R Ravimohan: Fight to the finish

If one were to take a mortal view of the earth, then it is expected to have a finite life. The same is true with the natural resources contained within the earth's surface, such as mineral ores, oil, and gas.

Given this finite life span of the natural resources, it is apparent that they will have a mid point to their life! A number of activities are pointing to the possibility that either we have reached that mid-point or are fast approaching it.

The Chinese oil behemoth has made an audacious bid for Unocal. They are also actively sealing their relationships in Latin America.

They have already sewn up Myanmar, North Vietnam, and Mongolia. The Unocal deal will give them resources in Bangladesh also.

Additionally, India is looking to develop the tri-national gas pipeline. The Middle East imbroglio has always been suspected to be based on its oil-richness.

The fact that all these conflicts have lately escalated supports the argument that the fight for resources has intensified.

Oil and gas prices have shot through the roof. All upstream activities, such as prospecting, exploring, activating wells and pipelines, are at peak levels.

As a matter of fact, one has to wait for 36 months to get the next available rig for oil exploration anywhere in the world! Shell has reported diminution in its reserves along with a few other oil majors.

Bolivian nationals are up in arms against its government for selling gas deals to multinationals.

This horror story is not restricted to oil. Take steel, for instance. Prices have gone up to historic levels. Its input materials have displayed similar trends.

Not only is coke's (a vital ingredient in steel making) price unaffordable, it is simply not available. Mittal Steel, the world's largest producer of steel, has announced an undisclosed cut in its steel production.

I am presuming it is because of the prohibitive costs of inputs. Countries like the US, China, and others in Europe, have been splitting hairs on duty protection for steel to offset the advantage that the countries with iron ore and coal deposits have in containing input costs.

The story is similar for aluminium, which is witnessing its longest bull run in history! All minerals, including mica, are currently facing buoyant prices.

Why has the problem suddenly cropped up? And when will it go away? If the development of the past three decades is reviewed, we will find that the 70s and 80s were spent in rapidly ramping up infrastructure and fuelling consumer spending.

Massive investments in core industries were made to meet the growing demand. New tiger economies from Asia and Latin America had to be fed, clothed, housed, transported, and otherwise catered for.

However, this lasted till the mid nineties, when it all blew up into what is, today, known as the East Asian crisis. This was not just limited to Asia, as it had wide spread global affects.

It brought down the shutters on new investments for almost a decade. The most affected was the core sector. Commodity prices tanked globally.

Explorations of new reserves were suspended and the conversion facilities of minerals into finished products went into a slimming mode. This has led to two problems.

One is the shortage that we are currently facing, which is sought to be addressed by accelerated capacity enhancements, leading to an acute supply-led price rise.

However, the larger, structural issue is that we are actually running out of reserves of natural resources.

The East Asian crisis masked the full impact of this structural weakness of the global economy. Preoccupied with survival, the world failed to notice the fact that the crisis had only suspended the unsustainable rise in global consumption.

Today, the global imbalance in the supply of material resources is rearing its head again. This is not a happy diagnosis, and it leads to further ugly consequences.

The first consequence of this diagnosis is that we are not likely to find a short-term answer and, therefore, the high commodity prices are likely to continue for some time to come.

Second, the fight to garner resources will intensify, leading to perhaps stiffer geo-political conflicts. The third result is a mixed bag.

While the high prices are bad for the consumers, it will provide great opportunities to the producers.

Therefore, what are the responses? The instant and the obvious response has already begun, as we dig furiously to find more minerals: sea beads, deserts, Mars, comets, whatever offers a surface is being dug! But this is both an expensive and time-consuming response.

The fact that deeper resources are now being pursued, especially under the current high-cost paradigm, means that the unearthed resources will be supplied at high prices to recover the high capitalised cost.

Therefore, this strategy will not be sustainable and will peter out shortly. The governments and industry need to wake up to the need for more fundamental responses.

The governments need to encourage energy- and material-saving behaviour. For instance, taxes related to energy consumption can be implemented, and will soon become the norm all over the energy-consuming world.

There can be tax incentives for energy-efficient devices and practices. Fiscal incentives can be provided for research and development for advanced material that can be less mineral resource-intense, like nano-technology, bio-materials and composites.

China is already running several programmes in this regard, with apparently good progress. Industry has been making strides in this area.

However, we are at a stage where considerable acceleration is needed for these efforts to translate into good of the community at large.

However, in the short term, the situation is likely to get worse before improving. As the surging Indian demand compounds the already heightened Chinese levels, the crunch is likely to come in advance of the new technological solutions.

Consuming countries could explore forming cartels amongst themselves, just like producing countries have done, to get as much relief they can against the stiff prices.

Consumers can form vigil groups, like in Bolivia, to ensure that policy makers and law enforcers are following sensible policies on natural resources.

ravimohan@crisil.com