Coal is a cheap source of energy. This is the biggest reason why the Chinese use coal to produce 80% of their electricity, while the U.S. uses coal for about 60%. India is another big consumer of the fuel, but it consumes only one-fifth as much as China. This big demand means big potential for global coal stocks Sasol (NYSE: SSL), Peabody Energy (NYSE: BTU), Puda Coal (AMEX: PUDA) and Yanzhou Coal (NYSE: YZC).

Any way you slice it, coal will remain a very important fuel for decades to come because it is inexpensive. And with continued investment in technologies, coal is getting cleaner as well as cost-effective. There has been a lot of progress already made on that front by South Africa-based Sasol (SSL), which is the authority on making gasoline and diesel fuel from both natural gas and coal. Sasol is already investing in China and the U.S. As oil prices rally — a process that is only a matter of time in my opinion — coal-to-liquids and coal gasification technologies will become more and more popular. SSL stock is the most obvious beneficiary.

The best coal mine that produces low-sulfur coal is Peabody Energy (BTU), which is the world’s largest private-sector coal mine. The company single-handedly supplies the coal to produce 10% of U.S. electricity and 2% of the world’s electricity, with an extensive reserve base.

Peabody has noticed the huge demand emanating from China and is trying to make a key acquisition. The company is bidding for Australia-based Macarthur Coal Ltd., which is the world’s largest producer of pulverized coal used in steelmaking. Prices for pulverized coal are currently 89% higher from a year ago and import volumes to China are rising. The increase in pulverized coal prices is similar to the increase of iron ore prices — up 91% from a year ago. If you look at commodity prices as indicators of the strength of economic growth, both pulverized coal and iron ore prices indicate that the global economy is recovering in a sustainable manner.

Now, in my Asia Edge newsletter I have been recommending Puda Coal (PUDA), which not only mines coal, but also purchases raw coal from coal mines and processes it into clean coal, which is turn is used to make coke for steel production and other applications. The company owns three plants that produce customized, cleaned and finished coal products. The Chinese government knows well that it has a pollution issue on its hands due to the popular use of coal in the country.

The Chinese have also closed about 1,000 small mines due to safety issues. Puda Coal is benefiting from this trend as the provincial government in Shaanxi, where Puda is based, is using the company’s expertise to consolidate the industry in order to improve the safety record. The company will complete two mining acquisitions this quarter.

Another Chinese coal mining company has been reporting strong operational performance — Yanzhou Coal (YZC). First-quarter net profit reported last week rose 191% from a year earlier, due to the acquisition of Australia’s Felix Resources Ltd. for 3.54 billion AUD last year. The deal remains the largest takeover in the Australian resources sector involving a Chinese company to date. The Chinese spent a record $32 billion last year for acquisitions abroad and given their increased nervousness about their $2.4 trillion forex reserve base centered on the problematic fiat currencies of the West, it is highly likely that 2010 will see even more acquisitions in the resource space.

As of this writing, Robert Hsu was recommending PUDA to his paid newsletter subscribers.

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