It turns out I was not alone when I discussed my bullish outlook for the nation’s coal producers last week. Earlier today, a Goldman Sachs (NYSE:GS) analyst gave a similar opinion.

The only difference between my article and his note to clients? His sent the industry soaring.

As I wrote Friday, my favorite coal producer, James River Coal (NASDAQ:JRCC), used strong contract prices to beat its Q1 estimates and send shares surging. The momentum from last week’s announcement has continued through today. Over the last five trading sessions, shares of the company have jumped by more than 55%.

There is a bull on the loose, for sure.

Thanks to the analyst’s positive note, James River is not alone today. Shares of Massey Energy (NYSE:MEE) are up by over 20%. National Coal Corp (NASDAQ:NCOC) is up by about 35%. Alpha Natural Resources (NYSE:ANR) is up by 10%. And rounding out my top five, Arch Coal (NYSE:ACI) is up by over 11%.

The big question is will the gains continue?

Here at home, the only person that can answer that question is Obama. As I wrote earlier today, his cap-and-trade notion could put the crimps on the sector’s future prosperity. Fortunately, most legislators are quickly realizing the idea is one of the most politically dangerous to come from Washington in a long time.

As the cap-and-trade nonsense begins to be pushed onto the next generation of leaders’ laps, coal prices will rise again. Even better, the bullishness will take place when international growth is starting to make headlines once again. It will be a coal-industry double whammy.

If you have been following the sector, you know China has a slew of coal-burning power projects in the works. Just because we are all sunshine, lollipops and alternative energy here, does not mean Asia is giving up its ultra-cheap infrastructure anytime soon.

International coal demand will grow, setting a floor for domestic prices. With one of the world’s largest reserve of coal, domestic producers will benefit from international growth.

Essentially, even though the coal industry got slammed by the current financial meltdown and a new wave of political fury, the industry is little changed from its phenomenal run just a few years ago.

I maintain my outlook and recommend buying coal-related plays on any dips.

Source: Lighting a Fire Under America’s Coal Industry

Did you see that China’s CNOOC is getting involved a $3 billion coal-to-liquids (CTL) project in South Australia? Tiny little Altona Resources Plc (LON: ANR), listed on London’s small cap market, has signed what it calls an ‘in-principle agreement’ with CNOOC Energy Investment Co Ltd to cooperate in the development of a project Altona has in the Ackaringa Basin of SA.

It’s an ambitious project too. The project includes a 10 million barrel per year (30kbpd) open cut mine and a 560 megawatt power plant. Altona Chairman Chris Lambert told investors the project could provide both base-load power to SA and diesel fuel. He says SA has, “a significant looming power deficiency and currently imports all of its distillate requirements.”

Nuclear, geothermal, coal, solar-thermal…what’s it going to be Australia? The energy to run Australian industry has to come from somewhere. And that somewhere is going to be influenced by whatever the price of carbon ends up being once the government gets its scheme in place.

Meanwhile, perhaps following Worley Parson’s (ASX:WOR) lead from last week, West Australian Premier Alan Carpenter said, “Us too!!” yesterday in announcing plans for an electric power grid in the Pilbara. The plan calls for 6,000 megawatts of capacity to be installed by 2015. It would replace the current on-site and private system whereby mining firms provide their own energy from diesel generators or dis-integrated power plants.

Source: CNOOC Signs Agreement With Altona (LON: ANR) for Coal to Liquids Project

“In the next 12 months there will be an unprecedented amount of both domestic and cross-border mergers and acquisitions,” Wilbur Ross, chairman of International Coal Group Inc. (ICO), told Bloomberg News. “U.S. reserves are undervalued relative to those in the rest of the world.”

Ross, the billionaire investor who helped consolidate the U.S. coal and steel industries, considers this the start of a round of mergers that will prove Cleveland-Cliffs prescient in its Alpha bid.

The top eight U.S. coal producers, which are worth more than $50 billion, are possible takeover targets for a country desperate for resources. And compared with China, American coal companies are bargains.

China Shenhua Energy Co., Asia’s biggest coal company is valued at $15.52 for every ton of coal it holds, compared to $2.11 a ton for Peabody Energy Corp. (BTU), and $1.76 for International Coal, Bloomberg reported.

At a point when the U.S. economy is slowing under the weight of a growing financial crisis, and spiking food-and-energy prices, escalating growth in the developing economies around the world has ignited a bull market for coal that analysts believe could last for at least 10 years.

And that’s going to lead to a major shift in the ownership of coal-related assets.

Enter the Red Dragon: China’s Coal Crisis

China, home to 1.3 billion people and the world’s fastest-growing economy, counts upon coal for 80% of its energy needs. Indeed, it’s the world’s largest coal producer, as well as its largest consumer. Coal demand in China jumped nearly 9% last year – meaning the Eastern power now accounts for a full quarter of the world’s annual coal consumption. So it’s no surprise at all that the growing global discrepancy between supply and demand is most acute in China.

Vic Svec, a senior executive at Peabody Energy, the world’s largest private-sector coal producer, referred to China’s ability to influence the price of commodities as a “butterfly effect.” In other words, “demand from Beijing can ripple back to Queensland, Australia, or Gillette, Wyoming,” Svec told The Wall Street Journal.

Svec’s right. Five years ago, China exported 83 million metric tons more coal than it imported. But last year, the nation’s surplus dropped to a meager 2 million metric tons. That means more than 80 million metric tons of coal (about 12% of the internationally traded market)has been taken out of global circulation.

That’s a big reason why the highly coveted low-sulfur coal from the Powder River Basin in Wyoming and Montana has climbed from less than $10 a ton last year, to nearly $15 a ton – a price gain of 50%. And why thermal coal prices at Australia’s Newcastle port, a benchmark for the Asian market, have more than doubled this year.

Ironically, the high prices demand and China helped create, have left the country on on the brink of a potentially disastrous energy shortfall. Overseas coal has simply become too expensive for China to import.

The Asian nation imported just 21.55 million metric tons of coal in the first six months of this year, down 20.4% from the same period last year, according to China’s customs bureau.

Now, the county is suffering through its worst power shortage in decades because of soaring demand and inadequate supplies.

Nearly half of China’s provinces have started to ration electricity. Last month, the government raised electricity tariffs by 5% but prices are still 30% lower than current coal prices would imply, according to BNP Paribas SA (OTC ADR: BNPQY) estimates. And that has forced many smaller energy producers out of business.

The government in Beijing tried to deal with the matter by imposing price controls on electricity that make it impossible for energy suppliers to raise their prices, even as they pay more for natural resources that have skyrocketed in price. But that measure is driving smaller producers out of business.

“Large state-owned power companies have no choice but to keep operating and we have seen strong power generation growth from them so far this year despite the high coal prices,” Daisy Zhang, an analyst with BNP Paribas in Shanghai, told the Financial Times. “But smaller power plants have been shutting down because the more they operate, the more [money] they lose.”

Figures from the China Electricity Council for the first five months of this year show that out of a total of 4,800 power plants, 1,800 suffered net losses over the period. The overwhelming majority of the losers were fueled by coal.

The government has also capped the price of coal but that hasn’t alleviated the pressure energy suppliers either.

“If a coal company wants to raise prices it just issues a notice and that’s it. There’s no way [to refuse] even if you don’t agree,” one coal purchaser with a power plant told the Shanghai Securities News last week.

The newspaper also cited industry officials as saying that coal companies have been refusing to honor contracts, thereby forcing power firms to buy from the spot market, where prices are considerably higher.

While previously around 80% of contracts were honored, the figure has dropped to 60%, the Shanghai Securities News said.

Another problem is the growing number of coal exports. Beijing has capped the price of coal sold in its home market, but global prices continue to rise, which makes exporting coal far more profitable. The difference between domestic and global coal prices was about $54.70 per metric ton in the week ended on July 4, China Business News reported.

China exported 25.49 million metric tons of coal in that time, a 10.2% increase from the year prior. In fact, China’s coal exports soared 83.5% year-over-year in June to 6.99 million metric tons, the highest monthly total since March 2005, even as the nation suffered through a shortage of the fuel that has resulted in blackouts across the country and a multitude of energy providers being shut down.

While many in the industry anticipate Beijing will raise energy tariffs further after the Olympic games, few believe that will be enough. It seems apparent that the solution for China’s coal crisis is to get more coal, and many believe it will through cross-border acquisitions.

China Ready to Pounce on U.S. Coal Suppliers

The total volume of mergers and acquisitions (M&A) dropped by 36% in the first half of 2008, the slowest start since 2005, according to Dealogic. But while deal volume in the United States tumbled 40%, transaction volumes jumped 5% in Asia.

The pickup in Asian transactions is largely attributable to Chinese companies, which announced plans to buy a combined $42 billion in foreign assets. That’s more than five times the amount Chinese companies spent on M&A in 2007, according to Dealogic. It’s also equivalent to the combined volume of all the foreign takeovers by Chinese companies from 2000 to 2006.

Also, while deal volume was down in most every sector, takeovers of energy and mining companies shot up 33% in the first six months of 2008. And that is only a small indication of things to come.

The recent buyout of Alpha Natural Resources Inc. by Cleveland Cliffs Inc. could pave the way for more than $50 billion worth of M&A activity in the U.S. coal industry over the next few years, Bloomberg News reported.

“People will look back on this as the first major U.S. event, not as overpriced,” International Coal’s Ross said.

Another factor to consider is the weakness of the dollar, which makes U.S. assets even more affordable for foreign companies.

Cross border activity represented 40% of the $1.6 trillion in first-half deals and, according to Thomson Financial, “was aided by emerging economies with cash to spend and favorable exchange rates in the U.S.”

Chinese interests have already displayed an aptitude in acquiring resources vital to their growth. This was evidenced earlier this month, when Sinosteel won its hostile bid for Midwest Corp. Ltd., an Australian iron ore producer. Iron ore, the other key ingredient in steel production, has more than doubled in price over the past year.

Also, in February, Aluminum Corp. of China (ADR: ACH) teamed up with Alcoa Inc. (AA) to buy a 12% stake in Rio Tinto PLC (RTP) hoping to thwart an unsolicited takeover from BHP Billiton Ltd. (BHP) that would have give the Australian powerhouse control over a third of the world’s iron ore.

So far, all but one of the 10 unsolicited hostile bids launched by Chinese firms on foreign targets since 2005 have focused on natural resources, according to The New York Times.

“Working on China-related deals two or three years ago, I once gave a presentation to an interest group in which I said Chinese investors did not yet have the appetite for hostile takeovers,” a Chinese lawyer working for an international law firm told China Economic Review. “But I am sure we will see a lot of more of these over the coming months and years. Chinese investors are increasingly sophisticated.”

The attorney went on to say that he was currently working on two commodities-related investments by Chinese firms in Australia – one of which could well end with an aggressive takeover bid.

Source: How Coal Shortages in China Will Spark More Foreign Takeovers of U.S. Assets

Cleveland-Cliffs is paying $10 billion for Alpha Natural Resources, a company that specializes in mining thermal coal used in steel production, the company said on its website. The deal values Alpha at $128.12 per share, a 35% premium to its closing share price on Tuesday.

Alpha shareholders will receive 0.95 Cleveland-Cliffs shares and $22.23 in cash for each share they hold. Alpha shareholders will hold 40% of the resultant company.

“By combining our companies’ complementary operations and management capabilities, we will be well positioned to meet the world’s increasing demand for raw materials,” Joseph Carrabba, Cleveland-Cliffs’ chairman and chief executive officer, said in a statement.

The new company, which will be known as Cliffs Natural Resources, will operate nine iron ore facilities and more than 60 coal mines throughout North America, South America, and Australia. The company’s iron-ore reserves will total one billion tons, while its coal reserves will more than triple to 916 million tons. The annual savings from cost synergies will be at least $200 million by 2010.

Cleveland-Cliffs brought in $2.28 billion in revenue last year, while Alpha took in $1.64 billion. Together, the companies expect to see total revenue of $10 billion by 2009.

“This transaction is a good strategic fit for Cleveland-Cliffs as it gives them a stronger presence in the very tight metallurgical coal market and complements their iron-ore business,” Brian Hicks, co-manager of the $2 billion Global Resources Fund at U.S. Global Investors Inc. (GROW) told Bloomberg News.

Coal and iron ore are the two key ingredients in the production of steel, which is in high demand throughout the developing world.

“Global steel demand growth continues to be led by emerging economies to meet the requirements of expanding industrial sectors and infrastructure growth,” Risaburo Nezu, chairman of the Organization for Economic Cooperation and Development (OECD) steel committee, told Forbes. “Demand in many mature economies has slowed in line with weaker economic activity.”

According to Nezu, steel use continues to grow most rapidly in the so-called “BRIC” economies of Brazil, Russia, India, and China. In 2007, steel use rose:

• 18.6% in Brazil
• 13.5% in Russia
• 11.3% in India
• 13% in China

All told, those four countries found uses for 521 metric tons of steel, with China accounting for 78% of that total.

While the price of U.S. steel-sheet hit a record $1,052 a ton in June, rising from $532 a year earlier, the price of coking coal and iron ore have doubled in the past year as well. As a producer of both products Cliffs Natural Resources will be well positioned to exploit emerging market growth.

Source: Cleveland-Cliffs Taps Into Emerging Market Steel Demand with $10 Billion Buyout of Alpha Natural Resources