Textile relevant commodities and future market risks

Textile relevant commodities and future market risks

McKinsey Global Institute (MGI) has just released a new study, titled “Resource Revolution – Tracking global commodity markets” and base upon the findings in view to cotton, TextileFuture is bringing to you the major new facts

According to the study, McKinsey Global Institutes remarks that prices of different resources have been increasingly closely correlated over the past three decades. While rapid growth in demand for resources from China has been an important driver of these increased links, two additional factors are also important. First, resources represent a substantial proportion of the input costs of other resources, and TextileFuture adds, also of cotton, wool, sisal and textiles. For instance, rising energy coasts in fertilizers drive higher production costs in agriculture. Second, technology advances are enabling more substitutions between resources in final demand, e.g. bio-fuels link agriculture and energy markets. As a result, shocks in one part of the resource system today can spread rapidly to other parts of the system.

Another finding is that technology could transform access both resources and its productivity. For example 3D and 4 D seismic technology could significantly improve energy exploration, while organic chemistry and genetic engineering could foster the next green revolution.

In the years ahead, resource markets will be shaped by the race between emerging market demand and the resulting need to increase supply from places where geology is more challenging in the energy sector, and the twin forces of supply side innovation and resource productivity.

In the future, strong demand from emerging markets, more challenging sources of supply, technological improvements, and the incorporation of environmental costs will all shape the evolution of prices, no matter what commodity is involved.

Further influencing factors

On the other hand, the volatility of resource prices has also been considerable higher since the turn of the century. While short term volatility is influenced by many factors, such as droughts, floods, labour strikes, and restrictions on exports, there also appears to be increasing evidence of a more structural supply issue that is driving longer term volatility of all commodities.

Climate and eco-system risks become evident by the fact that productivity lost, due to land degradation and climate change, could require an additional 30 million to 75 million ha by 2030, if significant increases to crop efficiency on remaining land cannot be achieved. Serious land degradation affects more than 20 % of the world’s arable land!

There are many causes of such degradation, including the pollution of land and water resources, soil nutrient mining, and soil salinisation. Soil salinisation highlights the link between resources. The over-extraction of groundwater is leading to a lowering of the water table. In coastal areas, this can allow the intrusion of marine water, increasing the salinity of the water table. The severity of the degradation varies, and with it the extent of yield loss. MGI accounts for land degradation by calculating the amount of new cropland needed to compensate for an overall loss of productivity and the estimation is earmarked with 30 million ha.

Different studies offer a wide range of estimates for the impact of climate change on agricultural yields, from a loss of 27 percent by 2050 to an increase of 22 percent by that time. One recent study estimated that global temperature rises are already having a significant impact on cereals yields. Different assumptions on carbon dioxide fertilisation are a major source of disagreement in these estimates. In view of the wide range of estimates, MGI makes a conservative, median assumption of a zero to two percent negative impact on yields by 2030. This could result in additional demand for cropland of as much as 45 million ha.

The role of supply and the pricing effects

Supply appears to be progressively less able to adjust rapidly to changes in demand. Available arable land is not connected to markets through infrastructure. Not to speak of areas with high political risks. Such factors not only increase the risk of disruptions to supply, but also make supply even more inelastic. As supply becomes increasingly unresponsive to demand, even small changes in demand can result in significant changes in price.

More details of the price fluctuations, also of cotton can be had from Table 1

Table-1-MGI-Resources-survey_Full-report_Sep-2013-35

Non food agricultural commodity nominal prices – including timber, cotton and tobacco – have risen by between 30 and 70 percent since 2000. Rubber prices have increased by more than 350 percent, because supply has been constrained at a time when demand from emerging economies for vehicle tyres has been surging. In the future, agricultural markets will be shaped by demand from large emerging countries such as China, climate and ecosystem risks, urban expansion into arable land, bio-fuels demand, and the potential for further productivity improvements.

The development of commodity prices in general (1900 – 2010) can be had from Table 2

Table-2MGI-Resources-survey_Full-report_Sep-2013-14

 

 

The volatility of non food agricultural raw materials, including cotton and wool as well as sisal can be had from Table 3

Table-3-MGI-Resources-survey_Full-report_Sep-2013-42

 

A newly from MGI developed Commodity Index

MGI has developed an index of 43 key commodities, broken into four sub-groups: energy, metals, food, and non food agricultural raw materials. Each sub-group has its weight based on their share of global export values. An average of the four sub-indexes is taken to crate the composite MGI Commodity Index. The four sub-indexes are not weight by their share of export values, given energy’s disproportionate share of global trade. As shown in Table 3 above the non food agricultural raw materials include also cotton, wool and sisal and all of that in a quarterly price data, in order to examine the evolution of commodity prices at more granular level.

Conclusions

We at TextileFuture are convinced that the study offers quite a few elements in the sectors of our mutual interest that were not pictured before in such a manner. The findings reveal some aspects usually not touched by direct reports from the cotton or wool sector. The most interesting fact is the interconnection of commodities, not only in view to pricing and fluctuation of prices, but also in view to risk assessment. We feel that the report offers new aspects of these sectors, because the authors employ a different angle to look at it.

www.mckinsey.com/mgi


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