Peabody Energy Corp’s (NYSE: BTU) largest markets are the US and Australia, though the latter drives growth; the company’s revenue increased 24 percent in the second quarter, whereas its Australian sales soared 93 percent.

Five years ago Peabody was a US-centric business, but management spun off its East Coast operations into Patriot Coal Corp (NYSE: PCX) and completed a number of Australian acquisitions. Given planned mine expansions in Australia, the focus will shift even more heavily in favor of Australia over the next few years.

Exports, primarily to Asia, drive Australian coal demand, and management sees no signs of flagging demand. CEO Gregory H. Boyce and his team highlighted a litany of statistics demonstrating that China and Asia’s demand will continue to grow. Here are some examples:

• Chinese electricity generation is up 19 percent in the first six months of 2010, compared to the same period one year ago;
• Vehicle sales in China are up 48 percent this year, and steel production is up 22 percent;
• China’s steel intensity–steel use per capita–is at half or less than that of Japan, South Korea and the US, but will ultimately be higher than in the US because Chinese cities are growing up (high-rise, steel structures) rather than out (suburbs);
• Coal exports to India soared 22 percent in the first half of 2010 and are expected to be up 15 to 20 percent for the full year; and
• Japanese steel production is up 20 percent this year, and imports of thermal coal have increased 13 percent through May–both signs of a recovery from the 2007-09 recession.

Boyce also expects total Chinese coal imports–thermal and met coal–to reach 125 to 135 tons this year, adding that the actual number may trump his estimate. Although the CEO noted that it was too early to gauge demand for 2011, he doubts that overall Chinese imports would go down compared to 2010 totals. Management projects that thermal coal imports in the Pacific region will increase more than 10 percent this year, while imports of met coal will be up 30 percent.

Given Asia’s high and growing demand for coal, Peabody plans to expand its Australian production substantially over the next few years. Management expects the firm to produce 27 to 29 million tons of coal in Australia this year. Peabody produced 12.6 million tons in the first half of 2010; management’s forecast implies significant growth in the final two quarters. Expanded capacity at the Port of Newcastle is a big part of this export growth.

Management has targeted production of 35 to 40 million tons by 2014. Because Peabody has closed a number of acquisitions in Australia, I wouldn’t be surprised if the company’s output surpasses this goal, assuming demand growth keeps pace.

Peabody’s management has long maintained that the long-term opportunity for the US coal industry resides in the seaborne market. The US does export coal, particularly met coal, but the actual tonnage is rather small compared to the size of the country’s reserves. Peabody continues to work on a plan to export some of it PRB and Illinois Basin production from the West Coast to Asia. Such an operation would be major growth driver for Peabody.

Industry chatter has also focused on the possibility of exporting coal from the Gulf Coast and around Africa to coal-hungry India. A wider Panama Canal could also offer the opportunity to ship coal to Asia.

Exports are the future, but Peabody’s outlook for its US operations remains conservative despite improvements in the market for PRB coal. Much of its US output has been priced and contracted for 2011. But the firm could ramp up production at its big mines if demand surprises to the upside next year.

Meanwhile, more than two-thirds of its Australian output hasn’t been priced for next year: It’s clear where Peabody’s near-term opportunities reside.

The company’s efforts to control costs at its US operations are also encouraging and should keep US margins healthy.

Peabody’s outlook backs up my strategy: Focus on firms leveraged to foreign demand, and avoid companies with major exposure to CAPP thermal coal production. When it comes to US operators, investors should favor names with heavy exposure to the PRB and Illinois Basin. But don’t forget that Asia is the real driver of near-term growth.

Peabody Energy Corp rates a strong buy under 52.