All businesses need resources – both raw materials and energy. Reserves of both are under strain and world prices increasingly volatile. With the rapid economic growth in India, China and other Asian economies, demand for raw materials and energy is outstripping supply and countries around the world are beginning to position themselves to protect their strategic interests. This unpredictability in the external environment has severe implications for business and should be a key factor in any PEST analysis produced by students.
Resource shortages are affecting many vital markets which are likely to presage a sharp rise in business costs and therefore consumer prices. Recent news stories have concerned several major markets including grain, rare earth metals and oil.
Russia was expected to have been the world’s third largest wheat exporter in the new 2010/11 season with forecast sales of 17.5 million tons, larger than Argentina’s entire wheat crop. However, it recently announced a grain export ban after its harvest was ravaged by the worst drought in over a century. Last week it extended its grain export ban until late 2011 and ordered authorities to prevent speculators driving up food prices after the worst harvest in years. The Russian ban and grain export restrictions in Ukraine sent world prices soaring. This is likely to have significant effects on several staples on the breakfast table from bread to cereals.
More hidden, but also potentially more damaging, is China’s decision to cap production levels of rare earth metals. This move deepened international concerns that it is unfairly hoarding its reserves of rare earth metals and other key raw materials at a time of rising global demand. Developed countries, including the US, are almost totally reliant on China for rare earth metals after years of cheap Chinese exports in the 1980s and 1990s made Australian and American rare earth mines uneconomic. China now produces 95% of the world’s essential rare earth metals. 17 elements from the middle of the periodic table are used in magnets, lasers, computer monitors, fibre-optic cables, cell phones, ceramics, stainless steel and are also essential for the on-going development of green technologies, such as low-energy light bulbs, wind turbines and batteries for hybrid and electric cars.
The EU and Mexico have already taken legal action at the World Trade Organisation (WTO) against Chinese import restrictions on nine key raw materials including coke, bauxite, fluorspar and magnesium. Experts are warning of the potentially damaging consequences of a further confrontation if developed countries now follow up with a WTO legal action against China’s rare earth metal restrictions.
The state of oil production is beginning to cause alarm. Peak Oil is used to describe the global maximum in conventional crude oil production. Once this maximum (or peak) has been reached global oil production will generally decline forever afterwards. It is something that will only become apparent some time after the event has happened due to fluctuations in oil production from year to year. Oil production is on a plateau with a peak occurring sometime in 2006 and global oil production from mature oil fields declining at a rate of between 6-7% per year. Another 5 million barrels of new oil per day must come on line per year to meet global demand. This is just about happening at the moment but is getting harder everyday at oil becomes more difficult, expensive and energy intensive to extract. The Peak Oil Crisis website has real time clocks of global oil consumption and stories and graphics on the impending crisis.
There is general insecurity about oil supplies in Asia which only holds about 1% of the world’s proven reserves of oil and apocalyptic predictions about a collapse in oil production by 2015. Oil prices are predicted to rise abruptly and Asian countries such as Japan, South Korea and India buying and storing crude oil in unprecedented quantities. China is also planning to increase its reserves to 90 days consumption by 2020.
Singapore preparing for the looming oil crunch is racing to complete a series of vast man-made caverns – the Jurong Rock Caverns (JRC) – which will include an oil storage complex to be built at subterranean depths beneath the seabed of Banyan Basin. The $594 million ‘design and build’ contract was awarded to Hyundai a year and a half after the tender was first announced in late 2007. The first two Jurong Rock Caverns providing 480,000 cubic metres (m³) of oil storage will be constructed by 2013. Three more caves are planned which would provide store enough oil to last Singapore a month
It would be a useful exercise to conduct an opportunities and threats analysis with your students. They may discuss opportunities like:
- Green energies
- Electric cars
- Low energy consumption technologies
- Social change and environmental awareness
However, the control over rare earth metals by China, makes some of these opportunities more restricted. Indeed, the threats analysis is likely to be more compelling.
Possible IB-style questions:
- Define the terms:
- Raw materials
- Economics growth.
- Explain the role of the World Trade Organisation
- Examine the like effects of shortages of resources on business activities
- To what extent can a business maintain its profitability in times of rising raw material and energy costs?
Tags: external environment, oil market, PEST analysis, raw materials, Resources
