 percent variation in engine efficiency across many G-20 countries relates closely to the cost of fuel
~40%
1 Light-duty vehicles only.
0 30 60 90 120 150 180
Engine efficiency1
Kilometers per liter
9.5
9.0
12.5
12.0
11.0
10.5
10.0
0
Total gasoline and diesel tax at pump$ per barrel
United States
United Kingdom
South Africa
Russia
Mexico
Japan
Italy
India
Germany
FranceChina
Canada
Brazil
11.5
SOURCE: McKinsey analysis
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Create efficient and integrated institutional approaches
Build awareness of risks
Develop skills and address mindsets
Address property rights and agency issues
Support access to capital
Ensure competitive investor returns
Accelerate and deepen innovation systems
Addressclassic “market failures”
Address “critical enablers”
There are 7 priority actions to capture this resource revolution
McKinsey & Company 20|
There is a need to tackle these issues in a holistic way: Agriculture example
Create efficient and integrated institutional approaches
Build awareness of risks
Develop skills and address mindsets
Address property rights and agency issues
Support access to capital
Ensure competitive investor returns
Accelerate and deepen innovation systems
Addressclassic “market failures”
Address “critical enablers”
Large barrier
Medium barrier
Small barrier
Lack of clear property rights make it difficult to invest in equipment and expand farm size
Over 70% of agriculture productivity opportunities have an IRR>10%
Public R&D to agriculture has fallen and is lower than in other sectors (e.g., automotive)
Annual investment in agriculture may need to increase by 50% and over 80% of opportunities are in developing countries
Lack of early warning systems on food availability, including linkages with other resources
Limited mechanisms to share best practice across countries; lack of core capabilities in many agriculture ministries
Large behavioral change needed to support new technologies (e.g., post-harvest waste)