This from Investment U:

The Obama administration has made a big deal about renewable energy. Over the next several years, the new President has plans to spend roughly $150 billion promoting and enabling its growth. And with $700 billion flowing from the United States into OPEC’s pockets every year, I don’t think you’ll get much of an argument from anyone about the timeliness or the need for renewables.

But even with massive amounts of capital investment – and widespread adoption by utilities and end users – renewable energy will still only account for roughly 10% of world energy output by 2030, an increase of only three percentage points from today’s estimated 7% contribution. Depending on whom you talk to, however, that estimate is wildly optimistic.

The stark reality of worldwide energy production is a dirty, four-letter word: coal. Since the beginning of the 21st century, its worldwide consumption has outpaced any other fuel source, growing nearly 5% per year. This, too, in the face of prices that have escalated every year since 2000.

Consider 97% of that growth has occurred in emerging market countries, most notably China and India. They’ve respectively accounted for 66% and 19% of the total increase.

To keep up with the demand, world coal production is projected to increase by nearly 60% by 2030. Every major coal producing country will see huge increases in its coal output: China will almost double its output, India’s will more than double and Russia’s will rise almost 75%.

What about reserves… is there enough coal out there to meet this huge increase in consumption? The answer is yes. World reserves are more than adequate, with China, Russia and the United States accounting for 60% of them.

Presently, China’s a net exporter of coal, but that will change in a year or two. By 2030, China will be importing 88 million tons of the black rock a year. India will be importing a staggering 220 million tons per year, overtaking Europe to become the second-largest importer.

All this is of great benefit to U.S. coal producers, who have seen their exports surge nearly 45% in 2008 alone. They will continue to see increasing exports of coal to China, India and other emerging market countries.

Large investments will be needed on the prospecting side – to identify economically viable deposits – and on the mining side to develop new projects once identified. Total investment in coal-supply infrastructure is expected to be $730 billion through 2030, with 91% of that going to mine development and mining equipment, and the rest for port expansions and shipping upgrades.

Mining Coal’s Profits

The safest direct coal play is the Market Vectors Coal ETF (NYSE:KOL), which tracks the performance of the Stowe Coal Index. This gives investors a means of tracking the overall performance of companies engaged in the coal industry. This is a relatively new ETF and it gives investors exposure to the major players in the industry including:

• Arch Coal (NYSE:ACI) – One of the largest coal producers in the United States.
• Peabody Energy (NYSE:BTU) – The largest private sector coal company in the world, with majority interests in 31 coal operations located throughout the United States and Australia.
• Bucyrus International, Inc. (Nasdaq:BUCY) – A world leader in above and sub-surface mining equipment.

Another safe coal bet is Joy Global, Inc. (Nasdaq:JOYG) – essentially a carbon copy of Bucyrus. Joy’s wholly owned China Mining Machinery subsidiary recently acquired Wuxi Shengda, a Chinese manufacturer of long wall shearing machines used in underground mining operations in China.

Speaking of China, the second-largest coal producer in China, Yanzhou Coal Mining Company (NYSE:YZC), owns eight working mines – including one in Australia – with many others under construction. The seven working mainland mines have almost two billion tons of proven reserves. That’s enough to run China’s power plants for five-and-a-half years.

Of course the negative aspects of increased coal usage are increased greenhouse gas generation. Right now coal is responsible for 42% of greenhouse gasses emitted worldwide. The International Energy Agency estimates that will increase to 46% by 2030, even with aggressive implementation of new carbon capture and storage technology.

Coal is a dirty four-letter word when it comes to energy generation. And unfortunately, even under the best-case scenario, the world will have to depend on it for years to come. Investors would be wise to consider some form of exposure to coal as part of a well-balanced energy and infrastructure portfolio.

Source: Renewable Energy Reality: Coal

This from Money Morning:

Between September 2007 and June 2008, oil prices doubled, gold rose 30% and commodities, in general, advanced by a similar percentage.

So why, six months later, when prices have fallen back below last year’s levels, does everybody think they won’t rise again? The difficulties of extraction haven’t gone away, nor have the prospects of increasing consumption in the faster-growing emerging markets such as China. Yes, the prices of commodities are severely affected by marginal moves in supply and demand, but this is ridiculous!

Rest assured, commodities prices will rebound in the New Year. The reasons will soon become quite clear.

The decline in commodities prices since the summer is broad-based. The Reuters Continuous Commodities Index traded recently at 341, down 25% from a year earlier and off about 45% from its June high. At $48 a barrel, oil is trading at less than one-third of its June high. And gold, which appreciated less than other commodities in the spring, is still down 18% from the $1,000-per-ounce level it reached earlier this year.

Conventional wisdom blames the decline in commodity prices squarely on the global recession. Since the rise in demand from emerging markets – particularly the huge consumption bases of China and India – had caused the previous run-up, it seems natural that the absence of that demand growth would cause prices to decline. After all, that happened in 1982, when a deep recession in the United States spread to a number of other countries. Oil prices plunged from $40 a barrel to a mere $10, breaking the back of the Organization of the Petroleum Exporting Countries (OPEC) in the process.

This time around, however, the math doesn’t seem to work. For one thing, the world as a whole is by no means locked into recession. We in the rich countries think of our economies as spiraling into a deep decline, but the reality is that we may only be witnessing a secular shift caused by the narrowing of income differentials between rich and poor countries as globalization proceeds.

In countries such as China, India and Brazil – three of the four so-called “BRIC” economies – growth has slowed and many are suffering imbalances in their financial structures, but there is little sign of actual decline in any of them. Indeed, if China’s recently announced $590 billion infrastructure investment serves to redirect growth toward domestic consumers, it is possible that the demand for oil and other commodities there may show very little dip at all; it takes a great deal of iron ore and other commodities to produce $100 billion worth of railroads, for example, one of China’s stated objectives.

On the supply side, OPEC was full of spare capacity in the 1980s. South Africa and the Soviet Union were still expanding gold production, and the explorations of the 1970s had produced surpluses of many other commodities. But in the past two and a half decades, things have changed.

Oil, for example, remains in short supply. Both deep offshore fields – like those discovered by Petroleo Brasileiro SA, or Petrobras (ADR: PBR), in the Tupi Complex – and the tar sands (like the ones in Canada and Venezuela), are economically unfeasible with oil trading at such a low price. And, if prices remain low, the expansion and exploration of new sources of production will be curtailed even further.

More importantly, though, supply and demand is only one of the reasons commodity prices rise and fall. What really spurred the big price rise in commodities that took place earlier this year was the explosion in the money supply throughout the world.

Money supply, unlike demand, is something that hasn’t evaporated with the economic downturn. In fact, it has actually ramped up. Even though money markets have become illiquid, central banks throughout the world are forcing down interest rates and pumping out liquidity by every means they can think of [Indeed, the policymaking arm of the U.S. Federal Reserve meets today (Tuesday), and is expected to cut rates yet again. For a related story, click here].

Meanwhile, governments everywhere (except Germany) are implementing massive “stimulus packages” that will destabilize budgets and insert huge additional demand into the global economy. Since the governments will have to borrow the money to finance those stimulus packages – and the budget deficits that are inevitable in an economic downturn – central banks will be compelled to pump out even more money to accommodate all the increased debt; otherwise, interest rates would go through the roof and finance for the private sector would become unobtainable, hardly the object of this whole costly exercise.

The future is thus one of rapidly increasing inflation, combined with a healthy recovery in global demand, at least in the emerging markets, as Europe and the United States may suffer deep recessions this time around.

To take advantage of this likely trend, I would recommend a broad portfolio of shares whose prices are closely linked to the prices of major commodities. Among those you might consider:

• Vale (ADR:RIO): As a gigantic Brazilian iron ore producer, Vale will benefit enormously from China’s new infrastructure program (Think of all those steel rails!). The stock is currently trading at just over $12 a share with a Price/Earnings ratio (P/E) of about 7.0 and a yield of slightly more than 1.0%.

• Rio Tinto PLC (ADR:RTP): Another huge mining conglomerate, the long-and-bloody attempted takeover of Rio Tinto by BHP-Billiton Ltd. (ADR: BHP) recently fell apart. At $93, Rio Tinto shares have a yield of 5.8% and a prospective P/E of about 3.0. The company is overleveraged, so somewhat dangerous, but you’d be getting paid for the risk.

• Suncor Energy Inc. (NYSE:SU): The largest pure player in the Canada’s Athabasca tar sands, Suncor’s marginal cost of production from operating facilities is about $30 per barrel and the cost of opening new facilities is about $60 per barrel. It’s currently trading with a P/E of 8.0 but has a yield of less than 1.0%, as it needs all its cash.

• SPDR Gold Trust (NYSE:GLD)exchange-traded fund (ETF): The largest ETF that invests in gold, GLD has more than 750 tons of the “yellow metal” held in trust.

Yanzhou Coal Mining Co. (ADR:YZC): China’s largest coal miner, Yanzhou has a P/E of 4.0, yields 3.5% and enjoys low costs – not to mention a super-close proximity to the gigantic market that is China.

Source: Five Ways to Profit from the New Year Rebound in Commodity Prices

But what might the new administration mean for more traditional – and more reliable –energy sources?

Oil is always the first energy source to spring to mind. But it’s hardly a solo act – coal and nuclear make up the other two-thirds of the top fuel trio. Coal delivers 50% of U.S. electricity needs, and nuclear power brings another 20% to the table.

The cold truth is that demand for energy of all types – and especially electricity – is going to keep advancing, domestically and worldwide. And developing alternatives to coal and nuclear will take time. For instance, tying wind and solar into the existing power grid will be enormously expensive and is likely to pose massive technical and engineering problems.

In fact, according to the International Energy Agency, renewable energy isn’t likely to make a meaningful dent in meeting the world’s energy needs before 2030, if then.

And regardless where the power comes from, our appetite for electricity will continue to skyrocket. Across the planet, overall electricity consumption is expected to double by 2030, increasing by 17 trillion kilowatt hours. While electricity demand will “only” increase by 50% in the U.S. market by 2030, demand will increase 400% in China and six-fold in India.

Our research indicates that President Obama will have very little flexibility in solving our short-term energy problems once he’s sworn into office next month. While he may prefer the environmentally friendly alternatives, most of those replacements are far from fully developed.

The bottom line: Obama’s apparent preference for renewable energy aside, coal and nuclear power are fully deployed, and in widespread use, meaning they’ll remain the backbone of our energy sector in the New Year – and for years to come.

Even so, it’s well worth factoring in all the possible players as we examine energy-sector outlook – and the accompanying potential profit plays – for the next 12 months.

King Coal Reigns Supreme

When it comes to future energy profits for investors, coal and nuclear will continue to be the “dream team” for years to come. Coal will provide the answer to our short-term and intermediate energy needs.  It’s plentiful, it’s cheaper than other available alternatives, and a big percentage of the world’s power plants burn it.

Nuclear power offers a long-term solution to energy shortages and a clean solution to global warming, as well. Uranium-fueled nuclear plants are cheap to operate, can run for long periods without refueling, and cause little pollution.

While there is widespread distaste for coal-fired power plants that spew billions of tons of carbon dioxide and other pollutants into the air, there’s no doubt coal will continue to be the dominant player in the electricity game for some time to come.

A full 50% of the electricity U.S. consumers use is generated by coal, and coal is king in the rest of the world, as well. According to the IEA, coal accounted for 42% of all worldwide electricity consumption in 2005.
But get this – the agency predicts coal use will explode by 73% over the next 20 years. That’s the largest projected percentage increase of all energy sources.
As you might suspect, China and India use 45% of world’s coal and will be responsible for 80% of that increase. China, alone, uses more coal than the United States, Japan and Europe combined.  China is utterly dependent on coal to run its factories and assembly plants, with coal supplying 80% of its electricity. The Red Dragon also is the world’s top producer of steel, a process that’s also a big burner of coal.

But while China is coal’s largest consumer and producer, the United States controls 27% of the world’s proven reserves, the biggest-single percentage on the planet.  That puts this country front and center on the worldwide coal stage, and President-elect Obama’s energy policy in the spotlight.

The president plays a pivotal role in shaping the nation’s energy policy, naming top officials at the U.S. Environmental Protection Agency (EPA), the Office of Surface Mining Reclamation and Enforcement and the U.S. Army Corps of Engineers.

Obama has proposed an economy-wide cap-and-trade system to reduce carbon emissions by 80% by 2050.  His system – which would set an overall emissions limit, then require polluters to buy allowances at public auction – would increase electricity rates and discourage coal consumption in the U.S. market. President-elect Obama even has stated that any utilities building coal-fired plants could go bankrupt buying pollution allowances.

And on Capitol Hill, newly emboldened Democrats recently tackled global warming and other environmental problems by choosing Sen. Henry Waxman, D-Calif., to head the House of Representative’s Energy and Commerce panel.  Waxman has already signed onto legislation that would ban any new coal-fired power plants that aren’t built using new technologies that capture carbon dioxide and store it underground, a key part of the Obama energy plan.

Luke Popovich, a spokesman for the National Mining Association, said he believes Obama will be pragmatic about the need to keep coal in the nation’s energy mix.

“He presumably would be sensitive to the impacts of energy policies given the perilous state of the economy,” Popovich said.

But while U.S. utilities may eventually be forced to tighten emissions rules and increase rates, Obama’s renewable energy plans will have very little impact on U.S. coal producers in the near future.

The world needs coal. We have it. And we’re going to sell it.

In the first half of 2008, U.S. coal exports increased by 13 million short tons, or 50%, over first-half 2007 shipments, according to the IEA.  Strong global demand for coal, combined with supply disruptions in several key coal exporting countries (Australia, South Africa and China), were the primary factors behind the increase.

But lately, coal prices, along with the prices of other fossil fuels, have suffered from the global economic crisis, and from a resurgent U.S. dollar. An 80% decline in global shipping rates has also fostered competition from other exporters, like Australia, which can now ship farther and compete with U.S. exporters.

As a result, the price of Appalachian Coal on the New York Mercantile Exchange (CME) has fallen to less than $80 a ton from $143 in July.

This will have a negative impact on coal producers until the world economy is able to gather itself back up and build up a new head of steam.

But don’t expect the slump to last long.  China’s economy is getting a shot in the arm from a gigantic $586 billion stimulus package, cementing growth expectations for 2009.  Expect U.S.exports to accelerate when that kicks in, probably in the second half of 2009.

Since the stock market usually leads economic indicators by six-to-nine months, right now is a good time to be looking at candidates for your investing dollar. But you should be cautious about pulling the trigger.  Watch construction activity in China – especially steel demand in the late spring – for the first signs of a rebound in coal prices.

When you think things are ready to take off, Peabody Energy Corp. (BTU) and Arch Coal Inc. (ACI) – the largest U.S. producers – are worth a look. For those who like to play a basket of shares, the Market Vectors Coal exchange traded fund (KOL), or ETF, provides the desired diversification. All three securities are trading at discounts of at least 80% from their July highs, and currently trade at bargain basement multiples.

If you want a coal play that bets directly on China, Money Morning Investment Director Keith Fitz-Gerald likes Yanzhou Coal Mining Co. Ltd. (ADR: YZC), one of China’s biggest coal suppliers. It produces lots of high-grade, low-sulfur coal, which burns cleaner and therefore fetches a premium price. The company boasts profit margins of 22%, when the industry averages half that.  The company profits are up a blistering 364% in the year’s first three quarters, compared with a year ago.  The stock trades at only three times earnings and has a dividend yield of 4.3%.

Nuclear Power: It Struggles in the U.S., but Thrives Abroad

Nuclear power is attractive to the energy industry because it produces electricity on a predictable, 24-hour basis – earning it the industry sobriquet of “base load” power. Coal and hydroelectric plants are the only other power sources that also rate that label. Such alternatives as wind, solar or biofuels do not.

During its term, the Bush administration tried to spark a “renaissance” in the construction of nuclear power plants.  And during his presidential campaign, Sen. John McCain stood firmly behind the industry’s hopes of building 45 new reactors by 2030.

Interest in new types of reactors seemed to hint at least at the beginnings of a new start. But President-elect Obama has been lukewarm on nuclear.  He acknowledges that nuclear is one of several viable components of the nation’s energy portfolio – the current 104-plant fleet provides 20% of America’s electricity – but has questioned its safety while emphasizing a need to diversify the nation’s energy mix with more wind, solar and other renewable sources.

“That’s sort of like my wife saying she’d support divorce under certain situations,” says William Kovacs, the U.S. Chamber of Commerce’s vice president of environment, technology, and public affairs.

In fact, the Barack Obama/Joe Biden New Energy for America Plan, while recognizing that nukes provide 70% of our non-carbon-generated electricity, says that “before an expansion of nuclear power is considered, key issues must be addressed including: security of nuclear fuel and waste, waste storage and proliferation.”  It goes on to say that the team of President-elect Obama and incoming Vice President Joe Biden “do not believe that Yucca Mountain is a suitable site as a long-term repository for spent nuclear designed for long-term storage.  In any case, the earliest the storage site could open would be 2017, and that was before Republicans lost control of the Senate.

With Senate Majority Leader Harry Reid, D-Nev., firmly opposed to nuclear waste storage in his home state – and with the Obama administration ready to hold the industry’s feet to the regulatory fire – any plans to expand the nuclear industry in the United States now face a high hurdle.

But nuclear proponents are hardly impotent.  The Nuclear Energy Institute, the industry’s most powerful lobbying group, helped craft the Energy Policy Act of 2005 with more than $12 billion in subsidies for nukes.

Maintaining nuclear energy’s current 20% share of generation would require building three reactors every two years starting in 2016, based on U.S. Department of Energy forecasts.  Right now, some 17 companies and consortia are pursuing licenses for more than 30 nuclear power plants with the Nuclear Regulatory Commission.

But the last operating license for a nuclear plant in the United States was issued in 1978, and the approval process takes a minimum of 24 months after site approval, which can take years.  Expect lots of public comment and infighting in Washington, as applications wind their way through the approval process at the NRC.

Meanwhile, the rest of the world is racing ahead with plans to up the ante in the nuclear power game. There are currently 440 nuclear reactors in 31 countries that generate about 16% of the world’s electricity.

Uranium-fueled nuclear energy is rapidly gaining global acceptance as a clean, reliable alternative to such dirty-burning fossil fuels as coal and oil. In a twin bid to combat global warming and keep up with soaring demand for electricity, countries are rushing to build nuclear power plants. Under current projections, 630 reactors will be operating in 55 countries by 2030.

It’s the new technologies those reactors are designed around that are aimed at allaying the public’s perception about the safety of nuclear power.  Toshiba Plant & System Services, which has built 112 plants in the past 12 years (more than any other company), is working on a “mininuke,” according to Forbes magazine. Called the “4S” (short for Super-Safe, Small and Simple), it uses a bath of molten sodium to produce steam twice as hot as steam from water-cooled reactors.  The 4S can crank out as much as 50 megawatts of power, easily enough to fire up a small factory, or to service an entire town that’s located off the main power grid.

On top of that, the mininuke can go 30 years without refueling, as opposed to typical reactors, which must be fed every 18 months. And the 4S will be safer, because the reactor core is deep underground, well protected against a terrorist attack or earthquakes.

China and South Africa are working on so-called “pebble-bed reactors,” one version of which is filled with 100,000 billiard-ball-sized spheres of coated uranium that are cooled by helium. That eliminates the need for enormous pressurized water-cooling systems and million-dollar containment domes, making them virtually meltdown-proof.

U.S. firms are also on the trail of smaller and safer designs. A Santa Fe, NM company called Hyperion Power Generation Inc., is working on a hot-tub sized design, which eliminates the need for the notoriously unstable uranium control rods. U.S. giant General Electric Co. (GE) is working on new, more efficient designs, as well.

No matter how you slice it, the fuel for the reactors in those plants all depend on a scarce commodity – uranium.  Flat out, there’s just not enough “yellow cake” to go around.  It takes seven to 10 years to transform a uranium discovery into a fully operational mine. With that kind of lag time, it’s clearly almost impossible for supply to keep up with demand.

Until recently, the market reflected the scarcity, rising as high as $137 a pound in 2007. But lately, despite the global shortages, uranium prices – in sympathy with other commodity prices – have nosedived.

Prices have fallen 40% this year, leading to a sharp decline in the share prices of mining companies, and eviscerating the financing for extraction projects. In the last month alone, six uranium mines in western Colorado and Utah were either put on hold or closed.

Some experts lay the blame for this current credit squeeze squarely at the feet of hedge funds – who they blame for buying up uranium – and banks no longer willing to lend money.

“Hedge funds were selling off their uranium to raise cash, and the prices just plunged,” said George E.L. Glasier, chief executive officer of Energy Fuels Inc., a Canadian junior miner that recently put a Colorado mine project on hold as part of a “capital preservation” strategy brought on by the credit crunch.

Uranium prices fell to $75 early this year, and fell as low as $44 this fall.  The spot price now is $55.

With the worldwide growth in the industry – and a classic supply/demand imbalance in the making – someone is eventually going to have to pay the price.  History shows when uranium prices move higher, uranium stocks almost always hitch a ride North. So when uranium prices advance – most likely to new highs – expect mining stocks to rise in virtual lock step.

But notwithstanding global growth – for now, at least – Obama’s energy plan and the mothballing of mines makes any uranium play a long-term proposition.

Besides Toshiba (PINK:TOSBF), the stocks to consider include Cameco Corp. (CCJ), the largest U.S. producer; and General Electric, which has a presence in the commercial nuclear power market here and overseas. Also, take a look at Rio Tinto PLC (RTP) and BHP Billiton Ltd. (BHP), huge international mining firms with large uranium deposits.  Each of these firms would stand to reap substantial profits from a resurgent price in yellow cake.

Outlook 2009 – and Beyond

However, regardless of what uranium does, coal is still the 800-pound gorilla in the energy world. In the United States, no matter how lofty our environmental intentions may be, it’s unlikely coal will be regulated out of existence anytime soon. That’s especially true overseas, where coal is playing a crucial role, fueling the transformation of such countries as China and India from “emerging markets” into first-order powerhouse economies. Given that, the world market simply can’t replace coal anytime soon, either.

As for nuclear power, safety improvements and other technological solutions make nuclear energy a viable energy source for the long term, eventually grabbing a bigger piece of the energy pie – especially overseas.

The bottom line: The economic outlook for both coal and nuclear power is upbeat.  Investors might look at both energy plays when considering how to allocate their portfolio – for the New Year and beyond.

Source: Surprise! Coal & Nuclear Power are Keys to Obama’s Energy Plan

This from Money Morning:

The $585 billion (RMB4 trillion) stimulus package that China announced Sunday may or may not help China’s economy. But with investments in low-income housing, water and energy projects, airports, disaster relief – and $100 billion for new railroads – over the next two years, this financial package provides oodles of opportunities for investors.

There is no doubt China needs infrastructure. Now the world’s fourth-largest economy, China has grown so rapidly that many of its services are stretched beyond belief. Equally, it is not so certain that the government knows what infrastructure to build, or that it can be built, without hopeless corruption. For instance, the Three Gorges Dam became a global watchword for waste and environmental destruction, while the fancy toll roads built between major cities are still very underutilized, because the tolls are too high for all but the rich. In the stimulus package, more than $100 billion is earmarked for railroads, a seemingly 19th Century priority at the beginning of the 21st.

(As Money Morning reported in a market analysis story this past summer, General Electric Co. (NYSE:GE) said it expects its business in China to double to $10 billion a year by 2010 – making that country a key element of the struggling U.S. industrial giant’s strategy to offset its struggles here in its home market by pursuing business in faster-growing markets abroad. GE also announced that it would be providing China with 300 of its most modern locomotives between now and 2010).

Even if the Chinese economy had slowed sufficiently to warrant stimulus, there was a better way of getting it. For a decade, China has enjoyed unbalanced growth, with excessive rates of savings and investment and inadequate consumption. This has resulted in the huge buildup of Chinese foreign exchange reserves, now more than $1.9 trillion –the largest in the world, both in relation to the economy, and in real terms.

To rebalance the economy and maintain growth, China actually needs more domestic consumption. While Bush-style cuts in high-level income taxes would benefit only the “Chuppies” – China’s newly emergent yuppie class – there are other taxes that bear heavily on the economy and could usefully be cut.

The farmland usage tax, for example, levied at 13.6 cents to $1.36 (one to 10 RMB) per square meter in 1987, was late last year boosted to 68 cents to $3.40 (five to 25 RMB) – thus increasing what was already a huge imposition on the poorer farmers, whose margin above subsistence is very limited, only to be made even more so by such regressive taxes. Thus a Chinese government that truly had the welfare of its people at heart would have engaged in tax cuts, not grandiose public sector infrastructure projects.

There is considerable danger of such a massive Chinese infrastructure program leading to inflation. Assuming that China uses $585 billion of its foreign exchange reserves to fund it, increasing the domestic supply of Renminbi, this will increase its M2 money supply by almost 10%

However, The People’s Daily yesterday (Monday) stated that this massive financing package would have a positive effect on “cement, iron and steel producers.” The capital outlay should also be a boon for China’s trading partners: Not so much its three largest trading partners – Japan, South Korea and Taiwan – as they primarily manufacture components that are assembled in China for re-export to the West, or supply manufactured goods, which would benefit from a consumer-led spending surge, rather than this government-led stimulus.

However, suppliers of raw materials – which have already found the long Chinese boom to be a bonanza – can look to benefit further.

And that brings us to some possible profit plays that should rise with the tide of this $585 billion infusion:

• Anhui Conch Cement (Pink Sheets: AHCHF) is China’s largest cement producer – hence, it’s certain to benefit from a major infrastructure program of this kind. Be careful, however: It’s quoted only on the “Pink Sheets,” and is trading on 17 times earnings.
• China Railway Construction (Pink Sheets: CWYCF) is China’s largest construction group, with a special expertise in railroads. Again, it’s traded on the Pink Sheets, this time at 31 times earnings.
• Yanzhou Coal Mining Co. Ltd. (ADR: YZC) is an energy supplier that should profit greatly from the additional infrastructure investment. It’s much-better priced than the two predecessors, trading at only three times earnings and has an alluring dividend yield of 4.3%.
• Huaneng Power International Inc. (ADR: HNP) is a top China energy producer that’s been generating losses lately due to high coal prices. But it’s likely to increase output and profits with the economic expansion that should follow the massive infusion – and the 9.3% dividend yield is rather electrifying, as well.

But a big winner from China’s infrastructure boom (don’t forget, $100 billion in railroad investment) is Brazilian iron ore producer Vale (ADR: RIO), which has increased its prices to China twice in 2008, and that’s now actually holding back supplies while the Chinese market rebalances. China is a huge importer of iron ore, its imports will increase with heavy infrastructure investment, and Vale is the world’s largest supplier. Best of all: With a Price/Earnings ratio of 4.3 and a dividend yield of 4.2%, Vale’s shares are not at all expensive.

Source: Five Ways to Profit From China’s $585 Billion Stimulus Plan

So it follows that as worldwide demand for electricity skyrockets – as it will – the shares of companies that provide these two key fuels also will take flight.

And they make for almost-perfect partners.

That’s because coal represents the world’s short-term solution to the problem of a rapidly climbing global demand for power. It’s plentiful, it’s cheaper than other available alternatives, and a big percentage of the world’s power plants are set up to burn this fossil fuel.

Uranium, on the other hand, represents the long-term solution to potential fuel shortages – and it offers a solution to global warming, to boot. Uranium-powered commercial nuclear plants are cheap to operate, can run a long time, and when operated correctly cause little pollution.

The New ‘Black Gold’

India, a growing economic and industrial power, relies on coal for nearly 70% of its total energy supply. And the World Coal Institute expects India’s energy consumption to rise by as much as 8% to 10% annually through 2020.

Coal also is used to satisfy the Red Dragon’s energy appetite, providing 78% of China’s total power needs. 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, The Wall Street Journal reported.

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.

Vic Svec, a senior executive at Peabody Energy Corp. (BTU), 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, Svec told The Journal, “demand from Beijing can ripple back to Queensland, Australia, or Gillette, Wyoming.”

Svec’s right. China’s recent development is part of the reason the highly desirable low-sulfur coal from the coal-laden 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%.

Central Appalachian coal, the benchmark grade widely used by power plants, jumped from $40 a ton in early 2007, to nearly $90 a ton now, according to a recent report by the Associated Press. That’s price increase of 125% in just a single year.

Meanwhile, the weekly index for power station coal prices at Australia’s Newcastle port, a benchmark for the Asian market, averaged $126.45 per metric ton in the month of April, up nearly 40% from January. The port’s weekly price index rose to $133.63 per metric ton for the week ended May 9 – an 11-week high according to the globalCOAL NEWC Index. The index is up approximately 49% this year.

According to the Energy Information Administration, world coal consumption could expand by 74% from 2004 to 2030. And that will only drive prices higher.

While demand for coal is at an all-time high, the same can’t be said for coal supplies. Harsh weather conditions and infrastructure constraints in coal-producing regions have severely crimped supplies.

In South Africa, power shortages and flooding have closed down several key mines. With such setbacks, the price of coal coming out of South Africa’s Richards Bay Coal Terminal, the world’s largest, jumped nearly 90% last year.

Xstrata PLC, the world’s biggest exporter of power-station coal, said that first-quarter coal output fell 3.6% after floods and rain delays diminished supplies from Australian mines. Monsoon rains throughout the region also impacted archrivals Rio Tinto PLC (RTP), and BHP Billiton Ltd. (BHP).

Meanwhile, China, a leading producer and consumer, was devastated just a few months ago by the worst blizzard of the past half-century. Three weeks of snowfall killed at least 60 people and cost the country approximately $7.5 billion.

China had already closed a multitude of coalmines in 2007, after they were deemed unsafe. The subsequent weather problems only exacerbated that situation, forcing the closure of a great many more mines and prompting China to restrict exports. Major roads and railways also were shut down, creating traffic congestion during the thickly traveled Chinese New Year – and making deliveries highly problematic for drivers.

As the cold of winter gave way to the higher temperatures of spring and summer, yet another weather-related challenge emerged. This time around, the double-whammy of higher-than-expected temperatures coupled with sparse rainfall are straining thermal power plants: The warm weather is boosting the use of energy-intensive air conditioning even as those same higher temperatures have dropped the water level of the rivers that spin the huge power-producing turbines at hydroelectric dams.

If you’re looking to play surging coal prices, Money Morning Investment Director Keith Fitz-Gerald suggests taking a look at Yanzhou Coal Mining Co. (YZC). The China-based Yanzhou is nicely diversified in several ways:

• First, it not only operates underground coalmines, Yanzhou also operates a railway transportation network for shipping coal.
• Second, Yanzhou’s focus on low-sulfur coal products means it finds demand from large-scale power plants and from metal-producing companies all around the world. The reason: Low-sulfur coal can be combined with coking coal in a metal-production process known as “pulverized coal injection,” or PCI. That combination gives Yanzhou a nice extra bit of industrial diversification.
• Third, investors can add geographic diversification to the profit mix as they analyze sector plays.

Provided with these positives, it should be no surprise to investors that Yanzhou’s first-quarter profit more than doubled, climbing more than 112% on surging demand for the fuel and on the higher trading prices seen in the markets around the world.