Demand – for almost everything – is soaring.

As this race to meet that demand progresses, there are a couple of subsectors that are primed to rocket higher. In fact, there are two key commodities where this is especially true. Where demand is already outstripping supply. And where the imbalance is only going to get worse.

Over the next three years, nickel iron and ore are going to get hit hardest.

That means now is the time to buy.

One stellar company fits the bill as a way to own both. I’ll tell you all about the company and how to buy it in just a moment.

But first, let me explain why both nickel and iron ore are going to be extremely “supply challenged” over the next several years.

1) Nickel: The Base Metal to Watch

By the end of this decade, China is going to require one million more tonnes of nickel every year.

Now, that figure assumes that the mine supply from existing operations won’t decline. And it doesn’t account for demand growth in the rest of the world, either.

Don’t forget that Brazil, India, Russia, and a whole host of “developing” areas – like Indonesia, Malaysia, and Latin America – will also need additional nickel supplies.

Here’s where it gets really interesting…

Even if we ignore demand from the rest of the globe, it’s expected that, by 2015, China alone will require 17% more nickel than it consumes today. That amounts to 500,000 tonnes of additional annual supply in just the next three years.

Just to keep up with China’s needs.

Of the potential growth in nickel supply into 2015, projects that are currently being advanced only account for 490,000 tonnes.

What’s more, nearly half of those 490,000 tonnes are higher-risk supply, because they come from what are called Pressure Acid Leach projects (PAL). That means they face a whole host of challenges: They are more difficult to obtain permits for; they’re expensive to build; they’re slow to ramp up; and they’re more expensive to operate.

So there’s a strong chance that, come 2015, many of these PAL projects will simply not be producing at all.

We can’t count on many current projects; and we can’t count on inventories.

In 2010, the London Metals Exchange inventories of nickel declined by 22,000 tonnes. Those inventories fell by a further 46,000 tonnes in 2011, for a total of 77,000 tonnes gone since the peak stockpile in 2010.

And there’s more cause for concern

Indonesia, which produces 15% of the world nickel supply, plans to ban nickel ore exports in an effort to boost domestic metal production.

The country had indicated that this ban would go into effect in 2014. But now there are reports that this ban could apply as early as May 2012… only two months from now.

To be sure, that would likely have a dramatic effect on the nickel price. But the looming potential supply deficit over the next three years could also push nickel much higher.

Keep in mind that world nickel demand is at 1.5 milllion tonnes annually. So the impact of banning Indonesian exports (15% of total supply), combined with another 240,000 tonnes at risk due to riskier projects could mean as much as 30% of forecast nickel output is at risk over the next few years.

So you need exposure to nickel production to benefit.

But nickel isn’t the only base metal facing supply challenges…

2) Iron Ore: A Huge Swing in Supply

Nearly 98% of iron ore that’s mined goes to make steel.

And demand for steel is soaring, as industrialization takes hold in nearly every part of the world.

Already, iron ore supply is tight by historical standards.

But just recently, India, one of the largest iron ore producers, indicated that exports are likely to sag to a new low this year. Indian exports reached only about 60 million tonnes in 2011, a rough year by comparison; 2010 saw 100 million tonnes exported.

India has now become the wild card in iron ore supply. It’s expect that this year the world’s second-most populous nation will face an iron ore deficit, thanks to a government clamp down on illegal miners.

Whereas India produced as much as 260 million tonnes in 2010, they are expected to need to import as much as 160 million tonnes by the 2012-2013 fiscal year.

That’s a huge swing.

Already, many Indian steel mills have begun looking outside India for new sources of the raw material. Some are bringing in iron ore from South Africa and Mozambique. Other companies are so desperate, they are trying to get their hands on scrap steel.

What’s more, demand in China, Brazil, and India (whose Ministry of Steel sees a 300% increase in steel requirements by 2020) is being grossly underestimated.

With a tightening supply source, the marginal cost of production is now estimated to be close to $140 – $150/tonne. Yet iron ore is currently trading near the $140/tonne level.

This simply cannot last – especially with India becoming a large importer.

Research consultants Wood Mackenzie recently said that they expect iron ore prices to remain above $150/tonne until 2020, thanks to demand from China, which will need 1 billion tonnes annually by 2015, or 60% more than just two years ago.

Here’s How to Play These Looming Supply Deficits

Vale S.A. (NYSE:VALE) is the second-largest mining company on the planet; it’s No. 1 in iron ore production and No. 2 in nickel.

Iron ore and pellets represent about 75% of gross revenues, while nickel represents about 10%. So fully 85% of this company’s revenues come from two of the potentially most explosive base metals sectors.

(That’s right. By becoming a VALE shareholder, you can own a piece of one of the most dominant players in both the iron ore and the nickel markets.)

Vale has long been big in iron ore, responsible for 85% of Brazilian iron ore output. But back in 2006, management decided to become a key player in nickel, as well.

That’s when the company bought Canadian miner Inco for $19 billion, vaulting Vale into mining’s No. 2 spot. Now they operate nickel mines in two of the most prolific areas for the stuff (both located in Canada): Sudbury, Ontario, and Voisey’s Bay, Newfoundland and Labrador.

In Sudbury, Vale churns out 76,000 tonnes of nickel per annum, and at Voisey’s Bay, 45,000 tonnes.

No wonder the company is profitable… very profitable.

Profit margins are so thick that fully 50% of revenues are booked as earnings. Now that’s rich.

In fact, the market is so undervaluing Vale right now that, based on a few key metrics, this business is an extremely cheap – and therefore a very compelling – buy.

Despite its impressive $120 billion market cap, VALE is trading at a P/E ratio of only 6. That means you pay six times earnings to own the business. That’s cheaper than its main competitors, and half the industry average at a P/E of 12.

The company’s balance sheet is very healthy with a low debt-to earnings ratio. That lowers risk while increasing cash flow, as less goes to servicing its debt.

But hang on. It gets even better.

On top of buying shares at an undervalued level, you also get a very sweet dividend.

Right now, the company’s paying a $1.15 annual dividend per share, which translates into a 4.80% yield at current prices.

So by owning VALE now, you get paid handsomely as you look for the rest of the market to play catch-up.

The laggards will soon come to realize that nickel and iron ore supplies are going to be severely tested over the next few years.

In the process, they will start to bid up Vale’s share price, handing early movers (like us) some hefty gains along the way.

Early last year, shares were trading as high as $34. I expect we’ll meet and surpass those levels during the next 12 to 18 months.

That would mean a 42% gain or better on this mining giant, which will pay you nearly 5% in dividends as you wait.

Sounds like a sweet deal to me.

Action to Take: Buy Vale SA (NYSE:VALE) at market and use a 25% trailing stop to protect your profits and your capital.

This will be a November to remember.

With overwhelming Republican victories in the midterm elections now in the rearview mirror and the Democrat-in-chief Barack Obama admittedly bruised from the “shellacking” delivered by a fed-up public, financial industry lobbyists have nothing left in their way and will be shooting holes through recently enacted, but not yet implemented, regulatory reform legislation.

That is likely to mean a more favorable future for banks and brokers. And, that dovetails perfectly with the message trumpeted by the Federal Reserve on Wednesday, which is that they want banks to have free money and leverage themselves up with risk-free assets. They figure that the brokers will do well too because their plan includes pumping up the equities markets.

The whole quantitative easing thing is simple, in case you don’t understand what’s going on. The Fed wants inflation, but it doesn’t want the usual brand of inflation everyone fears. The Fed wants asset inflation. By announcing that they are buying bonds (folks, the Fed doesn’t have to announce anything) they are telling market participants that they are going to push up prices for everyone. They want to keep nominal interest rates on the short end of the yield curve (overnight bank to bank lending rates) at zero and they want real rates (the nominal rate minus the rate of inflation) at less than zero.

The game is designed to continue to prop up bank balance sheets so they eventually start lending more freely to John Q. Public (but that’s not going to happen) and lend to corporations (that is happening). It’s also designed to push money into the stock market, because with yields so low and the “threat” of inflation from the Fed’s easy money policies gaining attention, investors will seek higher yields and inflation protection in stocks. That is happening.

The public isn’t buying, but institution are buying and lifting prices. It’s a confidence game. If the stock market is improving, corporations are doing better (because they are re-tooling their own balance sheets with inexpensive debt they’re floating and from robust overseas earnings courtesy of the weak dollar) and banks are getting so flush they’re talking about paying out dividends again, everyone feels better.

It’s a confidence game. And it’s starting to work. It’s definitely working for businesses (big businesses). But the big game the Fed is trying to win is the public’s confidence in the revival of real estate. If they can keep rates low enough long enough and banks, businesses and bond and stock markets look fat and juicy, they are hoping that the broken leg of the economy, residential real estate, brings up the rear and the economy finally starts growing.

It’s a confidence game and that’s why this will be a November to remember.

If it works, if the broken leg of domestic economic growth gets bandaged up enough so America’s economy can start walking again, we just might have a couple of years of rising markets.

We’ll continue to enjoy that prospect by adding still more positions this coming week.

I have confidence in the power of lobbyists and Republicans to join forces with the Fed to inflate the next bubble, make that bubbles. And, until reality hits, which it eventually will (I’m talking about the real inflation monster being unleashed) the asset inflation game is going to make us some good and steady gains.

I’m going to surprise you this week. We’re going to take some positions that you may not realize are starting to look very enticing.0

Sincerest regards,

Shah