Don’t be fooled by the recent pullback in oil or gold prices. 

Insatiable demand in emerging economies continues to drive the bull market for industrial commodities and will for the foreseeable future.

China, for example, consumes 56 percent of the world’s cement production, 40 percent of aluminum, 39 percent of copper, 43 percent of steel and almost 63 percent of iron.

This extraordinary demand has tightened markets to the point that any disruptions to production have an outsized impact on prices.

Thus far in 2011, adverse conditions in key producing countries have reduced the supply of some industrial commodities, forcing purchasers to draw down stockpiled inventories. With demand showing few signs of abating and production costs increasing–companies must spend to restore capacity–prices of metals have soared.

In the first quarter, torrential downpours in Australia and Brazil kept about 25 million metric tons of iron ore from the market.

Meanwhile, India’s output of iron ore declined significantly after Karnataka, a state in southwest India and the nation’s second-largest producer of the steelmaking input, halted overseas shipments of the commodity in July 2010. Although a Supreme Court decision reversed the ban, it will take some time before production returns to previous levels.

In 2010 an average of 7.5 percent of global iron ore production capacity was offline, while supply disruptions in the first three months of 2011 kept about 10 percent of potential supply off the market. An average supply disruption of 5 percent in 2011 and 2012 would keep the iron ore market in a deficit, providing further support for prices.

Similar tightness in a number of metal markets has sent prices soaring. Although the long-term bull market in metals remains intact, price corrections could occur in the near term as market participants try to gauge the prospects for global economic growth and its implications for demand.

China’s efforts to cool its red-hot economy and curb runaway inflation could cause metal prices to retreat amid concerns about reduced demand. Investors should monitor this situation closely for the next three to six months and exercise caution when investing in metal-related securities.

However, this caveat doesn’t vitiate the bull market for metals–either in the near term or over the long term. Supplies remain tight, and Chinese demand would decline only incrementally, as development in the western and central provinces continues apace. Demand could even surprise to the upside, particularly if US consumption exceeds low expectations and Japan begins to rebuild after the devastating 9.0-magnitude earthquake in March.

Over the long term, Chinese demand for metals should remain robust, though the spectacular growth rates of 2003 to 2006 will prove difficult to replicate. Expect demand growth to average 10 percent in the future.

My Top Pick

For investors seeking to profit from tightening supply-demand balances for industrial metals, platinum group metals (PGM) are your best bet. Platinum and palladium are key components in automobiles’ catalytic converters and a host of consumer electronics.

Operational difficulties in South Africa, which produces 75 percent of the world’s platinum, have limited PGM production to multiyear lows. Rising costs from deeper mines, safety concerns and a stronger South African currency will continue to constrain output.

On the other side of the equation, a recovery in global car sales is a boon for PGM producers. In 2011 European automakers are expected to roll 19 million units off their assembly lines, while US carmakers should crank out 13 million new units. Chinese manufacturers are expected to produce roughly 16 million new cars in 2011.

Stillwater Mining (NYSE: SWC) is the largest producer of PGMs in North America and the only significant producer in the US. In 2010 the company produced 485,000 ounces of PGMs, including 374,000 ounces of palladium and 111,000 ounces of platinum.

Palladium prices were at depressed levels for much of 2002 to 2008, and Stillwater wasn’t in a position to expand operations or make money. But with palladium prices now well over USD700 per ounce, the miner is profitable once again.

The company expects to ramp up its annual output to roughly 700,000 ounces of PGMs over the next four years, an increase of 40 percent. About three-quarters of that output will be palladium, the PGM with the strongest near-term growth prospects and tightest supply-demand conditions.

Get my buy price along with my other top commodity picks when you join us.

Supply and Demand Are on a Collision Course

Resource depletion is the biggest investment story of this decade and NOW is the time to position yourself to profit.

This is the purest, simplest formula there is…High demand + low supply = rising prices.

You saw it when copper took off in 2003, fueled by massive global construction needs for copper wire and pipe. Investors pocketed 1,300 percent in less than 36 months.

You saw it when global GDP exploded 41 percent from 2000 to 2005, and the growth in transportation and manufacturing put the squeeze on oil supplies. Before all was said and done, savvy investors walked off with over 1,500 percent.

And now, with recession fading and global growth reigniting, the squeeze is on again.

Every country in the world has the same goal: To grow.

More growth means more manufacturing and consumption.

Which means manufacturing and consumption on overdrive. Growth so fast that we’ll have a hard time keeping up. We’ll have a hard time even comprehending it.

If you are ready to join the likes of Buffett and Soros in profiting from this resource crisis, start a risk-free trial of Personal Finance today and get immediate access to my top resource plays now.

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