Total thermal seaborne demand is set to increase from 680 million tons to 1.187 billion tons between 2010 and 2025

What’s dirty and out of fashion, but everybody wants it?

That would be coal, both the coking kind used to make steel, and the thermal coal used to fire power plants.

Over the past year or so, coal consumption has climbed on emerging market demand. To the industry’s surprise, it’s been enough to push global prices to a two-year high.

The Wall Street Journal reports that China even worries it may run out of coal someday. So the government may cap domestic output to keep from running down the country’s reserves too quickly.

Intent on meeting that demand, companies everywhere are busy merging and acquiring. In fact, just in the last few weeks, $15 billion in deals have been announced.

That includes Walter Energy (NYSE: WLT), with its $3.3 billion bid for Canada’s Western Coal (TSX: T.WTN). And Caterpillar (NYSE: CAT) spent $8.6 billion buying Bucyrus (NASDAQ: BUCY), which makes mining equipment such as the gigantic excavators used in opencast coal mines.

Those high-priced offers highlight the rapidly rising value of coal assets. Investors should look for that deal making to continue.

Investment bankers think other companies in the sector will want to cash in too. Certainly, even while window-shopping itself, Massey Energy (NYSE: MEE) is considering attracting buyers.

No wonder, too, when there’s so much profit to be made…

Coal prices rise as global demand increases

China takes up nearly half of global coal demand and India’s cravings keep rising too. The latter’s coal minister, Sripakash Jaiswal, recently reported that India’s coal intake could triple in the next two decades.

Asia especially needs the coking variety, which had spot prices recently hit $225 a metric ton. That’s much higher than the $85 paid for annual contracts just two years ago.

Mining companies keep searching for new deposits outside Australia and the U.S. But the best they’ve found lately are in problem areas like Mongolia and Mozambique.

And the situation looks even bleaker for thermal coal, despite its greater abundance.

As it fights against illegal mining, China has forced hundreds of smaller mines to close. That and its ever growing need for electricity has it needing more than it can produce.

Soon enough, China will overtake Japan as the largest thermal coal buyer by next year. Its net imports should hit about 122 million metric tons, above Japan’s 120 million.

China’s demand for thermal coal

As China uses more than it produces, it affects the entire thermal coal playing field… With that and Indian demand, even South Africa is giving Asia first pick over Europe.

As a result, European thermal coal prices have hit over $100 a ton. And it’s worse at the Australian port of Newcastle, the world’s biggest port for thermal coal.

Chinese coal demand has pushed prices to a two-year high of $115 a metric ton. That marks a 65% rise from early 2009 lows.

Traders and miners expect Beijing overseas net buying to rise to 100 to 110 million metric tons this year… a full 15% of the total global seaborne coal market! Amrita Sen, coal analyst at Barclays Capital, says, “China’s strong imports are supporting the price of thermal coal globally.”

And Jeff Watkins, head of coal at consultants Wood Mackenzie sees that growth lasting. “The global coal trade,” he recently stated, “will grow significantly during the next few decades, with total thermal seaborne coal demand set to increase from 680 million tons to 1.187 billion tons between 2010 and 2025.”

Negotiations for the annual thermal coal contracts for the 2011-2012 fiscal year, which starts in April, are about to start. Mining executives expect them to be settled at the second highest level ever, just below the $125 per metric ton of 2008-2009.

Fire up your portfolio with these coal investments

This all works out perfectly for the world’s top coal producers and their investors.

• That includes Peabody Energy (NYSE: BTU), BHP Billiton ADR (NYSE: BHP), and the world’s largest thermal coal producer, Xstrata.
• Certain ETFs should benefit as well, including Market Vectors Coal (NYSE: KOL). The fund devotes nearly half its portfolio to U.S. stocks, about 20% to Chinese coal companies, roughly 12% to Indonesia and 10% to Australia.
• Powershares Global Coal Portfolio (NASDAQ: PKOL) looks well placed too. Much more geographically balanced, it invests 26% into U.S. companies, 20% to Australia, 18% for China, 17% into Indonesia and 11% in Canada.

Any of the above should add a little fire to investors’ bottom line in the years ahead.

Disclosure: The author does not own positions in any of the stocks ment