Transforming materials management for the 21st

Century

January 2012

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company 1|

Commodity prices have increased sharply since 2000, erasing all the declines of the 20th century

40

60

80

100

120

140

160

180

200

220

240

260

1970 201122000199019801960195019401930192019101900

World War I

Post-warDepression

Great Depression

World War II

1970’soil shock

McKinsey Commodity Price Index (years 1999–2001 = 100)1

1 Based on arithmetic average of 4 commodity sub-indices of food, non-food agricultural items, metals and energy. 2 2011 prices based on average of first eight months of 2011.

SOURCE: Grilli and Yang; Pfaffenzeller; World Bank; International Monetary Fund; Organisation for Economic Co-operation and Development statistics; UN Food and Agriculture Organization; UN Comtrade; McKinsey analysis

McKinsey & Company 2|

The emergence of 3 billion middle-class consumers will fuel future demand

Global middle class1

Billions of people

Middle East and North Africa

Sub-Saharan Africa

2030

3.23Central and South America

4.88

3 billion

Asia-Pacific

North America

Europe

0.68

0.32

0.310.23

0.11

2020

3.25

1.74

0.70

0.33

0.250.170.06

2009

1.85

0.53

0.66

0.340.18

0.11 0.03

1 Based on daily consumption per capita ranging from $10 to $100 (in purchasing power parity terms)SOURCE: OECD

McKinsey & Company 3|

Incomes are rising in developing economies faster—and on a greater scale —than at any previous point in history

SOURCE: Angus Maddison; University of Groningen; McKinsey analysis

1 Time to increase per capita GDP (in PPP terms) from $1,300 to $2,600.

9

22

28

822

10

1,023

48

Country

Population at start of growth periodMillion

Years to double per capita GDP1

65

1700 1800 1900 2000

16

Germany

12China

India

United States

United Kingdom

33

53

154

South Korea

Japan

16

Year

McKinsey & Company 4|

0

2

4

6

8

10

12

14

16

0

1

2

3

4

5

6

7

8

20060504030201200099981997

Replenishing reserves of materials is increasingly difficult and expensive

SOURCE: BHP Billiton; US Geological Survey; MEG Minerals 2009

1 All metal and mining materials; latest data available to 2006.

Despite increasing exploration spend, discoveries are increasingly rare

Number of ore discoveries1

Exploration expenditure$ billion, real

World-class

Major

McKinsey & Company 5| 5

Examples of declining resource quantity/quality – iron ore and copper

84

99

111116

-2% pa

2020201520102006

Known reserves are depleting rapidly

Rich iron ore equivalent – proved reservesBn tons

Average copper grade%

Average grades are declining, driving up costs

0.50

0.55

0.60

0.65

2006 2008 2010 2012 2014 2016 2018 2020

-1% pa

Sources: U.S. GS; BHP Billiton; Brook Hunt; McKinsey 2008; global copper supply model

McKinsey & Company 6|

But there are also unexpected pockets of value

Concentration of goldppm

500

180

60

High grade PCB

Low grade PCB

Med Grade PCB

In ore

<10

TVs,

printers

PCs,

laptops

Mobile

phones

▪ Gold is highly concentrated in electronics:

– 1 ton of motherboards ~$16k

– 1 ton of ore $290

ELECTRONICS EXAMPLE

McKinsey & Company 7|

Parts manufacturer

Product manufacturer

Service provider

Biological nutrients

Technical nutrients

Consumer User

Landfill

Biosphere

Farming, collection

Leakage – to be minimized

Energy recovery (other)

Energy recovery

Recycle

Refurbish/remanufacture

Reuse/redistribute

Maintenance

Anaerobic digestion/

compostingCollectionCollection

Mining/ Materials manufacturing

There is a strong need to reframe materials management - to shift from “waste management” to “capturing value” from resources

SOURCE: McKinsey & Company

McKinsey & Company 8|

For example, e-waste recycling is poised to experience significant growth

Recycled vs. overall e-waste1

Percent

E-waste recycling still limited today, suggesting an untapped pool of value

1.1

1.3

1.4

1.6

1.9

2.1

0.5

0.5

0.5

0.5

0.6

0.6

0.2

+19% p.a.

2013E

8.8

1.0

2.2

2.8

12E

7.5

0.7

1.8

2.5

11E

6.1

0.5

2.1

10

5.1

0.4

1.1

1.7

09

4.2

0.3

0.8

1.4

2008

3.6

0.6

1.2 1.4

Global e-waste recycling revenue2

USD Billion

7279 82

100%

USA

18

EU

21

Japan

28

Recycled

Not recycled

Growth is likely to accelerate, especially in China but also in Europe and other parts of the world

1 Includes video products, audio products and telecommunication equipment2 Assumes recycling fee for PC: $10~18, Cell phone: $8~9, TV: $15~25 (depending on the regions); logistic fee for PC/TV: $14 in US, $9 in Japan and

Europe. $0 shipping cost for cell phones

SOURCE: EPA; IAER; Literature research; McKinsey analysis

Japan

USA

W.Europe

ROW

China

CAGR 08-13Percent

6

13

19

29

38

E-WASTE EXAMPLE

McKinsey & Company 9|

There is significant value that can potentially be captured from electronics

▪ There is a large store of gold in electronics– ~300M mobile phone subscribers in US = 11 tons of

gold = ~$500 M– 5B mobile phone subscribers worldwide = 170 tons

gold = $8.7B– Global gold production (2009) = ~2000 tons

▪ Gold mining has environmental burdens– 1 gram of gold = 300 - 700 tons of mine tailings– 252,000 tonnes of cyanide used annually in gold mining

McKinsey & Company 10|

Gold is just one of several precious metals used in electronics

1 Based on London Exchange Nov 2011

SOURCE: Yu et al., Review and prospects of recycling methods for waste PCBs (2008): Kamberovic et al., Hydrometallurgical process for extraction of metals from e-waste (2009); Hageluken, Improving metal returns and eco-efficiency in e-recycling (2006)

PCB EXAMPLE

180ppm 750ppm80ppm 20% 5% 1% 5% 3% 7%

Medium grade100% = $15.6k1

Wt:

5

7

10

11

100

64

Au Cu Al TotalSnAg FePd Ni Pb

0011

▪ PC-boards▪ Laptop

computers

$/tonPercent

McKinsey & Company 11|

Material recovery is most profitable element of e-waste recycling, though some players vertically integrate to access waste feedstock

Description

Collecting Disassembling Material Recovery

Example companies

Collect obsolete electronic products from end-consumers

Dismantle electronic products into parts

Recover plastics and metals from disassembled e-waste parts1

Location Local Local Developing countries, e.g., China, India, Southeast Asia

Margin rate 5% 3-5% 10-15%

1 Major metals recovered include platinum, gold, copper, palladium, sliver, tin and lead2 Consumer brings obsolete e-products back to retailers, in return for special discount or coupon for purchasing a new e-product

McKinsey & Company 12|

(15%)

The real trick is to harvest the superior (business and national) economics of circularity, not optimizing at the tail end

Landfill & unaccounted 161 (85%)

Mining

End of life 189 (100%)

1 Basic mobile phones include low-cost phones and basic communication devices as defined by Gartner (excl. smartphones)

SOURCE: Gartner, EPA, Eurostat, McKinsey, UNEP

Parts manufacturer

Product manufacturer

Service provider

Collection 29

ROUGH ESTIMATE –E-WASTE EXAMPLE

11(6%)

18(9%)

User

0

Maint-enance

(50%)Landfill & unaccounted95 (50%)

Mining

Parts manufacturer

Product manufacturer

Service provider

Collection 95

36(19%)

20(11%)

39(21%)

Maint-enance

User

Status Quo

Recycle

Remanu-facture

Reuse

Recycle

Remanu-facture

Reuse

End of life 189 (100%)

End-of-life mobile phone1 flows based on 2010 EU figuresMillion (Percent of total EoL devices)

Improved state

McKinsey & Company 13| 13

Generation

Present systems for municipal waste management do not focus on turning waste into a value center

▪ 8.9mn inhabitants and 4mn floating population generate residential waste

▪ 1,355 companies and industries generate industrial waste

▪ 12,000 formal workers in charge of cleaning streets and collecting waste

▪ 5,000 volunteer workers help formal process

▪ 222 workers involved in transfer process

▪ 190 companies paying rights to deposit waste directly

▪ 3,000 unionized workers selecting and classifying waste

▪ 126 workers needed for final landfill disposition

$150mn of

potentially recyclable materials enter the system, but this amount is not recovered because of fragmented and sub-optimal systems

$30mn for the sale of recyclables by

informal workers and volunteers causing financial loss to the city

A substantial amount siphoned off for sale by union workers

$90mn of

potentially recyclable materials disposed in landfill

Collection Transfer Selection Disposal

MUNICIPAL WASTE MANAGEMENT EXAMPLE