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Resource revolution

Fraser Thompson, Senior Fellow, McKinsey Global Institute, on the main findings of a recent report examining the impact on business of increasing competition for resources.

The rise in resource prices over the past decade, and the scale and pace of economic development sweeping across emerging markets, have revived the debate around resource economics, with great challenges but also many opportunities.

Companies, for example in the consumer goods sector, are concerned about how rising resource prices affect the cost of inputs into their products; costs which they cannot pass on to consumers in the current economic market. Governments are concerned about food security and the impact on economic recovery if energy prices increase. Even insurers are thinking on how this issue could affect claims if health and safety expenditure comes under pressure.

Resource prices are likely to continue to rise and be more volatile, and there will be huge future demand from three billion new middle-class consumers, mainly in China. This means a shift in how companies and countries manage resource economics is needed.

One of the main findings in the McKinsey Global Institute’s Resource Revolution report is that there are massive resource productivity opportunities for the private sector, worth US$2.9 trillion of savings by 2030. The current resource productivity opportunity is comparable to the progress made in labour productivity in the last century. Over 70% of these opportunities have returns above 10% – based on today’s market prices.

Companies are responding on three levels. There is a pocket of companies which are tackling the challenges head-on and actively pursuing opportunities, for example in energy efficiency, ‘Smart Cities’, and other initiatives. Another group has its toes in the water, acknowledging the potential importance of this area, and starting to make tentative plays. A last group has not had much exposure to resource trends, and is adopting a wait-and-see approach.

Key for companies is to adopt an integrated approach to resource management, based on an understanding of what the value at risk is from a changing resource picture – much of the risk can be embedded two or three layers down in the supply chain. Companies need to overcome a silo mentality and take time to understand how their entire business can benefit from this agenda.

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