The Coming China Coal Boom

There's not enough coal in China to meet demand.

According to the International Energy Agency (IEA), China imported over 100 million tons of coal in 2009. That's the first time in decades China became a net importer of coal. In 2006, the largest consumer of the dirty fuel was exporting about 25 million tons.

The demand should come as no surprise. After all, China is home to 1.3 billion people – more than four times the U.S. population. Also, its economy is growing at a double-digit pace year after year, more than triple our GDP growth.

As my colleague Matt Badiali pointed out recently, with stronger growth comes more electricity demand. Most of China's electricity (about 80%) is generated from coal-fired plants. In 2010, power-generating capacity is expected to increase another 10%. That amounts to over 200 million tons of coal usage, or 10% more output than the second-largest coal-producing region in the U.S.

In other words, forget the "going green" headlines. China's coal usage will not fade anytime soon. In fact, the IEA says it will be at least 20 years before coal's share of electricity generation in China falls below 75%.

Based on these statistics, Shanxi will be a busy place. More than 20% of China's coal production comes from this central province, known as the "King of Coal."

Unfortunately, Shanxi is also known for having a terrible safety record. More people die from mining deaths in Shanxi than any other place in the world. Most of the deaths come from smaller, privately owned mines. These owners (most are millionaires) bribe local officials and inspectors to ignore safety hazards.

That's why the Shanxi government announced a massive safety initiative that's changing the landscape of China's coal industry.

The new program (made official in 2008) calls for the elimination of 1,500 small and inefficient coal mines in Shanxi. These small producers are required to sell their businesses (most at a huge discount) to a government-appointed "consolidator." To put this in perspective, it's like Citigroup and JPMorgan receiving assets from a troubled bank for 40 cents on the dollar.

Below is a list of four China-based coal companies that trade in the U.S. All have been chosen as consolidators by the Shanxi government.

I would not be surprised if some of these companies are bought by larger international players over the next 12 months.

There's no doubt China's demand for coal will grow for decades. And the government's initiative to give away mining assets for dirt cheap plays right into the hands of the stocks highlighted above.

You should consider using the market pullback to buy some of these coal names today.

Yanzhou Coal Mining Co. Ltd. (NYSE: YZC, Stock Forum), Sinocoking Coal and Coke Chemical Industries Inc. (NASDAQ: SCOK, Stock Forum), L and L Energy Inc. (NASDAQ: LLEN, Stock Forum), Puda Coal Inc. (AMEX: PUDA, Stock Forum).