David Prosser's Outlook: That 20-year commodities super-cycle is in need of a puncture repair kit

The Olympics may have captivated all but the most sports-phobic among us, but Rio Tinto's directors can be forgiven for a sigh of relief that the Games are over. To satisfy the pollution commitments made to Olympics organisers, China had to put the brakes on its speeding economy, suspending manufacturing in Beijing and neighbouring provinces for much of the summer. That's not happy news for Rio, for which China is now the all-important customer.

However, the reaction to Rio's first-half results yesterday suggests the market is worried about the world's second-largest miner, even though China can now put the distraction of the Olympic Games behind it. Soaring profits and the continuing saga of rival BHP Billiton's interest in the company were not enough to prevent a sell-off of its shares.

The reason, of course, is concern about Rio's prospects in an environment of global economic slowdown. Advocates of the 20-year super-cycle of booming commodity markets have gone a little quiet over the past six weeks, as this concern has come to the fore. Not only have commodity markets stopped booming, many have fallen back by 20 per cent since the beginning of July, so they're actually in bear market territory.

Rio Tinto, whose own shares are off by close to 30 per cent since mid-May, urges investors to see past what it hopes will prove to be a short-term blip. Like other proponents of the super-cycle, Rio argues that demand for its products far outstrips supply. The logic of the commodity bulls is that demand is soaring thanks to the vast appetite for raw materials from the new global powerhouses – in particular, China. And because, for many years, prices were too low to encourage much in the way of exploration, supply for now remains limited. Ergo, commodity prices will keep rising.

Rio's own economic models predict 4 per cent global economic growth in 2009, with a 9 per cent increase in the size of the Chinese economy. The miner may be right, but there's a growing number of super-cycle sceptics who think such forecasts are about as accurate as the ones to which the Treasury is currently clinging for the UK economy. Not very, that is.

They have a point. In the past, central bankers around the world have acted in the same way when confronted by threats to economic growth, relaxing monetary policy in order to keep the show on the road. But these relaxations – and they have been at least partly responsible for the super-cycle getting started – are not such an easy option this time around. Indeed, many central banks are now more concerned about inflationary pressures than falling levels of growth.

The People's Bank of China is no exception. It has made a series of attempts over the past 18 months to get on top of inflation, culminating in a pledge from its governor in June that it would crack the problem. Its chief tactic has been to tighten the money supply, while other central banks – including those in India, Brazil and the eurozone – have focused on interest rate policy, but the effect has been the same: a slowdown.

Such has been the Chinese determination to get on top of inflation, the central bank has accepted a collapse on the Shanghai stock market as an unfortunate side effect of the battle. China's economy may not pick up quite as quickly, post-Olympics, as Rio hopes.

Not that the country, in any case, operates in a vacuum. Urbanisation and modernisation are only part of the economic success story – China also depends on demand for its exports, particularly from the US and western Europe. With these markets in decline, that demand is bound to fall back.

So much for the super-cycle, which in truth always sounded rather too good to be true. In a bull market, it is never difficult to find someone to explain why soaring prices are part of a sustainable paradigm shift, rather than a bubble that is bound to burst. Like so many before it, Rio may be about to discover that the world hasn't really changed after all.

Start your day with The Independent, sign up for daily news emails
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Day In a Page

General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
Public relations as 'art'? Surely not

Confessions of a former PR man

The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

Bill Granger's luxurious sweet treats

Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

The mother of all goodbyes

Paula Radcliffe's farewell to the London Marathon will be a family affair
Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

Steven Naismith: 'We know we must do better'

The Everton forward explains the reasons behind club's decline this season
Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

Michael Calvin's Last Word

Praise to Wenger for having the courage of his convictions