Raw materials remain scarce and prices are rising again
Despite the current lows, prices for raw materials are set to rise again substantially in the medium and long term. European companies in particular need to get to grips with this issue as the European economy depends heavily on imported raw materials. To ensure access to resources in the long term, energy and materials efficiency must be improved and strategic toolkits used (reverse integration, alliances). Modern financial instruments and a new interplay between government and business are also required. This was the message of a speech in Vienna by Roland Berger-CEO, Prof. Burkhard Schwenker. The consultant spoke on the subject of "Raw materials security for companies".
"With its effects on the real economy, the financial crisis can cause top managers to lose sight of key strategic issues such as raw materials security," said Schwenker, speaking in the conservatory of the DO&CO hotel in central Vienna. The technical aspects of extracting and transporting raw materials and the expected medium-term rise in demand suggest that prices will rise. Current reductions in subsidies and investments in establishing new access points seem to indicate that supply will fall again. Added to this, said Schwenker, is world population growth and an increasing appetite for raw materials, especially in Brazil, Russia, India and China. High demand and limited access capacity automatically create pressure on prices. The World Bank also expects the oil price to reach USD 75 again by the end of 2009. In futures markets, crude oil will be traded with a 50% markup by next December. There is a similar trend in industrial metals.
European economy heavily dependent on imported raw materials
According to Schwenker, the EU already has to import some 50% of the fossil fuels oil, gas and coal, with that figure expected to rise to 70% by 2030. The situation in industrial metals is no better: nearly half of the copper ore and copper concentrates required by companies has to be purchased outside the EU, plus 85% of iron, and as much as 100% of metals for high-tech products such as titanium, tantalum and platinum. What's more, mining and production of important metals is concentrated in just a few regions that are often politically unstable.
Environmental technology and reverse integration as possible solutions
Schwenker expects energy and materials efficiency to make a major contribution to raw materials security for companies. Experts estimate that in Germany alone, raw material usage in the manufacturing industry could fall by one-fifth by 2016, thanks to recycling and the use of new technology. This would mean savings of some EUR 27 billion. An obvious consideration for companies is therefore to secure raw materials via reverse integration; in other words, acquiring a stake in raw materials suppliers. The currently low valuations due to the economic crisis provide a good opportunity to do so. However, tapping into a new business segment harbors considerable risk for a company. There are few examples yet of successful reverse integration. Alliances and cooperative ventures are an alternative to direct participation. The risk of these is lower and can be spread more widely. For example, it is already common in the aluminum industry for several corporations to jointly operate a smelting plant. Another risk-minimizing tool is derivatives, with which raw materials costs can be set for several months in advance. But if a company guesses wrongly, the safety net can quickly become a burden. Cathay Pacific, for example, had paper losses of around a billion dollars last year through kerosene hedging.
New interplay needed between business and government
To get rid of competitive disadvantages for European companies, the EU must primarily lobby for the removal for trade restrictions and the reduction of import and export duties (e.g. for scrap steel in Russia and aluminum ore and coke in China). This new interplay is about securing long-term access to resources. The gas dispute between Russia and Ukraine has shown the importance of and necessity for clear and long-term agreements that give both partners security.
Close political cooperation with other states rich in raw materials, such as those in Africa, is also crucial. Up to now, European companies have hesitated to invest in African companies because of reservations about the unstable political environment and government corruption in some cases. By contrast, Chinese investors are highly involved in the African raw materials market. They are actively supported by the Chinese government and even encouraged to take the plunge. There are now around one million Chinese resident in Africa and establishing networks there. But Chinese companies are no longer interested just in Africa. Sharply reduced stock market valuations make European raw materials companies attractive investment targets too. "Western governments should demand greater access to the Chinese market in return," said Schwenker. But ethical issues need to be taken into account: "I am firmly convinced that Europe should not let itself be corrupted, no matter how tough the competition is for raw materials. We can better secure our interests in the long term by rigorously encouraging the creation of sound social structures than by entering into morally dubious compromises."
"With its effects on the real economy, the financial crisis can cause top managers to lose sight of key strategic issues such as raw materials security," said Schwenker, speaking in the conservatory of the DO&CO hotel in central Vienna. The technical aspects of extracting and transporting raw materials and the expected medium-term rise in demand suggest that prices will rise. Current reductions in subsidies and investments in establishing new access points seem to indicate that supply will fall again. Added to this, said Schwenker, is world population growth and an increasing appetite for raw materials, especially in Brazil, Russia, India and China. High demand and limited access capacity automatically create pressure on prices. The World Bank also expects the oil price to reach USD 75 again by the end of 2009. In futures markets, crude oil will be traded with a 50% markup by next December. There is a similar trend in industrial metals.
European economy heavily dependent on imported raw materials
According to Schwenker, the EU already has to import some 50% of the fossil fuels oil, gas and coal, with that figure expected to rise to 70% by 2030. The situation in industrial metals is no better: nearly half of the copper ore and copper concentrates required by companies has to be purchased outside the EU, plus 85% of iron, and as much as 100% of metals for high-tech products such as titanium, tantalum and platinum. What's more, mining and production of important metals is concentrated in just a few regions that are often politically unstable.
Environmental technology and reverse integration as possible solutions
Schwenker expects energy and materials efficiency to make a major contribution to raw materials security for companies. Experts estimate that in Germany alone, raw material usage in the manufacturing industry could fall by one-fifth by 2016, thanks to recycling and the use of new technology. This would mean savings of some EUR 27 billion. An obvious consideration for companies is therefore to secure raw materials via reverse integration; in other words, acquiring a stake in raw materials suppliers. The currently low valuations due to the economic crisis provide a good opportunity to do so. However, tapping into a new business segment harbors considerable risk for a company. There are few examples yet of successful reverse integration. Alliances and cooperative ventures are an alternative to direct participation. The risk of these is lower and can be spread more widely. For example, it is already common in the aluminum industry for several corporations to jointly operate a smelting plant. Another risk-minimizing tool is derivatives, with which raw materials costs can be set for several months in advance. But if a company guesses wrongly, the safety net can quickly become a burden. Cathay Pacific, for example, had paper losses of around a billion dollars last year through kerosene hedging.
New interplay needed between business and government
To get rid of competitive disadvantages for European companies, the EU must primarily lobby for the removal for trade restrictions and the reduction of import and export duties (e.g. for scrap steel in Russia and aluminum ore and coke in China). This new interplay is about securing long-term access to resources. The gas dispute between Russia and Ukraine has shown the importance of and necessity for clear and long-term agreements that give both partners security.
Close political cooperation with other states rich in raw materials, such as those in Africa, is also crucial. Up to now, European companies have hesitated to invest in African companies because of reservations about the unstable political environment and government corruption in some cases. By contrast, Chinese investors are highly involved in the African raw materials market. They are actively supported by the Chinese government and even encouraged to take the plunge. There are now around one million Chinese resident in Africa and establishing networks there. But Chinese companies are no longer interested just in Africa. Sharply reduced stock market valuations make European raw materials companies attractive investment targets too. "Western governments should demand greater access to the Chinese market in return," said Schwenker. But ethical issues need to be taken into account: "I am firmly convinced that Europe should not let itself be corrupted, no matter how tough the competition is for raw materials. We can better secure our interests in the long term by rigorously encouraging the creation of sound social structures than by entering into morally dubious compromises."
