Commodities' Golden Future

Includes: BHP, DBC, FCX, GSG, VALE
by: Ari Jahja

The global infrastructure boom has lifted the demand and prices of industrial metals such as iron ore, nickel, aluminum, zinc and copper. Some Wall Street analysts have also reiterated their positive view on these commodities.

Merrill Lynch recently raised its long-term price forecasts on a number of metals including iron ore, nickel, and aluminum.

Meanwhile, RBC Capital Markets increased its 2008 copper price forecast by 16 percent, based on supply constraints amid healthy demand.

Demand for commodities these days are driven by fast growing economies overseas, such as China and India. Both economies are growing at an annual pace of roughly 11 percent and 9 percent, respectively.

At the end of July, the International Monetary Fund [IMF] raised its forecasts for world economic growth, forecasting GDP growth of 5.2 pct in 2007 and 2008, compared to 4.9 pct in a previous forecast.

In contrast, it cut its forecast for the US in 2007 to 2.0 pct from its April forecast of 2.2 pct, and maintained at 2.8 pct its forecast for 2008. The major concern right now is whether or not global economic growth could be affected by the slowdown in U.S. economy amid the subprime crisis and credit squeeze.

Although some believe that the slowdown in U.S. consumer spending can hurt the Chinese economy, it is important to know that China's export to the U.S. only accounts 20 percent of its total exports.

Therefore, the slowdown is not substantial enough to drag growth in the Chinese economy and the demand for industrial metals. Due to increased production of cars, appliances, and building construction, China has become the world's largest consumer of metals.

Furthermore, investors should also not overlook the surging demand for commodities from India, the world's second-fastest growing major economy.

Predominantly a service-fueled economy, there is a plenty of room for further industrialization in India. As of 2006, the India's industrial sector accounted to only about 19 percent of GDP, a small portion relative to China's 47 percent.

According to Bloomberg, India's government plans to spend as much as $450 billion by 2012 to build new roads, ports and power stations and accelerate growth to 10% from an average 8.6 percent in the past four years.

BHP Billiton (NYSE:BHP), the world's largest mining company, mentioned in August that they have been pushing aggressively to India, as the country will need more energy commodities such as coal, as well as metals.

Blackstone (NYSE:BX), the private equity giant, is also betting on India's infrastructure boom through its $150 million investment in Nagarjuna Construction.

Firm commodity prices can be seen as a good proxy of healthy global economic growth. One way to capitalize on this long-term uptrend is through an exposure to commodity stocks in your portfolio. In addition to BHP Billiton, my top picks in the metals space include Companhia Vale do Rio Doce (NYSE:RIO), the world's biggest producer of iron ore, and Freeport McMoran (NYSE:FCX), the largest copper company that is also a major gold producer.

These companies have strong fundamentals and reasonable valuation at the current levels.