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Can Digital Decrease Resource Volatility?

Feature Article | January 2, 2017 by Kai Goerlich

We are living in the Anthropocene era, where human activities have a significant impact on our global ecosystems. Every year, the nonprofit Global Footprint Network, which promotes the sustainable use of natural resources, calculates Earth Overshoot Day—the day when we begin to consume more resources than our earth can regenerate.

This year, that date was August 8. Every year, Overshoot Day comes earlier.

Increasing global demand for raw materials has made the prices and supply of the world’s most highly traded commodities increasingly volatile. According to our analysis of OECD data, the prices of these commodities are now subject to swings of more than 30% annually, compared to less than 20% before the mid-1980s.
Just as digital technologies can help to reduce carbon emissions, they can also help companies manage the cost and inventory of raw materials in their supply chain—and balance unpredictability—by reducing waste, improving efficiency, and promoting reuse.

A July 2015 study by the Ellen MacArthur Foundation concludes that “a wave of disruptive technologies and business models” could also help to increase GDP in Europe up to seven percentage points by 2030 by reducing costs and improving resource productivity.

We estimate the world economy must generate US$33 trillion in savings through more productive use of food, water, energy, metals, and generated waste to keep up with resource demand during this period. Digital technologies can create an estimated $1.9 trillion in opportunities to use raw materials and water more effectively in agriculture and food production, forest industries, and the mining, processing, and application of common metals.

Decades of Increasing Resource Volatility

Prices of non-energy commodities with the highest-trading volume, including widely used food crops, forest products, and metals, swing more wildly today than in the past.


Food Crops

Maize (corn), sorghum, sugar, chicken, tea, beef, wheat, soybeans
Digital opportunity: $600 billion

Increasing food consumption, shifting trade patterns, and constraints on production make these top-traded food products volatile commodities. Digital technologies, including sensors and real-time analytics, can be used to optimize the planting, growing, harvesting, and transporting of food commodities.

sap_q416_digital_double_charted_images1Both supply and demand for food—including animal feed—are rising steadily as the global population grows. Global wheat production, for example, is projected to hit a record 986 million metric tons in 2017, according to industry group U.S. Wheat Associates, slightly exceeding forecasts for consumption. Corn and soybeans are expected to follow a similar trajectory in the short term.

However, shifts in global tastes (for example, as urban populations grow and consumer incomes rise in developing countries) signal a long-term trend toward consuming food faster than we can produce it, according to the World Resources Institute. We risk running out. Additionally, because of shifting trade patterns, the distribution of food stocks around the world varies greatly. Wheat exports from the European Union are currently falling, while those of the United States and Australia are rising. Industry forecasts project that China will hold 44% of the world’s wheat stocks at the end of 2016. Finally, water, along with space for raising food without deforesting the landscape (a key to keeping a viable habitat on earth) is finite. Researchers note that humans now use three-quarters of the planet’s ice-free surface.

Digital technologies can reduce volatility by making farming more productive, leading to a more a predictable supply of food crops. For example, Seven Springs Farm in Cadiz, Kentucky, uses cloud-based software systems hosted by tractor manufacturer John Deere to improve its corn crop yield, which is grown on 36,000 acres. Drones capture aerial imagery to enhance field maps, which automate and guide decisions about when to plant seeds and apply chemicals. The farm also uses an app to calibrate fertilizer purchases according to weather predictions, reducing runoff. A new John Deere self-driving tractor gathers sensor data about field conditions, too.


Forest Products

Sawn wood, rubber, palm oil
Digital opportunity: $100 billion

Current economic trends, from housing starts to oil prices, impact demand for forest products. But long growth time for trees limits supply, as do environmental factors that are difficult or impossible to control, such as climate and disease. Digital technologies can help companies use these resources more efficiently to reduce waste, redirect unused supplies, and improve resiliency in the supply chain.

sap_q416_digital_double_charted_images2When crude oil prices rose during the conflict between Ukraine and Russia in 2014, prices for palm oil—already high because of dry weather in Indonesia and Malaysia—spiked. A staple ingredient in food and cosmetics, palm oil is also used in biodiesel, and the world was worried about oil supplies. Rubber supplies and prices also fluctuate with climate conditions in the tropics, where rubber trees grow, while sawn wood (including lumber and timber) is impacted by housing starts and other broad economic trends in major economies like the United States.

Unilever, a major purchaser of palm oil, has invested in digital technologies to save money, reduce supply chain complexity, and become a sustainability leader in its use of agricultural raw materials. Writing in the company’s 2015 Sustainable Living Plan, Unilever CEO Paul Polman connected “continued climate-related challenges, uncertainty in markets and fluctuating commodity prices” with the need to secure sustainable sources. Gartner has lauded Unilever as a supply chain leader, in part for its zero-waste efforts and its investments in its order-to-cash processes.

Michelin Group, the world’s largest buyer of natural rubber, is working on tires that weigh less and don’t need air in order to reduce rubber consumption and boost its bottom line. It has also launched a tire-as-a-service business for fleet managers. Sensors embedded in tires monitor wear and performance, enabling predictive maintenance, reducing downtime for fleet operators, and maximizing tire mileage.


Metals

Platinum, lead, iron ore, tin, gold, nickel, copper, aluminum
Digital opportunity: $1.2 trillion

Prices of metal fluctuate with the global economy, and China is a big influence on price and supply. Digital technologies can help companies improve efficiency throughout their value chain.

sap_q416_digital_double_charted_images3In August, Moody’s Investor Service reported that prices for base metals, including aluminum, copper, lead, nickel, and tin, would stabilize after having been in decline for 18 months. China’s slowing economy and continued sluggishness in Europe dragged down global prices, even as industries in the United States showed strong demand for these metals. But Moody’s predicted that these “challenging conditions” would last another two years at least.

Iron ore, meanwhile, experienced a boom-bust-rebound cycle in the middle two quarters of 2016, driven by events, such as floods, and expectations that Chinese iron mills would receive expanded credit terms to push production, Bloomberg News reported.

Mining companies have turned to cost-cutting innovations to help them weather lower prices for their commodities. Energy is critical for harvesting these commodities. Rio Tinto, the British-Australian giant, uses analytics to reduce its energy usage and manage renewable hydro, wind, and solar power sources. The low-energy aluminum smelting systems that Rio Tinto sells to other producers rely on enterprise resource planning and manufacturing execution systems to reduce the energy and other natural resources needed for aluminum production.

In addition, mining operators can use smart devices to collect machine data about equipment and materials to bring efficiencies to the extraction process, notes Rockwell Automation, a company that services the mining industry.


Kai Goerlich is the Idea Director of Thought Leadership at SAP. Follow Kai on Twitter @KaiGoe.

This story originally appeared on Digitalist Magazine.

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