Record commodity consumption by China on multi-billion dollar infrastructure projects has some crystal ball gazers issuing warnings that capacity expansion is the wrong kind of growth. That matters not one jot for commodity prices in the near term, says Jim Lennon of Macquarie Research. For commodity consumption, he says infrastructure spending is the right kind of growth. Spending on base metals will only strengthen in the second half of 2009, says Lennon who foresees infrastructure and construction spending only growing over the course of the year. One would think that this analysis could be extended into 2010 as well, given the size of China's infrastructure spending package (US$586-billion) that is spread out over two years. Let's not forget the U. S. fiscal stimulus package where so far only one-tenth of infrastructure spending has taken place. In fact, only half of the allocated spend on these projects will have occurred by the end of 2010. It seems that the government is a tad slow finding shovel-ready projects to drop some coin on. As of July 10 only US$64.4-billion out of a total US$183.4-billion in eligible funds have been paid out. Industrial commodities in storage remain high on a global basis, suggesting that the surge in prices is in anticipation of a global recovery in industrial production that is beginning to take place. While these factors are supportive of commodity prices at current levels, investors might want to consider that prices have risen significantly (from low levels) and that the global recovery may impress for a quarter or two but is likely to be weak long term. Investors looking to take a ride on this rally might want to keep a finger next to the eject button.

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