McKinsey have just published an annual update on their resource scarcity work, which is well worth a read if you watch those issues. Key headlines as follows (in their own words):
Commodity prices have come off their previous peaks since 2011, prompting some observers to call an end to the so-called resources super cycle—the sharp price rises since the turn of the century. But talk about the death of the super cycle appears greatly exaggerated, the report finds. Despite recent declines, on average commodity prices are still almost at their levels in 2008 when the global financial crisis hit. This is striking given that the world economy is still not back to full power after the worldwide recession in 2009.
The volatility of resource prices has also been considerably higher since the turn of the century. While there are many factors influencing short-term volatility including droughts, floods, labor strikes, and restrictions on exports, there is also increasing evidence of a more structural supply issue that is likely to continue to drive volatility. Supply appears to be progressively less able to adjust rapidly to demand because new reserves are more challenging and expensive to access.
The prices of different resources have been increasingly closely correlated over the past three decades. While rapid growth in demand for resources from China has been an important driver of these increased links, two additional factors are also important. First, resources represent a substantial proportion of the input costs of other resources. Second, technology advances are enabling more substitution between resources in final demand. As a result, shocks in one part of the resource system today can transmit rapidly to other parts of the system.
With the notable exception of shale gas, long-term supply-side costs continue to increase. While the world does not face any near-term absolute shortages of natural resources, increases in the marginal costs of supply appear to be pervasive and put a floor under the prices of many commodities. In the years ahead, resource markets will be shaped by the race between emerging-market demand and the resulting need to increase supply from places where geology is more challenging, and the twin forces of supply-side innovation and resource productivity.
FYI McKinsey’s Jeremy Oppenheim, who worked on this project, is now on sabbatical to run the secretariat for the new Global Commission on the Economy and Climate (‘Stern 2’ to its friends), which was launched last week. Here’s its work programme.