The US is often called the Saudi Arabia of coal. And there’s a good reason for that: The nation has more than 27 percent of the world’s known coal reserves and some of the highest-quality deposits in the world. That’s 90 billion metric tons more than Russia, the nation with the second-largest reserves.

Somewhat surprising, the US hasn’t traditionally been a big player in the export market for coal, particularly when it comes to so-called “steam” coal used in power plants; US coal producers have traditionally focused on supplying domestic utilities.

But times are changing, and America is increasingly being drawn into a supply-constrained global coal market as a supplier of last resort. Consider that for the first time in well over a decade, European utilities are signing long-term steam coal supply deals with US producers.

For example, earlier this week Consol, a major US miner, reported that it’s currently in talks with five European buyers for two- to five-year coal supply deals. It’s also in preliminary discussions on a 10-year export deal.

European buyers are clearly interested in obtaining supply. And with coal prices in Europe and the US soaring, buyers are willing to sign long-term contracts at prices highly favorable to the miners. This suggests the buyers believe the current up-cycle in coal prices is sustainable and may, in fact, accelerate.

This tight market for coal has actually been building for some time, and it all relates back to the Asian market. China is both the world’s largest coal producer and its preeminent consumer.

It should come as little surprise that Chinese demand for coal will continue to surge in coming years. The country consumes vast quantities of both thermal coal and metallurgical (met) coal. Thermal coal is coal that’s used primarily in electricity generation; it’s burned in power plants.

Higher quality, more expensive met coal is used to make coke. Coke is a dense, nearly pure form of carbon that burns at an extraordinarily high temperature. It’s made by burning met coal at a high temperature in a sealed environment. Coke is, in turn, used in steel production and some other industrial applications.

The main difference between thermal coal and met coal is that met coal has higher energy content–there’s more energy contained in given quantity of coal. Although no two coals are exactly alike, met coals also typically produce far less ash when burned than thermal coal.

China’s thermal coal market is exploding because of the country’s rapidly rising demand for electric power. According to the Energy Information Administration (EIA), China currently has 271 gigawatts (GW) of coal-fired power capacity. To meet growing needs, China will need to add nearly another 500 GW by 2030, tripling coal-fired capacity.

This massive increase in coal-fired capacity means rapid growth in coal demand. In 2004, China consumed about 22.7 quadrillion British thermal units (quads) worth of coal in its electric power plants. By 2030, that figure will be closer to 56 quads.

China is also the world’s largest steel producer. In 2006, it produced 423 million metric tons of steel; this year production is forecast to approach 540 million metric tons. That increase in steel production spells rising demand for coke and met coal.

Historically, China’s massive domestic production has been enough to keep pace with runaway demand, but that’s no longer the case. In 2007, China became a net importer of coal. This is a sea-change: Just a few years ago, China was exporting more than 80 million metric tons of thermal coal annually. As recently as 2002, Japan was importing more than 20 percent of its thermal coal requirements directly from China, and South Korea was another big importer.

In fact, the Chinese government recently put a ban on all exports of coal; the Chinese are keen to keep as much coal as possible in China to meet domestic needs. The situation has been exacerbated by an unusually cold winter, the coldest in 50 years, that’s made transporting coal difficult. Not surprisingly, Chinese coal prices recently surged to all-time highs.

The bottom line: China is already an importer of coal and its import dependence will only increase in the coming years. And don’t forget it’s not just China. India is the world’s third-largest producer of coal behind China and the US, producing some 447 million metric tons of coal annually. But like China, India has seen and will continue to see strong growth in demand for coal in coming years.

The EIA projects that India will need to add more than 100 GW of new coal-fired power capacity by 2030 to keep pace with growing electricity demand. India’s total coal-fired capacity is projected to grow from less than 90 GW today to 186 GW by 2030. That growth spells rising demand for coal. India’s total demand would rise nearly 90 percent from 2004 through 2030 under such a scenario.

As noted above, India is a big coal producer and can meet many of its needs through domestically produced coal. But its reserves are high in ash content; India’s coal has as much as 40 percent ash content compared to 9 percent to 12 percent for most internationally traded thermal coal. Because ash reduces the efficiency of power plants, India also imports coal as a blending agent. Power producers can actually blend low-ash coals with domestic production to reduce overall ash content.

As you might expect, India has seen rapid growth in coal imports in recent years. It imported 23.4 million metric tons in 2006 and is forecast to import closer to 30 million metric tons this year. That represents an annualized growth rate of more than 13 percent.

The rapidly widening gap between Indian production and consumption has become more pronounced during the past five years. This widening gap represents greater reliance on imports. The EIA estimates that by 2030 India’s dependence on coal imports will be double what it is today.

From Demand to Supply

In light of the tight supply and demand balance in Asia, the obvious question is where all those coal imports will come from. Two countries in Asia will dominate the export trade for the foreseeable future: Australia and Indonesia.

Australia and Indonesia both benefit from large reserves and production capabilities well above what’s needed to satisfy domestic demand. And both are located relatively close to their key export markets.

Australia is the world’s largest exporter of coal. According to the Australian Bureau of Agricultural and Resource Economics (ABARE), the nation exported a little more than 115 million metric tons of thermal coal in 2007 and 136 million metric tons of met coal.

Australia is the world’s most important exporter of thermal coal; exports should top 175 metric tons in 2007 once final figures are released. It remains the dominant player in met coal. And don’t discount the country’s importance to the thermal coal market; it’s still the second-largest thermal coal exporter in the world.

But there are problems with this picture. Indonesian production has ramped up extraordinarily quickly in recent years, but it’s not enough to meet rapidly growing demand in Asia for seaborne coal imports. Meanwhile, Australia has experienced a series of problems ramping of coal exports.

Up until recently, the main problem was one of infrastructure: Rail and coal port capacity just aren’t sufficient enough to meet demand. Dry bulk carriers were queuing in Australia’s coal ports for more than a month waiting for cargoes.

More recently, the problem has been the weather–a deluge that flooded several of Australia’s largest mines. On Wednesday, mining giant BHP Billiton stated that the coal mines it controls–mines that account for as much as half of Australia’s coking coal exports–would see production curtailed for as long as six months.

Smaller exporters, including Australia’s MacArthur Coal, have declared force majeure. That means they’ll be able to default on contracted coal shipments without facing a penalty. This is bullish for Asian coal prices because it suggests even further pinched supplies.

And there are even more production issues worldwide. South Africa is another major exporter of seaborne coal. But because of strong economic growth in recent years, South Africa’s electricity demand has outstripped generation capacity. Shortages of power are common and miners have been forced to shut down or scale back production in recent weeks to conserve power; the government has warned that more blackouts are likely. That’s been severely curtailing production of everything from gold to coal.

That brings us back to the US and Europe. European utilities have historically relied on seaborne coal shipments to meet demand; these shipments have come from countries such as South Africa, Colombia and even Australia. Unfortunately, production from these nations has been either curtailed because of production problems or is finding its way into the booming Asian markets. That’s put Europe in a real supply squeeze.

The final piece of the puzzle is, of course, that European utilities are now turning to the one country with surplus production capacity available for export: the US. With the dollar weak, US coal also looks cheap relative to production from other nations. This is precisely why interest in US coal exports has picked up notably in recent quarters.