Following a decline last year, a substantial increase in metallurgical coal contract prices is expected for the coming financial year because of strong global demand for coal. What’s more, steel is forecast to enter a phase of intense demand, further supporting coal demand.

Stuart Burns for Ag Metal Miner reports on the strong factors driving the growth of these commodities:

• World metallurgical coal demand is strong, driven mainly by expanding steel industries in China and India. Iron ore prices are expected to rise substantially as well. [Why China's Buying Spree is Moving Commodity Markets.]
• China remains the main driver of growth in world steel production and is expected to account for around 70% of the increase in world steel output this year.
• With the introduction of an iron ore export duty by the Indian government and a significant depreciation of the U.S. dollar over the past year, prices are poised up to skyrocket. [Coal Leads Energy Sector Charge.]
• Beijing’s shift to a net importer follows a clampdown on illegal and unsafe mining operations, but has enabled the Australian miners to keep the market tight as demand has dropped elsewhere.

Iron ore or coking coal prices are not expected to come down from their levels now. A fall in the raw materials sectors would only be attributed to a sudden drop in Asian demand and production.

For more stories about commodities, visit our commodity ETF category.

• Market Vectors Steel (NYSEArca: SLX)

• Market Vectors Coal (NYSEArca: KOL)
  

• PowerShares Global Coal (NASDAQ: PKOL)
  

Trend 1: Small Caps Kicking You-Know-What

Small-cap ETFs are dusting large caps. The primary reason? History. In recovery periods, small-caps tend to lead the way toward the light. They’re smaller and quicker to react to shifts in economic and market conditions. Large companies have lots of flag poles up which to run various matters and issues, leaving big changes in strategy to get caught in bureaucracy. In the last month, small-caps are up about 11%, vs. about 7% for large-caps and 8% for mid-caps. [The Case for Small-Caps in 2010.]

• Rydex S&P SmallCap 600 Pure Value (NYSEArca: RZV)
• WisdomTree SmallCap Dividend (NYSEArca: DES)
• iShares S&P SmallCap 600 Growth (NYSEArca: IJT)

Trend 2: What’s the Beef with Fixed Income?

Even we have sounded the alarm: fixed-income could get hit as the Federal Reserve hikes interest rates. And that’s still true. But right now, it’s copacetic; there’s been a lot of bark with no bite yet in sight. Yields continue to be appealing in certain areas, too. For example, the SPDR Barclays Capital High Yield Junk (NYSEArca: JNK) is yielding 12.2% right now. Long-term Treasuries will get beat in a higher interest rate environment, but short-term Treasuries and corporate bonds have been fine. Have an exit strategy in place if and when that changes, though. [8 ETFs That Can Add Income to Your Portfolio.]

• iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG)
• Vanguard Short-Term Bond (NYSEArca: BSV)
• SPDR Barclays Capital Short-Term Corporate Bond (NYSEArca: SCPB)

Trend 3: Base Metals Heat Up

The “shiny” metals are out; base metals are in. The stars seem to have aligned for a possible rally in base metals: China is growing, building and importing base metals faster than they can be used in new skyscrapers; other emerging markets are also building and importing metals; the auto market is slowly recovering, lending support for a rally in platinum and palladium and the U.S. housing market is recovering in fits and starts. All this building and recovery means more demand for copper, platinum, steel and other building blocks of construction at home and abroad. [Why Metals ETFs Are Leading the Charge.]

• PowerShares DB Base Metals (NYSEArca: DBB)
• iPath DJ-UBS Copper ETN (NYSEArca: JJC)
• ETFS Physical Platinum (NYSEArca: PPLT)

For more stories on spotting trends and acting on them, read our special report on trend following.

Last year was the Year of All Things Gold as the safe haven metal supplied investors with a shelter for the market turmoil. But rampant fear in the marketplace has abated, and a bigger risk appetite is the order of the day. That means markets are moving, countries are growing and they’re hunting down the materials they need to get it going:

• Industrial demand for base metals is expected to take off as emerging economies continue to build up. It’s anticipated that the biggest beneficiaries of this will be aluminum, copper, nickel, lead and zinc, reports AAP on The Sydney Morning Herald.

• Commodity Online reports that China and India are expected to be big catalysts for base metals prices, as both economies see more industrial growth this year. [A Guide to Investing in Metals ETFs.]

• The U.S. dollar has been weakening, lending some support to these metal prices. As the dollar weakens, commodities priced in dollars will become cheaper for overseas buyers.

• The world’s supply of copper is concentrated in Chile. Worries about supply have been reinforced by the large earthquake and interruptions in mine production, reports Rebekah Curtis for Reuters. [The State of Aluminum, Copper and Nickel ETFs.]

For more stories about metals, visit our metals and mining category.

• PowerShares DB Base Metals (NYSEArca: DBB)

• Market Vectors Steel (NYSEArca: SLX)

• iPath DJ AIG Nickel ETN (NYSEArca: JJN)

• iPath DJ AIG Copper ETN (NYSEArca: JJD)

Market Vectors Coal ETF (NYSEArca: KOL) is up 224.9% off the low. Oil prices topping off in the low $80 range helped boost coal plays since March 9. Coal prices had an assist in recent months as those in the colder climes crank up the heat and push demand higher, eating into what had been a surplus. And last year, China shifted from being a coal exporter to an importer, shifting the dynamics of pricing. [Why Coal is Leading the Energy Sector.]

Market Vectors Indonesia ETF (NYSEArca: IDX) is up 203% off the low. Indonesia has been one of the powerhouses of the recovery. Influential global asset manager Templeton Asset Management said that Indonesia could be ready to become a member of the BRIC. President Susilo Bambang Yudhoyono expects the country’s growth to average 6.6% over the next five years. Indonesia recently had its sovereign debt upgraded to one level below investment grade by Fitch Ratings firm. [Is Indonesia BRIC Material?]

Market Vectors Steel (NYSEArca: SLX) is up 180% off the low. A global recovery led by emerging markets, a pickup in global auto demand, tight mine supply growth and more demand for investment are seen as being the primary drivers of any gains in metals this year. Steel is a key component in all kinds of infrastructure and building projects, putting it in prime position to benefit in recoveries. [Metals and Mining Outlook.]

iShares MSCI Turkey Index (NYSEArca: TUR) is up 178% off the low. Turkey has seen a shift in the last year: its government bond rating was raised by Moody’s, Fitch and S&P. Turkish banks also managed to get through the crisis without seeking aid from the government. But trouble lurks: A coup in the country threatens to undo its hard-won growth. [Turkey's Coup Troubles ETF.]

Market Vectors Russia (NYSEArca: RSX) is up 176% off the low. While Russia is no less secretive than it was before the crisis, the economy has at least delivered the goods so far. It’s  estimated to grow around 3.5% this year. In January, industrial output in Russia jumped 7.9% year-over-year. The Federal Statistics Service reported that industrial output dropped by 10.8% last year. Car and locomotive manufacturing increased by three-fold year-over-year. But will Russia diversify far beyond oil and gas? Whether it does could determine its long-term prospects for health. [Russian Central Bank Lends a Helping Hand.]

SPDR S&P Metals & Mining (NYSEArca: XME) is up 160% since the low. XME is another ETF in a prime position to trend up as the economic recovery continues. Add in an increasing federal deficit coupled with a large decline in the U.S. dollar, and it may eventually translate into rapid inflation and higher metal prices. As an equities-based ETF, it tends to have less volatility than ETFs backed by physical metals or futures contracts. Added bonus: Mining companies can continue to do well if a commodity’s price falls back, but remains far above the cost of production. [Guide to Metals ETFs.]

SPDR KBW Insurance (NYSEArca: KIE) is up 164% off the low. Insurers were one of the most embattled sectors a year ago. The industry’s leader, AIG, is still finding ways to pay back a massive bailout by selling off certain units. A British company has signed on to buy AIG’s Asia life insurance business for $35.5 billion. The deal would mean the largest repayment yet of the whopping $180 billion the government fronted AIG. The Federal Reserve of New York would grab the first $16 billion from the sale. This week, AIG sold its foreign life insurance business to MetLife for $15.5 billion. [More on Insurance.]

SPDR KBW Bank (NYSEArca: KBE) is up 152% off the low. This one is proof that the most beaten-down sectors in a crisis tend to perform among the best in recoveries. The most recent dip in major bank stocks came after President Barack Obama announced increased bank regulations. Critics see this as an attack on the fundamental business model and Congressmen are in no real rush to push the changes. The most prominent bullish argument for banks is the yield curve slope, which allows banks to make profits on the widening rate spread. [Why Big Banks May Be Big Performers.]

For full disclosure, Tom Lydon’s clients own shares of XME.

Max Chen contributed to this article.

Examine a list of the top-performing funds in the last month, and you’ll find it lousy with base and industrial metals. [Metals and Mining ETF Outlook.]

Among the funds showing the most strength in recent weeks include:

• SPDR S&P Metals & Mining (NYSEArca: XME), up 23.1% in the last month

• Market Vectors Steel (NYSEArca: SLX), up 20.2%

• iPath DJ AIG Copper (NYSEArca: JJC), up 18.8%

• Market Vectors Coal (NYSEArca: KOL), up 18.4%

Even iShares MSCI Australia (NYSEArca: EWA), a proxy for basic materials if there ever was one, has gone gangbusters in the last month, shooting up 15%.

What gives?

• Some risk appetite is returning. Greece still has no clear resolution to its crisis, but assurances that a deal is close has lured more investors to come out and play. [9 ETFs for Dollar Bears and Bulls.]
• Emerging markets, as usual. China, especially, has led the drive to consume copious amounts of copper and steel. But don’t forget other emerging markets. India, Brazil, South Africa, Egypt and others are in various stages of amassing raw materials to support their growth efforts. [China's Buying Spree.]
• Supply and demand. Mother nature has crimped Chile’s efforts at mining and producing copper. While the country’s miners are mostly back and running, aftershocks could threaten progress. China is rabidly consuming coal and iron ore, but they’re two of the commodities in shortest supply. [The Outlook for Coal and Steel.]

For full disclosure, Tom Lydon’s clients own shares of EWA and XME.

The dollar is at a crossroads, having made some decent gains in recent months (PowerShares DB U.S. Dollar Bullish (NYSEArca: UUP) is up 2.4% year-to-date). While some feel that this could mark a new era of strength for our currency, others see potholes lurking in the distance. [How to Take Advantage of the Euro's Drop.]

Jordan Di Pietro for The Money Times is one such person. It wasn’t so long ago that the dollar sagged to a 15-month low against a basket of major currencies and analysts are calling for an equally dreary 2010.

What could knock the dollar off its lofty perch?

• Interest rates are stagnant. The Fed announced that the target federal funds rate will be set at 0% to 0.25% for “an extended period.” With interest rates that low, foreign investors will continue borrowing in the United States and investing abroad, where they can get higher returns. In turn, foreign markets will rise and additional investment abroad will continue to weigh on the dollar.
• Foreign investment: The rapid influx of capital into emerging markets such as China, India, and Brazil could raise the value of their currencies, as asset prices tend to increase over time. Again, in this equation, the dollar could be on the losing end.

Where does that leave you?

If you’re among the dollar bears, one way to hedge that weakness is to diversify away from dollar assets. DiPietro says that one way to do this is by investing in domestic small-cap companies that earn at least 20% of their revenue overseas. A weak dollar makes our goods and services cheaper for foreigners. Schwab U.S. Small-Cap (NYSEArca: SCHA) could be an opportunity.

Commodities also tend to fare better when the dollar is weak; resources like oil and gold are generally priced in U.S. dollars, making them cheaper and thus more appealing for international buyers. United States Oil (NYSEArca: USO) and ETFS Gold Shares (NYSEArca: SGOL) are two funds out of many that will nab you this exposure.

And don’t forget the bearish dollar ETF, PowerShares DB U.S. Dollar Index Bearish (NYSEArca: UDN), a straightforward way to play negative dollar sentiment.

If you’re bullish on the dollar, one way to capitalize is by looking abroad. A strong dollar means greater purchasing power, but conversely, less demand for American goods. You might begin to see more goods purchased from China, more investment in emerging markets, greater imports of basic materials from major producers and  so on. And, naturally, the bullish dollar fund is a direct play on a gaining greenback. A few funds that might work in this kind of environment include:

• iShares FTSE/Xinhua China 25 (NYSEArca: FXI)

• EGS Dow Jones Emerging Markets Titans Composite (NYSEArca: EEG)

• iShares S&P Latin America 40 (NYSEArca: ILF): Latin America is one of the most resource-rich continents in the world

• Market Vectors Steel (NYSEArca: SLX): has nearly a 60% weighting to overseas markets

• PowerShares DB U.S. Dollar Index Bullish (NYSEArca: UUP)

For more stories about the dollar, visit our currency ETF category.

An analyst with HSBC recently noted what he sees are the top opportunities in the metals and mining sector. The Wall Street Transcript says that the places to go this year will likely be bulk commodities, such as iron ore, coal, thermal coal and metallurgical. [Metal and Mining Sector's Challenges.]

Coal presents an especially good opportunity, says the analyst. China is rapidly consumingcoal and iron ore, but they’re also two commodities in shortest supply. China’s demand is also such that coal can’t be produced quickly enough to cover it. [What Commodity ETFs Are All About.]

A similar rosy outlook for the platinum market is forecast, too. Last year, the group of six metals known as the platinum group metals (PGMs) outperformed gold and this year should bring more of the same, says Wong Eng Soon for the Business Times. A pickup in global auto demand, tight mine supply growth and more demand for investment are seen as being the primary drivers of any gains. [10 ETFs Advisors Like Most.]

For more stories about metals and mining, visit our metals and mining category.

• SPDR S&P Metals & Mining (NYSEArca: XME)

• Market Vectors RVE Hard Assets Prod ETF (NYSEArca: HAP)

• Emerging Global Shares Metals & Mining (NYSEArca: EMT)

• Market Vectors Steel (NYSEArca: SLX)

• ETFS Platinum Shares (NYSEArca: PPLT)

For full disclosure, Tom Lydon’s clients own shares of XME.

President Barack Obama’s National Export Initiative (NEI), a federal program designed to double U.S. exports over the next five years to support 2 million American jobs, is highly regarded by The North American Steel Industry. Steel Works says the U.S. steel industry has been a rough one for years, and has been dependent upon the strength of the U.S. dollar. [China's Role in the U.S. Steel Industry.]

Global demand has dipped, but watchers expect the declines to reverse as economies rebuild. The North American industry typically exports about 8 million tons of steel per year, according to Thomas A. Danjczek, president of the Steel Manufacturers Association. This figure could grow by 20% or more by the time the recovery is in full swing. [Coal and Steel ETFs in 2010.]

The NEI is targeting three main points to ensure growth:

• Improving access to credit, with a focus on small= and medium-sized businesses that want to export.
• Expand trade advocacy for all business sizes, which includes educating U.S. companies about opportunities overseas, directly connecting them with new customers and advocating more forcefully for their interests.
• Keep international trade markets regulated so all U.S. businesses can get free and fair access to foreign markets.

[For more stories about steel, visit our steel category.

• Market Vectors Steel (NYSEArca: SLX)

• PowerShares Global Steel (NYSEArca: PSTL)

China Investment Corp., the country’s sovereign wealth fund, purchased 2 million shares worth $78.6 million, or 3.48% of total shares, of United States Oil (NYSEArca: USO), and acquired 1.45 million shares worth $155.6 million, or 0.4% of total shares, of SPDR Gold Shares (NYSEArca: GLD), report Christian Schmollinger and Kyoungwha Kim for BusinessWeek. China is now the fourth-largest holder of USO. China bought a range of ETFs, covering everything from Japan to global materials funds, in an apparent bet on the global recovery.

Timothy Condon, chief Asian economist with ING Groep NV, says that China is hedging against the impact that their purchases of raw materials have on commodity prices. In total, CIC’s filing accounts for $9.6 billion of U.S.-listed assets; ETFs make up 25% of that, says John Spence at MarketWatch.

After years of incurring trade surpluses, China is standing on huge reserves of cash that could be used to amass more raw materials, according to SteelOrbis. As it stands, the East is purchasing materials from United States and Japanese sources. With higher demand, prices for the materials would inevitably go up. However, European sources are not a large provider to the East, and this may pose a problem to European scrap producers who are over-producing and unable to capture a market for their goods. [China's Quest for Coal and Steel.]

• Market Vectors Steel (NYSEArca: SLX)
• Market Vectors Coal (NYSEArca: KOL)
• PowerShares Global Coal (NYSEArca: PKOL)

According to Destatis, German exports plummeted $1.121 trillion last year while China’s exports totaled $1.202 trillion, reports Geoffrey T. Smith for The Wall Street Journal. Germany has held onto the title of the world’s No. 1 exporter, but China is quickly catching up as a result of the collapse in business confidence and investment during the financial crisis.  [Why China may see more growth.]

For more information on China, visit our China category.

• Shares FTSE/Xinhua China 25 (NYSEArca: FXI)

• SPDR S&P China (NYSEArca: GXC)

• Claymore/AlphaShares China All-Cap (NYSEArca: YAO)

• Claymore/AlphaShares Small Cap (NYSEArca: HAO)

• PowerShares USX Golden Dragon Halter (NYSEArca: PGJ)

Max Chen contributed to this article.

The price of thermal coal recently topped the psychological $100 barrier for the first time in more than a year, as heavy snow and cold weather settle on China, reports Tony Daltorio for Investment U. The storm threw a wrench in mining activity and caused panic buying and shortages. [Why coal may have a good 2010 performance.]

China’s shift from coal exporter to importer quietly began months ago as the country cracked down on illegal mining activity, meaning hundreds of mines were closed. As a result, China had to start buying coal from around the world, sending imports up near 500% in November 2009. China already has the world’s largest coal reserves. If they still need more, big plans must be in the works.

Robert Guy Matthews for The Wall Street Journal reports that China may also dominate the steel industry this year by increasing production by nearly 10%. The output probably won’t surpass demand, pushing prices higher for steel and its raw materials, which includes coal. [Steel and coal ETFs are set to rise in 2010.]

As a result, steelmakers are once again getting into gear. Rio Tinto (NYSE: RTP), China’s largest iron ore supplier, is firing up idled plants. Arcelor Mittal (NYSE: MT) is raising prices.

For more stories about coal, visit our coal category.

• Market Vectors Coal ETF (NYSEArca: KOL)

• PowerShares Global Coal Portfolio (NASDAQ: PKOL)

• Market Vectors Steel (NYSEArca: SLX)