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Evan Davis on... the cost of raw materials

Updated Thursday, 21st October 2010

Is it worth investing in high-priced raw materials? Evan Davis has an answer...

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Evan Davis

Over the last century or two, we've tended to judge companies by what they produce, by what comes out of them, the quality of their product, the innovation embodied within it.  Here’s a prediction: over the next couple of centuries we’ll judge companies far more by the way they use the stuff that goes into them, the raw materials.  The logic of this is absolutely clear.  The world is becoming very good at producing things and many more people in the world are becoming good at producing things, hundreds of millions of extra people are producing things in emerging markets like China and India.

So we can produce a lot more and a lot better, but we can't manufacture the raw materials in the way that we can the things that come out of the factories.  And so it’s the raw materials that’ll be scarce, and the competitive advantage of companies will be in innovating more effective ways of using those raw materials, in innovating processes that don’t need as much raw material or resource for any given amount of output, that’s where the effort will go.

Now how is the world going to make this transition?  What is it that is going to spur people to stop thinking so much about the output and start thinking more about how to use the inputs?  Well here I can tell you what the answer is: it’s going to be higher prices, or more exactly, an expectation of higher prices.  Once companies start believing the prices of those raw materials are going to go through the roof, they’ll then start focusing their minds on how to use those raw materials more effectively.  There’s a bit of economics that underpins all of this.  If you think raw material prices are going to be going up at 10 or 20% a year, it’s worth a company borrowing money at 5 or 10% a year to invest in new technology or new kit to make them use, allow them to use, raw materials more efficiently.  It all comes down to those higher prices.

Now generally we tend to think scarcer raw materials, higher prices of oil, we tend to think of that as terribly bad news, scares us to bits, makes us all worry about going down to the petrol station each week.  But in truth what higher prices are doing, and higher prices will do increasingly, is signal to the world that we need to think harder about how we use resources like oil, petrol and everything else that comes out of the ground.  Higher prices, far from being the enemy of our economy, are really the spur to improvement of it. 

That’s my view; you can join the debate with the Open University.

(2’49”)

 

 

 

 

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