A New Era of Volatility

Wherever you look, the world seems to be getting more volatile, more uncertain and more risky. And what’s more, none of these volatilities can be viewed in isolation.

Commodities 2

Commodity Prices

From energy products to agricultural products, from industrial metals to precious metals, the commodities which drive the world’s economies have been trading at increasingly volatile prices. 

For example, a report published earlier this year investigated fluctuations in the spot price from June 1996 to June 2011 for 25 different commodities. Taking short term fluctuations into account, the overall trend has been towards much more volatile commodity markets.

Grain prices have seen great fluctuations in recent years, partly due to the spate of droughts in 2012 that devastated several major crops, for example corn in the US and wheat in Russia, Ukraine and Australia. The demand for biofuels has also contributed to the problem, partly because their price is linked to oil prices.

Subject to geopolitical instability, oil prices have always been inherently unpredictable. However, 2012 was a particularly poignant reminder this, with the Arab Spring and the EU’s embargo on Iranian oil imports increasing the price per barrel by around $18.

There are a host of other influences too, from Saudi Arabia’s high domestic spending – which has increased oil prices by 240% in the space of a few years – to the decline in global economic activity. As a result, energy experts have strongly cautioned those investors exposed to the energy sector in 2013.

While crude prices have tripled in the last decade, gas prices fell from $12 per million BTU in 2008 to $2 in early 2012.  This is a result of the shale gas revolution in the US, an example of a disruptive event that no energy analysts had predicted.

Equally significant and unexpected has been Japan’s effective pull-out from nuclear following Fukushima, which has led to a surge in Japan’s gas demand. Meanwhile, leading economists have warned of the immense risk for the UK from its continued exposure to volatile gas prices.        

Ore

Rare Earths, a vital component for a range of products such as hybrid cars, wind turbines and LED lighting, will be increasingly important, especially for a low carbon economy. Yet with 95% of global supply coming from China and export quotas now in place, rare earth markets are set to remain tense.

For example, Lanthanum oxide – used in ceramics and fuel catalysts – rose from a price of just $8.71/kg in 2008 to an average $117/kg in the third quarter of 2011. By January 2013 it had fallen to $11/kg. Cerium oxide went from $4.56/kg in 2008 to $118/kg in 2011, but is now back at $12.

Weather

From snow drifts in Japan to droughts in the US, extreme weather incidents are on the rise. It’s too early to categorically state that these are caused by man-induced climate change, but the growing evidence supports this assertion.

Conflict

The most frightening consequence of these various volatilities is the increasing likelihood that they will result in human conflict. The dispute in the Middle East over water aquifers is well documented, but similar trouble exists in many other regions too.

For example, the notoriously complicated annual division of the Rio Grande’s water between Mexico and the US became especially fraught in 2012 following a particularly severe drought. In South Africa a future conflict may well be internal, as more and more water is diverted from those in poverty to fuel water-hungry coal power stations.

The UN predicts that 30 nations will be water scarce in 2025 and in 2012 the UK’s Energy Secretary warned how “climate instability drives political instability”.

Conclusion

In sum, it’s clear we have entered a new era of volatility with unprecedented impact on business, policy and society. Thinking forward and using data to better understand trends, risks and opportunities will be critical for successful adaptation and competitive advantage.

Best to get started because by the looks of world events… it’s not going to calm down soon.

 

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