Recent macroeconomic developments and underlying long-term trends have heightened the urgency of scaling up circular economy principles. From the 1850s to 2000, declining real resource prices, especially for fossil fuels, were the engine of economic growth in advanced economies. Reusing materials was not a priority: it was easier to obtain more primary resources, and cheap to dispose of them when they reached the end of their use. The greatest economic efficiency gains of the Industrial Revolution in fact came from using more resources (particularly energy) to reduce labour costs. 

How this picture has changed

The economic efficiency gains just described have changed for two key reasons: sustained rises in the price of resources and unparalleled resource price volatility. 

Stark and lasting resource price increases. In a trend separate from the repeated financial and economic crises over the last decade and a half, commodity prices overall increased by nearly 150% from 2002 to 2010, erasing the entire last century’s worth of real price declines. Almost all companies interviewed in this scoping study confirmed steep materials cost increases in recent years. Costs of key materials and components for making a power drill at B&Q/Kingfisher, for example, increased at a weighted average of 59% from 2010 to 2011 [Figure 8]. To decouple themselves from resource scarcity and price increases, B&Q/Kingfisher, Renault and Ricoh have moved to take control of their supplies and to protect their businesses from sudden shocks. Renault has a joint venture with a steel recycler and waste management company to tap into secondary material streams.²⁴ Ricoh has established a tight materials loop, the Comet CircleTM, aimed at reducing their virgin material intakes.²⁵

Figure 8: The price went up for most components of the 14.4V drill drive between 2010 and 2011

1 Prices are indexed to 1 for 2010 
2 Components shown represent 95% of the material costs
Source: B&Q/Kingfisher 14.4V power drill component price data

Unprecedented resource price volatility. The last decade has also seen higher price volatility for metals, food and non-food agricultural output than in any single decade in the 20th century.²⁶ Higher resource price volatility can dampen economic growth by increasing uncertainty, discouraging businesses from investing and increasing the cost of hedging against resource-related risks. 

The drivers of these changes

A number of underlying observations suggest that both these effects—spiralling prices and unparalleled volatility—are likely to continue in the future, making it all the more important that substantial value creation opportunities are achieved by adopting circular economy business models. This is because the drivers of these changes—demand- and supply-side trends—are bound to continue.

Demand-side trends. Around 3 billion people are expected to join the ranks of the middle class by 2025.²⁷ This represents the largest and fastest rise in disposable incomes ever and will occur mainly in the developing world. In addition, there are the relatively more affluent consumers in OECD economies: their resource footprint is a multiple of that generated by these new middle classes. The World Bank has described the coming upsurge in consumer demand as a “potential time bomb”²⁸  [Figure 9].

Figure 9: A potential consumption time bomb will lead to inevitable resource constraints

Source: World Bank, Ellen MacArthur Foundation circular economy team

Supply-side trends. Professor James Clark from the University of York in the UK has analysed current recycling levels across a number of elements of the periodic table and suggests that the pressure on finite resources is likely to remain high as we are unable to keep up the high quality of the existing stock of materials in use due to recycling leakage [Figure 10]. According to Clark, elements that may be depleted within five to fifty years include gold, silver, indium, iridium, tungsten and many others that are vital for industry.²⁹

Figure 10: Supplies of key resources are limited, while recycling rates for many remain low

Many resources are forcasted to run out within a relatively short period, …

 

… while only few materials are recycled at scale

Source: Professor James Clark, Green Chemistry, The University of York

 

At the same time, the average resource is forecast to face steeper production cost soon— despite recent improvements in unconventional fossil fuels. This effect is already visible with the costs of exploration and mining new resources have substantially increased [Figure 11]. Many future mining reserves are located in areas with high political risk, too, and potential disruption in continuity of supply could lead to further volatility in resource prices. As the investing world began buying commodities to balance the cycles of purely financial assets in their portfolios, the correlations increased between commodity prices and the price of oil as a convenient benchmark or index. This holds true not just for metals and mining products, but also for food categories such as maize, wheat and rice as well as beef. These links reflect increasing global integration and raise the risk that shortages and price changes in one resource could rapidly spread to others. Furthermore, the impact of a sharp rise in demand for resources on the environment could restrict supply. Greater soil erosion, depletion of fresh water reserves, deforestation and other environmental concerns are tightening constraints on the availability of resources, and are likely to trigger future price increases.³⁰

Figure 11: Replenishing reserves is increasingly difficult and expensive

1 All metal and mining materials; latest data available to 2010.
SOURCE: BHP Billiton; US Geological Survey; MEG Minerals 2011

While resource pressures will directly affect the economics of many materials-based product and service businesses, there are a host of macroeconomic risks that could potentially create additional volatility. In the 2012 edition of the World Economic Forum’s Global Risks report, many of the above-mentioned risks are considered to be of highest urgency (the water supply crisis, food shortage crisis, rising emissions, extreme volatility in energy and agricultural prices), as each was rated among the top five of fifty global risk in terms of likelihood or impact or in the case of water crisis, both [Figure 12].³¹

Figure 12: The evolving risk landscape—resources-related risks are among the most urgent

 

 

SOURCE: Global Risks 2012 , World Economic Forum

Against this backdrop, the rapid scale-up of circular economy principles could reduce pressure on resources significantly and avert adverse effects on the economy overall.