The future is now: How to win the resource revolution

future-is-now

Here is a brief excerpt from an article written by Scott Nyqvist, Matt Rogers, and Jonathan Woetzel for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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Although resource strains have lessened, new technology will disrupt the commodities market in myriad ways.

A few years ago, resource strains were everywhere: prices of oil, gas, coal, copper, iron ore, and other commodities had risen sharply on the back of high and rising demand from China. For only the second time in a century, in 2008, spending on mineral resources rose above 6 percent of global GDP, more than triple the long-term average. When we looked forward in 2011, we saw a need for more efficient resource use and dramatic increases in supply, with little room for slippage on either side of the equation, as three billion more people were poised to enter the consumer economy.

While our estimates of energy-efficiency opportunities were more or less on target, the overall picture looks quite different today. Technological breakthroughs such as hydraulic fracturing for natural gas have eased resource strains, and slowing growth in China and elsewhere has dampened demand. Since mid-2014, oil and other commodity prices have fallen dramatically, and global spending on many commodities dropped by 50 percent in 2015 alone.

Even though the hurricane-like “supercycle” of double-digit annual price increases that prevailed from the early 2000s until recently has hit land and abated, companies in all sectors need to brace for a new gale of disruption. This time, the forces at work are often less visible and may seem smaller-scale than vertiginous cyclical adjustments or discovery breakthroughs. Taken together, though, they are far-reaching in their impact. Technologies, many having little on the surface to do with resources, are combining in new ways to transform the supply-and-demand equation for commodities. Autonomous vehicles, new-generation batteries, drones and sensors that can carry out predictive maintenance, Internet of Things (IoT) connectivity, increased automation, and the growing use of data analytics throughout the corporate world all have significant implications for the future of commodities. At the same time, developed economies, in particular, are becoming ever more oriented toward services that have less need for resources; and in general, the global economy is using resources less intensively.

These trends will not have an impact overnight, and some will take longer than others. But understanding the forces at work can help executives seize emerging opportunities and avoid being blindsided. Our aim in this article is to explain these new dynamics, and to suggest how business leaders can create new strategies that will help them not only adapt but profit.

A technology-driven revolution

To understand what is going on, consider the way transportation is being roiled by technological change. Vehicle electrification, ride sharing, driverless cars, vehicle-to-vehicle communications, and the use of lightweight materials such as carbon and aluminum are beginning to ripple through the automotive sector. Any of them individually could materially change the demand and supply for oil—and for cars. Together, their first- and second-order effects could be substantial. McKinsey’s latest automotive forecast estimates that by 2030, electric vehicles could represent about 30 percent of all new cars sold globally, and close to 50 percent of those sold in China, the European Union, and the United States.

That’s just the start, since vehicles for ride-sharing on local roads in urban areas can be engineered to weigh less than half of today’s conventional vehicles, much of whose weight results from the demands of highway driving and the potential for high-speed collisions. Lighter vehicles are more fuel efficient, use less steel, and will require less spending on new roads or upkeep of existing ones. More short-haul driving may accelerate the pace of vehicle electrification. And we haven’t even mentioned the growth of autonomous vehicles, which would further enhance the operating efficiency of vehicles, as well as increasing road capacity utilization as cars travel more closely together. Several million fewer cars could be in the global car population by 2035 as a result of these factors, with annual car sales by then roughly 10 percent lower—reflecting a combination of reduced need as a result of sharing but also higher utilization and therefore faster turnover in vehicles and fleets.

The upshot of all this isn’t just massive change for the automotive sector, it’s a shift in the resource intensity of transportation, which today accounts for almost half of global oil consumption and more than 20 percent of greenhouse-gas emissions. Oil demand from light vehicles in 2035 could be three million barrels below a business-as-usual case. If you include the accelerated adoption of lighter materials, oil demand could drop by six million barrels. We may see “peak” oil—with respect to demand, not supply—around 2030. (For more, see “Is peak oil demand in sight?”)

Many other commodities face similar challenges. Natural-gas demand has been growing strongly as a source of power generation, especially in the United States and emerging economies. We see no signs of electricity demand abating—on the contrary, we expect demand for electricity to outpace the demand for other energy sources by more than two to one. But the electricity-generation mix is changing as solar- and wind-power technology improve and prices fall; wind could become competitive with fossil fuels in 2030, while solar power could become competitive with the marginal cost of natural-gas and coal production by 2025. Fossil fuels will continue to dominate the total energy mix, but renewables will account for about four-fifths of future electricity-generation growth.

Metals will be affected, too. Iron ore, a key raw material for steel production, may already be in structural decline as steel demand in China and elsewhere cools, and as recycling gathers pace. Lighter cars on roads that require less maintenance would only hasten that decline. We estimate that a smaller car fleet alone would potentially reduce global steel consumption by about 5 percent by 2035, compared with a business-as-usual scenario. Copper, on the other hand, is used in many electronics and consumer goods and could see a steady growth spurt—unless substitutes such as aluminum become more competitive in a wider set of applications. Electric vehicles, for example, require four times as much copper as those that use internal-combustion engines.

Some of the biggest impact on resource consumption could come from analytics, automation, and Internet of Things advances. These technologies have the potential to improve the efficiency of resource extraction—already, underwater robots on the Norwegian shelf are fixing gas pipelines at a depth of more than 1,000 meters, and some utilities are using drones to inspect wind turbines. Using IoT sensors, oil companies can increase the safety, reliability, and yield in real time of thousands of wells around the globe. These technologies will also reduce the resource intensity of buildings and industry. Cement-grinding plants can cut energy consumption by 5 percent or more with customized controls that predict peak demand. Algorithms that optimize robotic movements in advanced manufacturing can reduce a plant’s energy consumption by as much as 30 percent. At home, smart thermostats and lighting controls are already cutting electricity usage.

In the future, the pace of economic growth in emerging economies, the rate at which they seek to industrialize, and the vintage of the technology they adopt will continue to influence resource demand heavily. A key question is, how quickly will these economies adopt the new technology-driven advances? The challenge in part is from regulation and in part a question of access to capital, for example with solar energy in Africa. But the innovations provide new approaches to address age-old issues about resource intensity and the dependency on growth. Above all, they create the potential for dramatic reductions in natural-resource consumption everywhere. And that means there are substantial business opportunities for those with the foresight to seize them.

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Here is a direct link to the complete article.

Scott Nyquist is a senior partner in McKinsey’s Houston office, Matt Rogers is a senior partner in the San Francisco office, and Jonathan Woetzel is a senior partner in the Shanghai office.

The authors wish to thank Shannon Bouton, Michael Chui, Eric Hannon, Natalya Katsap, Stefan Knupfer, Jared Silvia, Ken Somers, Sree Ramaswamy, Richard Sellschop, Surya Ramkumar, Rembrandt Sutorius, and Steve Swartz for their contributions to this article and the research underlying it.

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