Singapore, 27 July 2011: Reuters

There appears to be a disconnect between the current high prices of commodities and the lagging share valuations of the companies that produce them. Copper is within 4 percent of its record high, gold is at a record, iron ore is 8 percent below its all-time peak, oil is heading for the highest yearly average price ever and both thermal and coking coal are holding at elevated levels.

Sounds like it should be bonanza time for commodity producers, but it isn't. BHP Billiton Ltd. , the world's largest mining company, has a 12-month forward price-earnings ratio of about 9.6, a substantial discount of around 14 percent to its 10-year median of 11.2.

Its share price of A$43 is little changed from the A$45.25 with which it started the year, and only 8 percent above the level of a year earlier. In those 12 months, copper has gained 45 percent, New York oil 29 percent, gold 38 percent, iron ore 33 percent and thermal coal at Australia's Newcastle port 24 percent.

It is clear that BHP's share price is not keeping pace with commodity prices, and the phenomenon isn't just confined to the Melbourne-based diversified miner and oil producer.

Rio Tinto Group, the world's third-largest miner, has gained 17 percent in the last year, while its forward p/e ratio is 8.9, or 14.2 percent below its 10-year median.

It's not just the diversified miners either. Coal & Allied, a Rio Tinto unit whose share price isn't affected by the takeover speculation swirling around some of Australia's independent producers, is up 4.3 percent from a year ago and is about 18 percent below its 10-year p/e ratio.

And finally, it's not an Australian issue either. While Exxon Mobil Corp. has gained 38 percent the past year, it is only up 15 percent this year and is currently on a forward p/e of 9.6, almost 26 percent below its 10-year median.

So, if the share prices of resource companies are lagging those of the commodities they produce, the question has to be whether commodities are overvalued and due for a correction or whether the companies are undervalued and should gain.

The answer is dependent on whether you are bullish or bearish on the world economic outlook. The bulls will point to ongoing Chinese demand for raw materials and energy, citing evidence of renewed copper imports and hopes for a soft landing in the world's largest commodity consumer.

The bears need look no further than the European sovereign debt crisis, which appears to be only temporarily resolved, and the U.S. debt ceiling talks, which currently are an interesting exercise in how close the Americans can come to sparking another global financial meltdown before (hopefully) agreeing a deal.

Central bankers such as the Federal Reserve's Ben Bernanke are worried that high commodity prices are hindering the fragile economic recoveries in the developed world, while his Asian counterparts fret about energy and food inflation.

They will be hoping for steady commodity prices with any gains below the economic growth rate, at least for a while. But even flat commodity prices mean huge amounts of cash filling up the coffers of BHP, Rio and Exxon Mobil. BHP is forecast to have a 27 percent jump in revenues and a near doubling in net income to $22.4 billion in the 2010-2011 fiscal year, while Rio's 2011 profit is expected to gain 34 percent and Exxon Mobil's 38 percent.

These are impressive numbers compared with Google Inc., a current market darling, whose net income is forecast to expand only 20 percent in 2011 and whose share price is up 26.4 percent from a year ago.

For now, equity investors appear cautious until there is clarity on the U.S. debt ceiling, but if this issue is resolved and the world economic outlook improves, then resource sector shares should start to reflect the strength in commodity prices.

Conversely, ongoing debt worries in the developed world and any signs that China's landing may be hard will send commodity prices down, perhaps by more than the share prices of producers will decline in such circumstances.

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