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However, commodity markets have been out- of-sync and moved up as other assets depreciated. What's more, this is true for several ranges of commodities. Crude and other fuel sources have hit successive record levels.
So have metals and metallurgical minerals. Aluminium, copper and zinc have started rising in the recent past while steel has been strong for three years.
A range of agri-commodities such as foodgrains and vegetable oils are also ruling high. For the first time in decades, the minimum support prices (MSP) offered by Indian governments to farmers growing staples, has been lower than open market prices.
The uncoordinated behaviour of different markets may seem surprising. The US is in some version of a recession and growth is weak in both Japan and Europe. So why are commodities strong?
A couple of I-banks offer "decoupling" as a possible explanation. According to them, domestic demand from China and India is keeping the global commodity markets buzzing.
This is probably not the whole truth. Taken together, India and China generate perhaps 8 per cent of global GDP. Even given unusually high demand for commodities due to infrastructure creation, this isn't enough to compensate for weakness across the rest of the planet. Especially, given China's dependency on exports to the US and the slowdown in India's economy.
It's probably better to assume that this is one of those periods when commodity cycles are out-of-synch with equity cycles. If you prefer, the subprime shock has burst a bubble in financial assets. But commodity markets, which are cued to the real economy rather than the financial, have stayed bullish.
There are specific explanations for the high pricing of specific commodities. The reasons underlying high crude prices for example, have been discussed many times. High crude automatically means high gas prices and by extension, high coal prices.
Coal prices have been further driven up by bull-markets in metals. Coal is a key input in power generation, which is a key factor in metal production. It's also a raw material in steel production.
There isn't a great deal Indians investors can do to surf the rising tide in foodgrains or in crude, gas and coal. There are tight pricing controls in those areas, there's also a lack of listed businesses of meaningful size. Plus, the government can be guaranteed to interfere as indeed, it has done by blocking trading of foodgrain futures on commodity exchanges.
In crude oil, the clunky subsidy mechanism also removes any possibility of making profitable trades. Private sector refiners don't have to adhere to the subsidy mechanism but they're hobbled by the fact that there is price control. ONGC's realisations are also subject to subsidy mechanisms reducing its realisations.
But there is room to invest in primary metal plays and India does have a lot of companies of fair size distributed across the entire ferrous and non-ferrous space. Now, pricing power doesn't exist in a commodity almost by definition. So commodity plays are generally a function of size and efficiency.
Given little room to charge higher-than-market rates, producers work to improve efficiency and to deliver higher volumes. Given higher efficiencies, they can derive higher margins from the same prices.
On those metrics, Indian metal producers do well. They are all among the most low-cost global producers of metals, they are already of significant size and they are getting larger now that regulatory constraints are being eased. Most have their own captive power capacities giving some control over a vital cost component.
Most are hoping that easier regulations on captive mining and coal will make it easier for them to tie up fuel sources and raw material supplies. Further integration would measurably assist in cost control as well as offering the chance to ramp production up (or down).
The hurdles are likely to be political. All key metal and coal supply zones and plant locations are in the Naxalite belt that runs down the middle of India.
That introduces an element of "off-balance-sheet" risk. It's likely that each producer will have to find its own means of accommodation with the Maoists. Those, that can, will be good investments.
