David Prosser: Why the commodity bulls are getting back on their bikes

Outlook: There have been a handful of long-term bull runs for commodities over the past two centuries, with average durations of around 20 years
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The Independent Online

Do we believe BHP Billiton when it insists that, for once, it is not plotting a huge new M&A deal? Well, after a hat-trick of failures – the Rio takeover, the Potash bid and then the Rio iron-ore alliance – you might forgive the miner for feeling a little disillusioned. Organic growth may be slower, but it also comes without the risk of public humiliation and an expensive bill from City advisers (the Potash debacle cost BHP £200m alone).

There is a more pragmatic reason, however, about why BHP is wary: just about anything you can imagine that it might like to buy is currently trading on a whacking valuation thanks to the commodities boom. Moreover, BHP's view is that the boom is not about to turn to bust – while there may be short-term volatility, supply and demand fundamentals (the former being ever tougher to augment) make for an optimistic outlook. As the world's biggest miner, BHP would say that – but there are analysts who disagree. They argue that as China seeks to grow in a more controlled fashion, its voracious appetite for commodities will diminish.

It is certainly true that we do not hear so much of the commodity super-cycle these days – those who talked up the idea that the world had moved into an era of very long-term rising prices were rather let down by the events of 2008. The unexpected global economic correction saw commodities plunge.

Still, that was a remarkable one-off event prompted by a financial crisis rather than any breakdown in the arguments of super-cycle fans, which are based on the ongoing transition of China and India from emerging economies to industrial powerhouses. And since the global downturn ended, commodity prices have hit new highs.

How long will this continue? Well, it is worth noting that there have been a handful of long-term bull runs for commodities over the past two centuries, with average durations of around 20 years. Stripping out the freak event of 2008, we are about 10 years into the current upswing. BHP's M&A abstinence may just last longer than cynics assume.



The twists and turns of the great rate debate

The great danger for those at the wheel of monetary policy is over-steering: react too strongly to the latest perceived threat from inflation – of an under or over-shoot – and the result is much more severe than desired. Before you know it, you're over-steering again in an attempt to correct the problem.

Mervyn King, the Governor of the Bank of the England, knows the dangers better than most. His public utterances of the past couple of days, however, represent the verbal equivalent of over-steering: having been rather heavy-handed with hints of interest-rate rises to come on Tuesday, yesterday the Government was vehement in its insistence that no-one should jump to any assumptions.

Broadly speaking though, the interest-rate debate stands where it did before the inflation data was published. May remains the most likely month for the first increase because only then will the Bank's Monetary Policy Committee have real data on how the economy has bounced back from the snow-mired final quarter of 2010.

Still, there is no doubt of a big shift in the debate. Only a few months ago, the loudest calls for a change to monetary policy came from economists who wanted to see the Bank increase the size of its quantitative-easing programme. That camp has now gone quiet and the noise is coming from those who think the MPC should be raising interest rates right now.

The hawks argue that the Bank will lose credibility if it is not seen to take action on inflation and that inflation expectations will rise as a result. To which Mr King might point to yesterday's miserable labour-market data – that the value of annual wage settlements has fallen back to an average of just 1.8 per cent suggests such expectations, if they are indeed rising, are not translating into higher pay demands (or successful ones).

Doing something for the sake of appearances would be, in any case, a curious way to conduct monetary policy. But with the headline inflation figures certain to creep up in the months ahead, do not expect the calls for early rate rises to become any less shrill.



India's dismal failure to stamp out corruption

David Cameron and Vince Cable understandably believe India represents a huge opportunity for British business: that is why it was the destination for a high-profile Government-led trade mission within months of the Coalition coming to power. The obstacles for companies that want to do business in India remain sizeable, however. Exporting to the country is one thing, but developing a presence there is quite another, with restrictive rules on foreign-business ownership. Even more pressing is the issue of corruption.

All the more disappointing then, that six years after becoming Prime Minister, Manmohan Singh seems no closer to convincing people India's reputation for corruption is unfair or out of date. Quite the reverse, in fact. Yesterday, Mr Manmohan Singh had to give a televised press conference in order to insist he was not standing in the way of an investigation into a telecoms scandal that may have cost Indian taxpayers more than £25bn.

For overseas companies hoping to do business in India on a level playing field, it can't be a good omen that the country's Telecoms minister has had to resign over the scandal (or that he has subsequently been arrested). Coming hard on the heels of the Commonwealth Games saga, the impression is that the government has failed to get to grips with corruption. So much so that these affairs now overshadow the Prime Minister's attempts to liberalise the Indian economy, which are in danger of stalling.

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