The World Economic Forum published its sixth annual Global Risks report this week, highlighting a range of interconnected risks such as macroeconomic imbalances, the illegal economy, and growing resource shortages. Once again, the report touched on a number of risks that could pose threats to global supply chains for manufacturers, notably significant rises and volatility in commodity and material prices.
The report pointed to the main “clusters” of risk, including sovereign debt and fiscal crises among governments; the growth of failed, fragile states and increasing levels of illicit trade and organised crime; and increases shortages for food, water and energy. “The world is more vulnerable to future shocks, as the risks are more interconnected than ever before thanks to globalisation,” said Robert Greenhill, MD and chief business officer, World Economic Forum, speaking at a London press conference to discuss the report. “The world can not absorb the costs of another major crisis.”
While most of the risks discussed were at a macro level that would have wide reaching effects for any industry, several were of specific concern to the supply chain. John Drzik, CEO of the Oliver Wyman Group, said at the press conference that rises in commodity and material prices suggest a “new normal” of “highly volatile” prices. In 2010, for example, oil rose 15% for the year, to a current level of around $90 a barrel, while metals such as gold and silver rose 30% and 83%, respectively; commodities such as coffee and cotton rose 77% and 84%, respectively.
The report highlights both “soft” temporary limits driven by inadequate past investment in production – a likely outcome among the supply base in the current automotive industry, for example, following the harsh downturn – as well as “hard”, natural limits driven by a resource’s availability.
The report notes that sustained increases in commodity prices have a negative impact on growth. Drzik added such price rises tend to lead to reactionary and protectionist responses from governments, such as export controls or higher import duties.
“We expect to see more businesses facing earnings volatility because of material costs,” he said. “As CEOs notice these impacts more, the question is what their reaction will be. Will they change suppliers or contracts, divest of riskier businesses or invest more in risk assessment?”
Drzik also highlighted the increase in “supply disruptions,” caused notably by extreme weather conditions, which lead to further price volatility. In the decade 2000-2009, 49 such disruptions were recorded, compared to 35 in 1990-1999, and 13 in the decade before. The current decade appears to be keeping on a growing curve in this regard. Wyman said that the current floods in Australia, for example, had led to 30% in coal from the region, which is currently impacting energy prices across Asia.
The report (available in full here: www.weforum.org/issues/global-risks) was written in conjunction with Marsh & McLennan, Swiss Reinsurance, Zurich Financial Services, Wharton Center for Risk Management and the University of Pennsylvania. The report has been launched ahead of World Economic Forum Annual Meeting in Davos-Kosters, Switzerland, where the Forum will also be launching a new platform for understanding and tackling such risks, called the Risk Response Network.
