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Commodity Prices Revised Down as Global Growth Weakens and Supplies Remain Ample

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Energy and metal commodity prices are expected to continue to fall in 2020 following sharp declines in 2019 on a weaker outlook for global growth and consequent softer demand, the World Bank said in its October Commodity Markets Outlook.

“Slowing demand for commodities presents a challenge for exporters and an opportunity for importers,” said Ceyla Pazarbasioglu, World Bank Group Vice President for Equitable Growth, Finance & Institutions. “As both of them switch from using one commodity to another due to price fluctuation and technological advance, it will be important that these resources be produced and consumed in an environmentally sustainable way.”

Crude oil prices are projected to average US$60 per barrel in 2019 and weaken to US$58 per barrel in 2020. These forecasts are US$6 per barrel and US$7 per barrel lower than anticipated in the April Commodity Markets Outlook. In line with the slowdown in global growth, oil consumption is now expected to rise at a much slower pace than earlier forecasts and increase only modestly next year. A sharper-than expected economic downturn poses the greatest risk to the oil price forecast. More broadly, energy prices, which also include natural gas and coal, are expected to average almost 15 percent lower in 2019 than in 2018, and to continue to decline in 2020.

Metal prices are also projected to fall 5 percent in 2019 and continue to slide next year as slowing global demand weighs heavily on the market. Precious metals, which have risen sharply this year, are anticipated to make further gains in 2020 in response to heightened global uncertainty and accommodative monetary policies. Agriculture prices are anticipated to decline this year but stabilize in 2020.

A resolution of trade tensions could push up the prices of some agricultural commodities, such as soybeans and corn, while lower energy prices could lower fuel costs and fertilizer prices, reducing prices of energy-intensive crops such as oilseeds.

A special section in the report looks at what drives consumers to substitute one commodity for another, such as natural gas for coal, or paper instead of plastic. These substitutions are driven by technological innovation and changes in commodity prices. This phenomenon highlights the risks to the long-term growth prospects of countries that rely heavily on a narrow group of commodity exports.

“Depending on export revenues from a small set of commodities makes commodity-exporting developing economies vulnerable because demand surges and higher prices could induce innovation and facilitate substitution among commodities,” said Ayhan Kose, Director of the World Bank’s Prospects Group.

Another special section looks at the impact of the September 14 attacks on oil production facilities in Saudi Arabia. The market response was short-lived by historical standards because of the swift restoration of production, increasingly diversified sources of oil supplies, including shale oil, and weakening demand. However, it was a reminder that the global oil market remains dependent on several critical infrastructure and transport bottlenecks that may be vulnerable to disruption.  

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Finance

Net-Zero Challenge: The Supply Chain Opportunity

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The commitment to tackling climate change is accelerating in all sectors of society, with net-zero pledges from companies, cities, states, and regions doubling in the past year. Decarbonizing supply chains is a major opportunity for companies to put these commitments into practice.

New research published today by the World Economic Forum and Boston Consulting Group (BCG) shows how tackling supply chain emissions can be a game changer in the global fight against climate change. Net-Zero Challenge: The Supply Chain Opportunity analyzes the top eight global supply chains that account for more than 50% of global greenhouse gas emissions and finds that end-to-end decarbonization of these supply chains would add as little as 1% to 4% to end-consumer costs in the medium term.

The report breaks down the major sources of emissions along each of the eight major supply chains—food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services, and freight. It assesses the key levers to reduce emissions in each supply chain and shows that many can be easily deployed today and cost very little to implement. The report also points to the global nature of many supply chains, enabling companies to support decarbonization across borders and in countries where governments do not yet prioritize climate action.

The opportunity for impact is especially high for consumer-facing companies, whose supply chain emissions far outweigh their direct emissions from manufacturing. These companies can use their buying power to push for rapid decarbonization and help fund the transition by co-investing with upstream raw-material producers, which struggle to finance the transition alone.

For example, while it costs a steel producer significantly more to make zero-carbon steel, raw input materials like steel account for such a low proportion of end-consumer prices that a zero-carbon car is only about 2% more expensive for the buyer in the medium term.

The report points to nine major actions that CEOs should take today to address supply chain emissions, including:

  • Building a robust view of emissions with supplier-specific data and setting ambitious targets for emissions reductions
  • Redesigning products and reconsidering geographical sourcing strategies to optimize for CO2
  • Cofunding abatement measures and educating suppliers on how to implement low-carbon solutions
  • Engaging in industry ecosystems to share best practices and create a demand signal for green products
  • Aligning incentives internally to ensure that decision makers focus on lowering emissions

Quotes

Nigel Topping, the UNFCCC’s high-level climate action champion, said: “Supply-chain decarbonization will be a ‘game changer’ for the impact of corporate climate action. Addressing Scope 3 emissions is fundamental for companies to realize credible climate change commitments.”

Dominic Waughray, managing director, World Economic Forum, said: “This important report shows how companies have the opportunity to make a huge impact in the fight against climate change by also decarbonizing their supply chains. The interaction between governments and companies to seize this opportunity is an important one. We welcome more leaders to join and help build momentum on this important agenda.”

Patrick Herhold, a report coauthor and managing director and partner at BCG’s Centre for Climate Action, said: “The argument that costs are a major barrier to reducing emissions is increasingly flawed—around 40% of the emissions across the eight major supply chains we analyzed can be eliminated with measures that bring cost savings or are at costs of less than €10 per ton of CO2 equivalent. Increasing process efficiency and the use of recycled materials, as well as buying more renewable power, provides companies with major climate gains at very low costs.”

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Driving Growth Using ‘Practical Wisdom’: Japan’s Perspectives

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In response to the COVID-19 crisis, the World Economic Forum has taken an initiative to create a more sustainable and resilient world. Further to the regular dialogues held on managing the crisis and shaping a positive post-COVID world, the Regional Action Group for Japan (RAGJ), a community of leaders engaged with the World Economic Forum, published a report “Driving Growth Using ‘Practical Wisdom’: Japan’s Perspectives”

The report suggests that the country should create a well-structured, forward-thinking society based on sustainability, inclusivity and resiliency through four pillars: attitude, business culture, economy, and the global collaboration framework. The report also suggests that Japanese leaders can implement the concept by drawing on the country’s “practical wisdom,” or its long tradition of practicing stakeholder-based capitalism, sustainable business models, disaster resilience, and the championing of environmental values.

“There is an urgent need for global stakeholders to cooperate in simultaneously managing the direct consequences of the COVID-19 crisis. It is of great significance for the World Economic Forum that Japanese leaders came together to propose what it takes for the country, as well as for the international community, to improve the state of the world. Japan’s perspectives, laid out in the report, are one of the first responses to our call to present a vision of that guides us through the post-COVID future,” said Makiko Eda, Chief Representative Officer, World Economic Forum, Japan.

“The current crisis requires us to revisit the status quo of every aspect of society. At the same time, it presents us with a unique opportunity to accelerate necessary reforms to shape a better future,” said Nobuhiro Hemmi, Partner and Chief Strategist, Deloitte Japan, who supported the organization of the discussion of the RAGJ. “Capitalizing on this momentum, Japanese leaders are committed to making long-lasting impacts to society while fostering engagement with the public and communities around the world. I hope that the report serves as a catalyst in implementing ‘great resets’ that help shape the post-COVID future,” he added.

The report proposes that Japan draws on its “practical wisdom” in its effort to resetting four areas:

Attitudes: To address systemic challenges such as sustainability and climate change, leaders must abandon wishful thinking that such a task will be easy. Three approaches should help this shift: sharing a greater sense of urgency among officials, businesses, and the public; accelerating necessary reforms for a long-lasting impact on public trust; and addressing unresolved issues to usher in a new era for Japan.

Business Culture: Leaders should transform their own businesses’ behavior, moving the focus away from their own successes in favor of contributing to the common good. Three steps are proposed: growing truly purpose-driven businesses for long-term value generation; upgrading community and environmental solutions via digital leapfrogging; and promoting diversity and inclusion to revitalize the leadership.

Economy: Japanese leaders must transform the economy system, shifting the emphasis away from shareholders to stakeholders. Three measures should support the shift: redefining economic success; striking a shareholder-stakeholder balance to reframe economic focus; and shifting investor focus from short-term returns to long-term value creation.

Global collaboration framework: Japan must rebuild the bonds of global cooperation by growing out of its traditional role as a rule-follower and becoming a rule-shaper. This is made possible by three approaches: adjusting or adopting rules to create a new era of cooperation; renewing global trade systems; and serving as a great mediator for transnational cooperation.

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Energy News

IEA: take urgent action to cut methane emissions from oil and gas sector

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Methane emissions from the global oil and gas industry fell by an estimated 10% in 2020 as producers slashed output in response to the historic shock of the Covid-19 crisis, the International Energy Agency said today, warning that these emissions could rebound strongly without greater action by companies, policy makers and regulators.

Methane is a much more potent greenhouse gas than carbon dioxide (CO2) and makes a major contribution to global warming. According to the IEA’s 2021 update of its Methane Tracker, oil and gas operations worldwide emitted more than 70 million tonnes of methane into the atmosphere last year. This is broadly equivalent to the total energy-related CO2 emissions from the entire European Union.

The new IEA analysis indicates that a large part of the drop in methane emissions in 2020 occurred not because companies were taking more care to avoid methane leaks from their operations, but simply because they were producing less oil and gas. As such, there is clearly a risk that this downward trend will be reversed by an increase in production to fuel a rebound in global economic activity.

“The immediate task now for the oil and gas industry is to make sure that there is no resurgence in methane emissions, even as the world economy recovers, and that 2019 becomes their historical peak. There is no good reason to allow these harmful leaks to continue, and there is every reason for responsible operators to ensure that they are addressed,” said Dr Fatih Birol, the IEA Executive Director.

“Alongside ambitious efforts to decarbonise our economies, early action on methane emissions will be critical for avoiding the worst effects of climate change. There has never been a greater sense of urgency about this issue than there is today, said Dr Birol. “To help accelerate these efforts, the IEA is today releasing a ‘how-to’ guide that governments and regulators can use to bring down methane emissions from oil and gas operations.”

IEA analysis highlights that reducing methane emissions is very cost-effective for oil and gas companies. Unlike CO2, there is already a price for methane everywhere in the world – the price of natural gas. This means the costs of improving operations or making repairs to prevent leaks can often be paid for by the value of the additional gas that is brought to market.

“We believe that industry must act, visibly and quickly,” Dr Birol said. “But there is also a strong role for government policies; to incentivise early action by companies, push for transparency and improvements in performance, and support innovation in getting results.”

The new IEA report, Driving Down Methane Leaks from the Oil and Gas Industry: A Regulatory Roadmap and Toolkit, offers a step-by-step guide for anyone trying develop or to update regulation on methane. Its advice draws on analysis of how more than 50 countries, states or provinces – from the United States to Nigeria, from Iraq to China and Russia – have tackled methane emissions from a regulatory perspective.

“In this crucial year for climate action leading up to COP26 in Glasgow in November, this is the moment for governments to raise ambitions not only on CO2 but also on methane,” Dr Birol said. “One important avenue, especially for countries with large oil and gas sectors, will be to include commitments on methane in their new or updated pledges in advance of the COP meeting. This is also the moment for companies to put all their weight behind this effort.”

The case for action is not just environmental or reputational. There are increasing signs that consumers are starting to look carefully at the emissions profile of different sources of gas when making decisions on what to buy. A gas producer without a credible story on methane abatement is also one that is taking commercial risks.

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