Amid the chorus of commodity bulls and analysts predicting more rallies in 2011, some expect steep corrections if demand destruction sets in from high prices and big consumer China gets tougher against inflation.

Copper, cotton and gold prices hit record highs in December and oil and various edible crops soared to multi-month peaks on both fundamentals and speculation. The Reuters-Jefferies CRB index, a global commodities benchmark, is up 17% for the year, extending last year’s 23% growth.

While a number of investors and market watchers expect such bullish trends to continue into the new year, some think they will be overdone, forcing sharp price reversals.

"Investors may take stock of the 2011 landscape and may not necessarily like what they see," said Edward Meir, senior commodities analyst MF Global, one of the world’s largest commodity brokers.

"Although the world macro picture is far improved from where we were two years ago, there are trouble spots looming ahead," Meir said in a commentary on energy and metals.

Meir said sharply rising food and other basic material costs had boosted inflation in emerging economies, prompting aggressive moves to rein in growth, particularly in China, a top metals buyer and major energy and grains consumer.

Beijing had resorted to various tightening measures this year, including raising interest rates twice in just over two months.

But Meir said China was still "behind the curve," in that nominal interest rates were barely above the "official" inflation reading and well below the food inflation index of nearly 12%.

Beijing’s state media reported on Monday that minimum wages in China’s capital will go up by 21% next year, potentially creating a greater cost burden for exporters of Chinese-made goods.

"This will only exacerbate the inflation picture down the road," Meir said.

"More broadly, the commodity spiral, if left unchecked, will trigger possible demand destruction, lead to commodity substitution where applicable, and generate a more aggressive supply-side response, factors that, admittedly thus far, do not seem to be registering with investors."

Demand destruction was the catalyst for the financial crisis that erupted in late 2008, after oil rose 50% that year alone to an all-time high of nearly US$150 a barrel.

This year, oil is up 15% percent to above US$91.

Aside from soaring prices of fuel and other commodities, China was also burdened by a looming property glut, and could be forced to get tougher on inflation.

"The world economy is resting on policymakers in China. If the interest rate rises don’t reduce inflation there, eventually the population could become very difficult to govern," said Peter Cohan, a financial markets commentator in Malborough, Massachusetts.

"If the resulting instability leads to a decline in Chinese demand, those betting on a weak dollar and ever-rising commodities prices could be in for a world of hurt."