Resource Revolution: Meeting

the worlds energy, materials,

food and water needs

McKinsey Global Institute

Sustainability and Resource Productivity Practice
Overview of conclusions
February 15th, 2011
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited

Contents

Overview

Key exhibits

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Key messages (1/2)

During the 20th century, real resource prices fell by almost half,
despite a 20-fold expansion in global GDP.
The last decade has undone the effects of the previous 100-year
decline in resource prices. With the exception of energy in the 1970s,
resource price volatility is at an all-time high.
This is likely (but not certain) to continue over the next 20 years as 3
billion new middle class consumers are added to the global
economy (especially in China and India), with demand for key
resources increasing by up to 80%.
Resource productivity both on the demand and supply-side - has
the potential to address up to 30% of 2030 total resource demand.
Our estimates suggest that, excluding environmental externalities,
the resource productivity prize could be worth $2.9 trillion per annum
by 2030. Including these externalities and adjusting for subsidies, the
prize would be worth $3.7 trillion per annum.
Just 15 types of opportunity, from improving the energy efficiency
of buildings to moving to more efficient irrigation, represent roughly
75 percent of this prize.
While some supply expansion, especially for energy and steel, would
still be necessary in a more resource productive economy, the strain
on supply chains and environmental resources would be reduced.
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Key messages (2/2)

Addressing climate change and ensuring universal energy access
would require further action requiring an additional ~$400b of
annual investment over the next 20 years.
Tackling this resource agenda must start with new institutional
mindsets and mechanisms that can develop more coordinated
approaches to the challenge of resources.
In addition, there are 3 critical priorities for policymakers
1.Unleash the power of the market by strengthening market
signals, including removing the $1.1 trillion of resources subsidies
and supporting stability in long-term prices
2.This must be supported by addressing (non-price) market
failures, including property rights, agency issues, access to capital
and innovation
3.Create long-term resilience by building awareness of risks and
appropriate safety nets, strengthening and deepening innovation
systems, and addressing consumer mindsets
For the private sector, 9 resource-related trends will shape
competitive dynamics across a range of sectors. Successful firms
must place resource issues at the heart of their business strategy,
including mitigating resource risk in operations through building
knowledge of relevant risks and capturing available efficiency
opportunities, and aggressively going after new growth opportunities.
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Contents

Overview

Key exhibits

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Commodity prices have increased sharply since 2000, erasing all the
declines of the 20th century
McKinsey Commodity Price Index (years 19992001 = 100)1
260
240

World War I

220

1970s
oil shock

200
180

World War II

160
140
120
100
80
60
40
1900

Post-war
Depression

Great
Depression

1910

1930

1920

1940

1950

1960

1970

1980

1990

2000

20112

1 Based on arithmetic average of 4 commodity sub-indices of food, non-food agricultural items, metals and energy.
2 2011 prices based on average of first eight months of 2011.
SOURCE: Grilli and Yang; Pfaffenzeller; World Bank; International Monetary Fund; Organisation for Economic Co-operation
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and Development statistics; UN Food and Agriculture Organization; UN Comtrade

Resource price volatility is at an all-time high, with the exception of energy

in the 1970s
Annual price volatility1
%

56
39

38
20

22

21

Energy

Food

14

13

15

15

Agricultural
materials

10

11

24

20

15
1909

17

28

21
10

29

39

21

13
3

6
26

11
19

20

Metals
24

14

32

25
7

15

49

17

59

10

11

13

69

79

89

99

2011

1 Calculated as the standard deviation of the commodity subindex divided by the average of the subindex over the time frame.
SOURCE: Grilli and Yang; Pfaffenzeller; World Bank; International Monetary Fund; Organisation for Economic Co-operation
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and Development statistics; UN Food and Agriculture Organization; UN Comtrade

The emergence of 3 billion middle-class consumers will fuel future

demand
Global middle class1
Billions of people

4.88
0.11
0.23
0.31
0.32
3.25
0.06 0.17
0.25
0.33

Sub-Saharan Africa
Middle East and North Africa
Central and South America
North America
Europe
Asia-Pacific

1.85
0.11 0.03
0.18
0.34
0.66

0.68

3 billion

0.70
3.23
1.74

0.53
2009

2020

2030

1 Based on daily consumption per capita ranging from $10 to $100 (in purchasing power parity terms)
SOURCE: OECD
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Many countries have shown that as incomes rise,

demand for resource increasesand a similar curve
is likely in China and India

ENERGY EXAMPLE

Historic (1970-2008)

Per capita energy consumption, 19702008, projected to 2030 for India and China
Million British thermal units per person

Projected

250

United States
200

Australia

150

Historical range
for energy
consumption
evolution

Germany
France

100

South Korea

Japan

United Kingdom
2030 projected

50

China

2030 projected
India

0
0

5,000

10,000

15,000

SOURCE: IEA; Global Insight; McKinsey analysis

20,000

25,000

30,000

35,000

40,000

45,000

Per capita GDP

Real 2005 $PPP per person
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The high degree of linkages among resources means

strong demand for one can spread to others

Relative claim on
global resource
5%

Carbon
capacity of
atmosphere

Materials

Rare earths critical for solar PV/

steel critical for offshore drilling
<5 percent
of water
withdrawals
used in
mining

50%

~14 percent of energy used in metals

and mining

Hydrocarbons

Desalination, groundwater pumping,

and water transport

Carbon
abatement
through
afforestation
and reduced
deforestation

Agriculture is
<2 percent of
energy demand

Energy

~8 percent of water withdrawals

used in energy

Water

Land is
~28 percent
of CO2e

Biofuels use
~2 percent of
global cropland

Irrigation

Land

~70 percent of water withdrawals used in agriculture

Phosphates critical inputs into fertilizers
SOURCE: McKinsey analysis

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These resource trends pose several risks to global growth and welfare
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

At least 8 countries commit 5 percent or more of their GDP to

energy subsidies. In 2005, government subsidies were
estimated to account for 14 percent of Indias GDP
Just four countriesIran, Iraq, Saudi Arabia, and
Venezuelahold almost 50 percent of known oil
reserves
A recent study by the Economics of Climate
Adaptation Working Group suggests that some
regions are at risk of losing up to 12 percent of
their annual GDP by 2030 as a result of
existing climate patterns
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PRODUCTIVITY RESPONSE CASE

In our productivity response case, there are opportunities that could meet
13 to 29 percent of resources demand
Primary energy1
QBTU

Steel2
Million tonnes
steel equivalent

Water
Cubic kilometers

Land
Million cropland
hectares

655

143

492

2,290

-13%

1,1501,350

5,0005,200

-18 to -21%

435500

1,2101,320

-25 to -29%

Productivity
improvements

Remaining
2030 demand

6,350

4,500

1,535

1,7101,755

2010 demand

2030 base-case
demand

-22%

1,995

295

1,270

512

1 Productivity improvements include supply-side measures, such as enhanced oil recovery that lower effective remaining
demand.
2 Supply-side levers such as improving recovery rates and the conversion rate in mining and coke do not save steel and are
not reflected in this exhibit. We have included effective steel savings from higher scrap recycling.
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SOURCE: McKinsey analysis

To meet 2030 food, feed, and fuel demand would require

175 million to 220 million hectares of additional cropland
Base case cropland demand1 by 2030
Million hectares
2010 demand
Food/feed demand

Assuming 30 percent crop

production increase with
1.0 percent per annum yield growth

1,535
+90

Land degradation

+30

Climate change

+045

Urban expansion

+30

Energy infrastructure

+10

First-generation
biofuel demand2
2030 demand

Impact of
productivity
loss

+15
175220

1,7101,755

1 Defined as arable land and permanent crops by the UN Food and Agriculture Organization.
2 As 3080 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.
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;
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McKinsey Agriculture Initiative; McKinsey analysis

PRODUCTIVITY RESPONSE CASE

Developing countries account for 70 to 85 percent of the

productivity opportunities

Energy

Land

Water

Steel

% of total productivity opportunity by resource and region

Europe
(OECD/EU-27)
United States
and Canada

10
8
7
9

13
8
7

Middle
East
6
3
5
5

11

Latin
America
6
9
8
7

Global air
and sea
(energy only)
5
Total
opportunity
Energy
%
Water2
Land
Steel3

Africa

Russia and
Eastern Europe
8
10
8
3

32
8
20
16

14
10
40

10

15
22
1

Developing

Developed

71

29
84

16

83

17

73

China

India

Rest of developing Asia1

6
14
14
5

Developed
Asia-Pacific
3
2
2
8

27

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 conversionside levers.
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SOURCE: McKinsey analysis

PRODUCTIVITY RESPONSE CASE

Fifteen groups of opportunities represent 75 percent of

the resource savings
Societal perspective, 2030
Building energy efficiency
Large scale farm yields
Food waste
Municipal water leakage
Urban densification
Iron and steel energy efficiency
Smallholder farm yields
Transport efficiency
Electric and hybrid vehicles
Land degradation
End-use steel efficiency
Oil and coal recovery
Irrigation techniques
Road freight shift
Power plant efficiency
Other3

Total resource benefit1

$ billion (2010 dollars)

Energy

Land

Water

Steel

Average societal cost

efficiency2
696

0.5
0.4
0.5

266
252
167
155
145
143
138
138
134
132
115
115
108
106

0.2
0.9
0.2
0.4
0.5
1.2
0.5
0.4
0.5
0.2
0.7
0.3
892

0.6

1 Based on current prices for energy, steel, and food plus unsubsidized water prices and a shadow cost for carbon.
2 Annualized cost of implementation divided by annual total resource benefit.
3 Includes feed efficiency, industrial water efficiency, air transport, municipal water, steel recycling, wastewater reuse, and
other industrial energy efficiency.
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SOURCE: McKinsey analysis

PRODUCTIVITY RESPONSE CASE

We have developed an integrated resource cost curve to compare

productivity levers across resources
Cost efficiency
$ cost of implementation per $ resource benefit
Productivity opportunities with returns lower
than the assumed hurdle rate
Lever width quantifies annual
resource savings calculated as
the resource volume saved (e.g.,
barrels of oil) times todays price
(e.g., $100/barrel of oil)
1.0
Lever height quantifies the cost
efficiency of investment (i.e.,
the cost of implementation
divided by the resource benefit)
Productivity opportunities with returns
higher than the assumed hurdle rate
Annual resource benefit
$ billion, 2030
SOURCE: McKinsey analysis

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PRODUCTIVITY RESPONSE CASE

Resource productivity opportunities could create societal benefits of up to

$3.7 trillion, with 90 percent of opportunities above the hurdle rate
2030
Investor
perspective
Current
prices
Discount
rate 10%

Cost efficiency of investment

7
5

70% of productivity
opportunities above
hurdle rate

Energy

Land

Water

Steel

+800
billion

1
0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

-1
-3
Societal
perspective
Societal
prices1
Discount
rate 4%

7
90% of productivity
opportunities above
hurdle rate

5
3
1
0
-1

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Total annual resource benefit, $ billion

-3
1 Based on current prices for energy, steel, and food, less energy taxes, plus subsidies, and a shadow cost for carbon
(at $30 per tonne of carbon dioxide equivalent).
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SOURCE: McKinsey analysis

There are significant barriers affecting each of the three

cases for meeting future resource demand
Incentivebarriers
barriers
Incentive
1 Capital intensity

Supply expansion
Up to $3.1 trillion per
annum

2 Return on investment

Productivity response

Large barriers
Minimal barriers
Some barriers

Climate response

Up to $3.2 trillion per

annum

Up to $3.5 trillion per

annum

~50% of energy productivity

levers have IRR<10%

Requires public subsidy (in

short term) for renewables

Some agency issues in

energy

Some agency issues in

energy

Decision-making barriers
3 Agency issues

4 Political risk

Risk of government
interference (e.g., export
bans, windfall taxes)

Some opportunities require

difficult reforms (e.g.,
subsidy removal)

Highly challenging, requires

international collaboration
on carbon pricing

5 Information failures

Some information failures

around remaining reserves

Low awareness of
opportunities (e.g., energy)

Low awareness of
opportunities (e.g., energy)

6 Supply-chain bottlenecks

Weak infrastructure; risk of

supply chain crunch

Some specific new skills

required

Many renewable technologies lack full value chain

7 Capital availability

Resource firms have

generally easy access to
capital for investment

Opportunities less familiar

to financial institutions

8 Regulatory issues

Property right concerns

(e.g., land tenure)

Property right concerns

(e.g., land tenure)

9 Technological readiness

Challenging extraction may

require new technologies

All opportunities based on

existing technologies

Many renewable energy

technologies are unproven

10 Entrenched behavior

No change in behavior

Requires change in
behavior and mindsets

Requires change in
behavior and mindsets

Implementation barriers

SOURCE: McKinsey analysis

Renewable opportunities
perceived as higher risk,
with weaker capital pools
Relies critically on subsidy /
payment mechanisms for
renewable energy / forests

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CLIMATE RESPONSE CASE

Shifting the energy mix and pursuing additional carbon abatement in land
can be used to close the remaining gap to a 450-ppm pathway
Carbon emissions footprint, 2030
Gigatonnes of carbon dioxide equivalent
66

~1

6
10
1

7
5

Base-case
emissions

Steel and
water

Cropland

Carbon abatement from

productivity response
1 CCS = carbon capture and storage.
SOURCE: McKinsey analysis

Energy

Scale-up
of biofuels

Shift in
power mix
plus CCS1

Additional
agriculture
and forestry
abatement

35

Required
emissions
for 450-ppm
pathway

Additional investment for

450-ppm pathway
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ADDRESS NON-PRICE MARKET FAILURES

Capital investment could increase significantly under all three cases

Average annual capital expenditure requirement, 2010301
$ billion (2010 dollars)

Energy
2010 capital
expenditure

Supply
expansion
2030
cases

Productivity
response
Climate
response

Water

1,000

1,400
1,440
1,690
1,730
1,990
2,140

270

Land
310

Steel
350

Total
1,930

345
405

500
550

2,800
3,070

425
515

365
435

445
475

2,925
3,155

425
515

375
445

445
475

555
675

3,235
3,575

1 Does not include capital expenditure for base-case productivity improvements; includes impact of capital price spikes due to
supply constraints.
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SOURCE: McKinsey analysis

CLIMATE RESPONSE CASE

Power mix shifts significantly in a climate response case

Share of global power production
%; terawatt hours

CCS

Coal

Gas

Oil

Other RE2

Solar

Nuclear Hydro Wind

100% =

Current state

Supply
expansion/
productivity
response1

2010

40

2020

42

2030

43

2020

50

22

25

21

21

27

12

13

12

22

17

15

11

16

2 27,519/
1 24,593

5 13

14

21,022

32,582/
26,617

24,593

26,617

Climate
response
2030

13

21

1 6

11

15

17

1 Same power mix assumed in both the supply expansion and productivity response cases. End demand varies between the two
casesthe first number shown on the 100% line refers to supply expansion; the second number to productivity response.
2 RE = Renewables. Other RE include dedicated biomass, geothermal, and marine.
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SOURCE: McKinsey analysis

There are 4 broad areas of action to capture this resource revolution

Description
Adopt an
integrated
approach

Tackling this resource agenda must start with new institutional mindsets

Strengthen
market
signals

Unleash the power of the market by strengthening market signals,

Address other
market
failures

Create longterm
resilience

and mechanisms that can develop more coordinated approaches to the

challenge of resources

including removing resource subsidies and supporting stability in longterm prices

Address property rights, agency issues, access to capital and innovation

Build awareness of risks and opportunities

Create appropriate safety nets to reduce vulnerability
of poorest members of society to resource price changes

Address consumer and business mindsets

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Disruptive trends in three broad categories could shape

private-sector competitive dynamics and value creation

Impact on sector
High
Medium

Industry
Disruptive
force

CPG1
More expensive resource
input costs

Resource
Rising volatility and
cost-related
correlation
forces

Regulationrelated
forces

Resourcerelated
technological
forces

Low
Mining

Oil and
gas

Illustrative facts
The average cost per oil well doubled from
2000 to 2010
Annual volatility across resources is at its
highest level of the past 100 years

Rising environmental costs

Potential impact on yields of greater than

10 percent in next 20 years

Rising geopolitical concerns

>80 percent of available arable land is in

countries with infrastructure or political issues

Public policy push to realize

true cost of resources

Current subsidies for agriculture, energy, and

water total up to $1.1 trillion per year

The new social contract for

access to resources

Maintaining social license to operate is a topfour issue for metals/mining executives

Supply-chain efficiency
opportunities

CPG players can reduce energy consumption

by 20 to 50 percent on average

Impact of technology on
competitive advantage

Learning curves for renewable power

sources range from 10 to 20 percent

Demand for resource-efficient

products

Half of shoppers consider green attributes in

their purchasing decisions

1 CPG = consumer packaged goods.

SOURCE: McKinsey analysis

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