More than a year without abundant rain, and a whole department is alarmed. The president of the Pyrénées-Orientales has just sent a letter to the Elysée, worrying about “an ecological disaster, tomorrow economic” in this territory which needs water to grow peaches and eggplants. On the other side of the Pyrenees, the drought of the soil, by causing a drop in olive production, has caused a surge of almost 60% since June 2022 in olive oil prices, of which Spain is the world’s largest producer. Reported by the Financial Times, this Spanish runaway, reinforced by the exceptional heat wave affecting the country this spring, may not remain an isolated case. “In the production of metals, which consumes a lot of water, water stress is also felt and could constrain production and lead to additional costs”, warns Benjamin Louvet, director of raw materials management at OFI Invest Asset Management.
Just like the drought, the torrential rains accentuate the pressure on the supply. In New Caledonia or Indonesia, they forced mines to close for days or weeks. “The inflation we are entering is a long-term trend, says Laurent Babikian, director of capital markets at CDP, formerly the Carbon Disclosure Project, an organization that assesses the transparency of companies on their carbon and water impact. The change climate change has concrete implications on the cost of natural resources. Some have a market price – olives -, others do not – trees or water. We will have to put a price on everything, including carbon, if we want to be able to quantify the consequences of these disruptions.”
Physical constraints
If climate change is a factor of inflation, so is the fight against this scourge. Encouraging the energy transition could go through the integration of the environmental cost of any economic activity, with the general introduction of a carbon tax. While waiting for such a break, mechanisms are already at work. Which can produce induced effects. “Let’s remember: even before the outbreak of war in Ukraine, the desire to curb the production of fossil fuels when the alternatives were not yet there had brought the price of a barrel of oil to 90 dollars”, recalls Benjamin Louvet. The expert also evokes the physical constraints to extract metals essential to this transition, such as copper and nickel, and which should maintain durably high prices.
In principle, a supply deficit adjusts after a price increase, which stimulates investment to increase production and meet demand. “But this spring will not be enough. Because the need for these metals will remain colossal, even if the prices increase. And because it takes sixteen years, on average, to open a new mine”, continues Benjamin Louvet. Not to mention that China, which dominates the sector of refining and semi-finished products in the value chain of wind turbines and other solar panels, can impose its prices, and that the considerable investment needs in the transmission of electricity should also increase the bill. “By 2050, it will be necessary to develop 152 million kilometers of electrical network, or approximately the distance from the Earth to the Sun!”, insists the specialist.
Who will bear this additional cost? For Laurent Babikian, companies must do their part. “Inflation is going to have a lasting negative impact on purchasing power. Solving this problem by borrowing would be madness, when the total volume of debt in the world – 300,000 billion dollars – is already three times higher than the world’s GDP, estimates this former banker. My thesis is that the costs of the transition will be so enormous that companies will not be able to pass it on in full in the selling prices. The fall in their margin will be the variable d ‘adjustment.”