At a time when the world is grappling with rising food and energy prices and climate change, Living in a Material World provides an insight into some of the contributing factors behind these challenges. The emergence of new consumers in China, India, Russia and the Middle East has added formidable competition to the natural resources that have been taken for granted in the developed world.


Everything we consume involves the use of metals, fossil fuels or agriculture. Our high tech 'lifestyles' depend on the secure supply of these raw materials which we take from planet earth and use to make our lives more comfortable, more productive or more manageable. The effect of this increasing global demand for commodities has pushed up prices of materials from oil and copper to corn and wheat; forcing consumers to pay more for the many 'necessities' of life, from a loaf of bread to electricity bills.

Since the commodity boom has unfolded, commodities have gone from the back page of the newspaper to the front; with more and more headlines about record food and oil prices, dire climate change warnings, energy security and China's demand for more raw materials.

This era of high oil and food prices is no passing phase: The supply of many key natural resources is stretched to the limit. But what is the real cost?


Living in a Material World makes the link between raw materials and the consumer, and shows how they are relevant to everybody, everyday - now more so than at any time since the last oil shock nearly three decades ago. A unique insight into this 'once in a generation' boom, the book shows how the increasing value of commodities is impacting on consumers and investors, in ways we are only just beginning to understand.


"It was a great pleasure to read this book which provides an essential background to understanding commodities for anybody interested in understanding them more closely. It is so rare to see all the essential elements brought together in one book."

Chris Brodie, Krom River Partners LLP


"Kevin Morrison set out to write a book about the daily relevance that raw materials have for the ordinary consumer. He has achieved his objective par excellence. The subject matter has been comprehensively researched and well documented - yet the writer has avoided using complicated technical language. The style of the book is more in tune with a novel and the main topics are treated with a special sense of humour. I would readily recommend this work to anyone interested in how global energy issues have a direct affect on us all."

Mehdi Varzi, President, Varzi Energy, London

Living in a Material World

The Commodity Connection

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By Kevin Morrison

John Wiley & Sons

Copyright © 2008 Kevin Morrison
All right reserved.
ISBN: 978-0-470-51891-5

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Chapter One

Energy

'Time is the only capital that any human being has, and the one thing that he can't afford to lose.' Thomas Edison

The Return of King Coal Adds a Warm Glow

A visit to the Forbidden City in the centre of Beijing provides a fascinating insight into China's rich historic past. For almost five centuries the imperial palace was home to 24 emperors, and the city - a vast array of ancient preserved wooden buildings - was the political centre of the Chinese government throughout the Ming and the Qing dynasties. But it is outside the Gate of Heavenly Peace, looking across the stretch of tarmac separating the old imperial palace from Tiananmen Square under the watchful gaze of Mao, where you get a real picture of the China of today, and of tomorrow. The 12-lane road is clogged with cars, four-wheel drives, trucks and buses. One or two cyclists are glimpsed in the traffic, but pedal power is a fringe mode of transport on the first proper ring road in Beijing, millions of Chinese having ditched their bicycles in favour of cars.

The Forbidden City was once China's most important symbol of power. Today the Volkswagen Santana and Jetta, the Geely or Xiali mark individual power and wealth of the Chinese consumer. The icon of Mao just a few hundred metres away is a stark contrast to the symbols of capitalism on the road ahead, marking the dualism of a China still strongly connected to its past while intent on progression. The main goal of the Chinese Communist leadership today has moved beyond equality between its citizens to economic equality between Chinese people and those in the developed world. And, in the process, for China to regain its mantle as the world's most powerful economy, a position it last held during the fifteenth century (Kynge, 2006). China is now pursuing the same trappings of the modern lifestyle long enjoyed in the US, Europe and Japan. It is a trend that you'd think would be applauded by proponents of the US car industry, where the car is viewed as a symbol of freedom and wealth. But the growing demand for motor vehicles among the increasingly affluent Chinese is creating a huge dilemma for the global energy sector.

In 2007 China overtook Japan as the world's second largest car market. It is predicted to become the biggest in the next decade, overtaking the United States by 2015. It's a dramatic turnaround for China, especially when you consider that in 1990 it had in total around a quarter of the number of cars on British roads. In the space of 25 years it will have become the largest car market in the world (International Energy Agency, 2007; Department of Transport, 2007). The fact that more Chinese citizens are able to afford cars is thanks to China's nearly unbroken 30-year economic expansion. China has become the 'workshop for the world', as factory owners in the West relocate their manufacturing facilities to China to take advantage of the lower wages and industrious work ethic of the Chinese. But the 37 million cars and 60 million motorcyclists on China's roads need fuel, and, increasingly, imported fuel: China was last self-reliant for its oil in the mid-1990s. Its thirst for oil is growing fast, which has prompted the Chinese government and many of its state-owned companies to scour the world for other sources. What is striking is that they're going to places the US dares not, such as Sudan and Iran; completely changing the world geopolitical landscape. The number of cars, trucks, SUVs and vans on Chinese roads is expected to increase to a staggering 270 million by 2030 according to the International Energy Agency, so barring a major technological breakthrough in automobile engines or alternative fuel supply (neither of which is expected to be commercially available within the next ten years) China will need even more fuel. China is expected to become as 'addicted' to oil as the US within the next 20 years.

The transferral of much of the world's manufacturing industry to China has also stimulated one of the largest movements of humans in history. Its cities have doubled in size in the past 20 years and hundreds of millions of Chinese citizens have moved from the countryside to apartments equipped with electricity - a stark contrast to their rural dwellings, which were largely without power. About 200 of China's cities have a population of more than one million, and about 40 % of its total population of 1.3 billion live in cities, with another 130 million expected to move from rural to urban areas over the next ten years (International Energy Agency, 2007).

Power for the People

Electricity in the vast majority of Chinese homes is generated by coal-fired power stations. Until 2007 China was self-sufficient in coal (as home to the largest coal reserves in the world, it should be!). But China has been building more power stations to provide electricity for expanding demand; its power network expansion in 2006 alone was bigger than the electricity generation of the entire UK. It would be inconceivable to think of Britain, or indeed any other country, installing as much electricity generation capacity in one year. It has plans on the drawing board to expand its power network even further, which would equate to the construction of new infrastructure as large as the entire power grid built across Europe since the Second World War - that's all the homes, buildings, restaurants, factories and sports venues stretching from the Baltic countries to the west of Ireland, and from the tip of Norway to the Greek Islands in the Mediterranean.

This planned expansion will light up millions of new homes, for even greater numbers of consumers (many of whom will become car owners for the first time). The country's demand for energy is so great that it is projected to overtake the United States as the world's largest consumer of energy, coal, oil and nuclear power at the end of the decade. Considering that as recently as 2005, the US consumed over a third more energy than China, it represents growth of astronomical proportions. The scale and the speed of the increase meant that in the three years prior to 2005, China's increase in energy demand was the equivalent of all of Japan's annual energy needs, and at this pace China's need for more energy supplies has become critical, pushing oil prices above $100 a barrel in 2008.

The increase in electricity consumption is primarily due to more homes connecting to the power network, which in turn stimulates the demand for consumer electronic goods. Rapid income growth and declining prices mean that almost every home in Chinese cities now has at least one television, a washing machine and refrigerator. Air-conditioning systems are now found in four of every five homes. These appliances account for more than a fifth of total residential energy (International Energy Agency, 2007). Electrical gadgets may well have improved the quality of daily life for Chinese consumers, but these appliances in fact suck much more electrical power than their equivalents in developed countries and emit much more carbon pollution. This is one of the reasons why China's energy demand has risen so rapidly.

The Comeback King

Coal's re-emergence as a major fuel source is a significant factor in the rise of C[O.sub.2] emissions. Coal overtook wood during the 1800s as the world's major fuel source and fuelled the Industrial Revolution in Britain and the United States of America. It was during this era that the phrase 'King Coal' was coined by 19th century economist William Stanley Jevons who said: '(Coal) stands not beside but entirely above all other commodities.' King coal held onto its crown in the US until just after the Second World War when oil from the Middle East and Venezuela changed things, by which stage the US was the largest coal consumer in the world. Usage declined further in the 1930s when coal was banned from US homes, and a decade later in trains. By the 1950s and 1960s, nuclear and gas were set to replace coal altogether - that is until the Three Mile accident halted the expansion of nuclear power. Gas was ready to step in, and between 1975 and 2002 every power station built in America was gas-fired (Goodell, 2006). But gas, too, had its shortcomings.

China's industrial revolution has followed the pattern of Britain's industrialization, which started about 250 years ago, in that it is fuelled by coal and has stimulated the renaissance in global demand for the black rock. In China's case coal is burned in power stations, not the home or factory; it is out of sight and out of mind for most consumers, who rarely make the connection between switching on a light or watching the television and the emission of greenhouse gases. An inconvenient truth much less acknowledged is the role of the always-on internet-connected world in boosting electricity demand from coal-fired stations.

Coal's re-emergence confounds predictions in the second half of the 20th century that coal had a dim future. Coal was used to heat the Victorian-built home in London that I lived in as a child. It wasn't very effective; while it heated the room where the fire was located, the rest of the house was freezing. It was my job to fill a bucket with coal from the cellar (which today is probably used for the wine collection of an Islington family). Our coal was delivered each autumn by the coalman, who would empty sacks of coal down the coalhole (a feature of Victorian houses) in front of the doorstep. But the coalman's days were numbered when hundreds of thousands of UK house- holds switched to natural gas in the 1960s and 1970s, piped from the new gas fields in the North Sea straight to people's houses. The gas central heating system that replaced our antiquated coal fires heated the whole house with the flick of a switch. It was great - I no longer needed to sleep under five blankets or to huddle around the small electric fire in the lounge. Nor was it necessary to do those cold trips down to the cellar each night. That was it - coal was history, and gas was the future.

Coal's perceived decline in the 1980s and 1990s and the popularity of gas was due to the efficiency of gas-fired generating plants. They convert more primary energy into electricity than coal-fired plants and they are cheaper to build than coal or nuclear plants and gas is a cleaner fuel than coal and oil. This view was endorsed in the 1980s when coal mines across Britain were closed. The price of coal had plummeted and the government-owned mines were now uneconomic: they had no place in the Conservative government of Margaret Thatcher. The decision led to bitter battles between police and British coal miners. The closure of the British coalmines was another sign that the world had moved beyond coal.

The gas coming from the North Sea territory was not enough to heat, light and power Britain; now gas is piped from Norway, Belgium and shipped from Algeria and Qatar. The decline in gas supplies from politically secure areas such as the North Sea and the Gulf of Mexico has left consumers more reliant on Russia, the Middle East and Indonesia for gas supplies. The political risks long associated with oil imports now apply to gas; in particular, Russia, which has used its market position as the world's largest exporter to threaten cuts in supply to some consumers if they do not pay. Gas exporters have also become friendlier with each other, raising fears about the creation of a gas Opec (Organization of the Petroleum Exporting Countries).

Coal has resurfaced, and Britain is now importing record volumes. The port of Immingham in Lincolnshire on the east coast of England is the largest import point for coal in Britain; the mountains of coal around the port turn the snow black in winter and the coal dust which rises into the air in the summer has to be hosed down with water. Much of the coal feeds the nearby Drax power station, the largest of its kind in the UK. Coal still accounts for less than half of Britain's electricity power supply (Energy Information Administration, no date).

Coal's key role in the British Industrial Revolution was firing the first steam engine that started the railway revolution. This, in turn, helped move vast quantities of commodities - from grains to minerals - from producer to industrial consumer. Steam turbines were used for electricity generation: the efficiency of steam turbines has improved vastly since the 19th century. The size of the coal-fired power station has increased too, by 1500 times from the start of the 20th century, which means more coal can be burned to produce more power (Jaccard, 2006).

Coal can easily be transported via railways and boats, so it can be moved from pit to power station without the political connotations associated with gas or oil pipelines. Coal also has the largest of all fossil fuel reserves in the world. Global coal reserves are concentrated in North America, the former Soviet Union, China, India, Australia and South Africa. These reserves of fossil fuels are finite; something which demand for electricity shows no sign of being. Its abundance and perceived low political risk has also made coal cheaper than the fossil fuel alternatives, gas and oil. Gas prices have risen because they are linked to oil prices: most gas is exported on a sales contract between the buyer and seller whereby the price is indexed to oil prices, in order to ensure that gas remains competitive. Coal prices rose by more than 50 % last year, but they remain competitively cheap compared with oil and gas.

Coal Play

The increase in energy demand globally is largely due to the simple fact that there are more people living on the planet. The world's population is projected to reach 8.2 billion by 2030, from 6.4 billion in 2005. The population rise in the second half of the 20th century corresponded to a huge increase in energy demand. A trend that looks set to continue in the first third of the 21st century.

The world's demand for energy is projected to rise by 55 % by 2030 from 2005 levels (International Energy Agency, 2007). This means more power stations, and more copper and aluminium electricity lines to transmit the electrons from power stations to homes, factories, offices and street lights. Less than a fifth of the world's energy supply is projected to come from less polluting sources, such as nuclear, hydro, biomass, wind and solar. The majority of the increased demand will be met by power generated from fossil fuels.

Most of the rise in the world's population is occurring in the developing world. China and India are expected to remain the world's two most populous countries over this period, but both countries have hundreds of millions of citizens living without electricity, and those who are connected are subject to frequent power shortages. The respective Beijing and New Delhi governments have plans to connect most of their citizens to power networks in the next 25 years. Hundreds of new power stations will be built. Many will be fuelled by coal. So vast is the planned increase in coal demand that the two countries are expected to account for about 80% of the world's coal growth by 2030, and 40% of the world's increase in oil demand over the same period.

China relies on coal because it has its own vast reserves, in addition to imports from relatively safe producers such as Australia and South Africa. Coal is also far cheaper than nuclear and natural gas, and since China is not bound by the Kyoto Protocol or any other international pact limiting emissions, it is basically unhindered. The new power stations China is building will undoubtedly breach the emissions levels that the Kyoto signatories are attempting to abide by. All this has earned China the unenviable title of the world's largest polluter; a position it has won in rapid time - it was responsible for an estimated 58% of the increase in global emissions in the six years leading up to 2006 (in contrast, India accounted for 6% of global emissions). China's desire to become the largest economy has put the world on a path towards increased global temperatures, which scientists at the United Nations International Panel of Climate Change (IPCC) warn would be catastrophic and irreversible.

(Continues...)

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Excerpted from Living in a Material World by Kevin Morrison Copyright © 2008 by Kevin Morrison . Excerpted by permission.
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Kevin Morrison has been a journalist for 17 years, working for the Financial Times, Reuters, Sydney Morning Herald and now with Argus Media, as well as contributing to other publications including BaseMetals.com. During that period he has covered the rise and fall of the dot com bubble and has spent most of this decade writing about the global commodities boom and the emergence of the carbon emissions trading sector for the Financial Times in London and for Argus. This decade Morrison has travelled around the world meeting farmers, miners, oil ministers, financiers, environmentalists, lawyers and policy advisors. His experiences during this period, during which time the commodities world has moved from the obscure to the mainstream, provide the material for this book. His interest in agriculture stems from his parents upbringing on farms and the environment has always been an area of strong interest. Morrison now lives in Sydney with his wife and daughter. This is his first book.