You've no doubt heard plenty as to why commodities are going through the roof. Yes, turmoil in the Middle East plays a part. As does a weakening U.S. dollar.
But perhaps the underlying catalyst in the commodities pits is China. The nation's $5 trillion economy is 90 times bigger than it was when economic reforms took place in 1978.
Major industrial hubs like Shenzhen (which has 25,000 manufacturing facilities) deserve much of the credit. China is the world's largest exporter, shipping out huge quantities of toys, electronics, apparel, automobiles and other products. The country accounts for nearly one-fifth of the world's manufacturing activity.
But before you can make a finished good, you have to start with raw materials. You can't assemble cars without steel -- and you can't make steel without coal or iron ore. But these basic building blocks are in relatively short supply.
China devours more than half of the world's iron ore supply each year and two-thirds of its metallurgical coal. But the list certainly doesn't end there.
Production of copper, for example, can't be turned on and off like tap water. There just aren't many new projects that can be brought online quickly, and existing mines often run at 100% capacity.
China also consumes more than one-third of global copper supplies and nearly 40% of the world's aluminum. And it has an appetite for oil -- about 9.4 million barrels a day and rising.
Efforts to clamp down on inflation may temper demand, but the impact will be short-lived. There is little that can halt China's inevitable rise. By some estimates, construction activity in Beijing alone is greater than that in all of Europe.
The country can't support its own weight, so it's meeting the deficit by importing iron ore from Brazil, coal from Australia, nickel from the Philippines, and bauxite (for aluminum) from Indonesia.
And let's not forget that China isn't the only country fighting for a limited supply of these backbone raw materials -- India is another hungry consumer. The massive infrastructure boom taking place there will require huge amounts of steel and other building blocks.
There will be ebbs and flows in demand. And China won't always grow at double-digit rates. But the global economy simply can't function without the basic materials and hard assets being consumed at a ever-greater pace.
I found the easiest way for individual investors to profit is with a fund. The world's supplies of most real assets are controlled by a surprisingly small group of companies. One fund can let you basically buy them all.
For example, BlackRock Real Asset Equity Trust's (NYSE: BCF) $770 million portfolio is geared primarily to the metals and mining sector. You won't find any second-rate companies watering down results. The fund targets major players such as Brazil's Vale (NYSE: VALE), South Africa's Impala Platinum (OTC: IMPUY.PK), and Russian conglomerate MMC Norilsk.
Metal/mining heavyweights soak up about 45% of the fund's assets. Another 30% of the portfolio is devoted to energy producers like Arch Coal (NYSE: ACI) and PetroChina (NYSE: PTR), as well as the supporting cast of equipment service providers. The remainder is split between chemicals and forestry products.
> That's led to some rich gains. The fund has been up 50% since July. But given the bullish supply/demand pattern for limited resources, I think the rise could continue for years.
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