Behind every obvious economic boom there’s a less-obvious boom. The story with China is no different. It easily got back into its pre-recession growth-groove once it was clear the global recession was easing, but it couldn’t have done so without help from these two companies…

Why China needs “the land down under”
The ironic fact is Australia, where these two companies are based, is rich in many of the natural resources China loves to consume. It’s why China is coal and iron ore mining giant BHP Billiton’s (NYSE: BHP) biggest customer. The same goes for Rio Tinto (NYSE: RIO), which mines industrial metals. China is all over it when it comes to giving business to these two companies.

Just for a little perspective on China’s need and Australia’s capacity…

Australia is the world’s biggest coal exporter, responsible for more than one-fourth of the world’s total supply. Last year, it exported 260 million tons, or $55 billion (Australian) worth, of the 940 million tons of coal sold globally. Forecasters expect Australia’s coal exports to reach 390 million tons by 2015.

Australia isn’t the world’s biggest miner of coal, though. This honor actually belongs to China. Yet, it’s still not enough to fully power China’s growth, which requires more than 3 billion tons of coal per year. The country is a net importer of both coking (metallurgical/smelting) as well as thermal (electricity generating) coal. China can’t make more of its own though, having already reached its peak coal-production capacity.

The steel (iron ore) disparity between China and Australia mirrors that of coal as well.

Do the math here —  Australia has it and China needs it. China’s choices are either to slow down its growth or keep importing coal and iron. The former is just not going to happen, even if the price of both continues to rise. This is good news for investing in Australia.

Rising coal and metal prices boost profits
While coal and metal investors like the idea of rising commodity prices, a higher price is irrelevant if nobody is willing to pay it — a real concern, given recent price rallies.

Two years ago, steel billet spot prices were just under $400 per metric ton. Now they’re above $600. Hot rolled steel coil was priced at $575/ton in the middle of 2009, compared with roughly $750/ton now — a 30% increase. Australian thermal coal has surged from $76.48 per metric ton in June of 2009 to $127.80 for June of 2011 — a hefty 67% price increase. You get the idea…

Yet, higher prices haven’t tempered Chinese demand. In fact, demand has outpaced pricing, as Australia’s miners are still struggling to keep up with China’s needs.

Not that investors are complaining. Demand has lead to real earnings growth. BHP Billiton’s earnings slumped to $2.11 per share in 2009 (from $5.50 in 2008), but are on pace to reach a record $5.86 in 2011. Rio Tinto is ready to crank profits up from $3.57 per share in 2009 to $9.23 in 2011, which would also be a record.

The future looks even brighter
If the experts and industry veterans are right, the next decade of Chinese industrial growth could make the last decade look like child’s play. China’s gross domestic product (GDP) is forecasted by some to double by 2016 and quadruple by 2021.

It sounds enormous, and it is. Then again, an enormous portion of China’s 1.3 billion people are moving to cities which lack the infrastructure needed to house and support them. The side-effect of this growth phase will be an even further increased demand for steel.

Currently, China is consuming about 500 kg of steel per person, per year. The current population-displacement trend implies that each of China’s inhabitants will soon require annual consumption of 750 kg of steel to meet the country’s changing infrastructure needs. It’s an odd statistic to be sure, but still a telling one when basic steel costs are in the $0.50/kg range. This works out to be a few hundred billion dollars worth of steel per year needed during the next 10 years or so, with coal in tow.

Do the math
We already know demand — and growth in demand — from China for Australia’s commodities is insatiable at any price. And, we’ve already seen Australian mining profits move in tandem with growing consumption, which has moved in tandem with higher prices. The underlying supply/demand dynamics are locked in, meaning the growth trends are, too.

Conclusion? The profit growth game is Australia’s to lose, and it’s unlikely the country would squander the opportunity.

Action to Take –> Though there are two distinct trends in motion here (one is coal, and the other is steel), the two go hand in hand. This is good, since neither BHP Billiton nor Rio Tinto are “pure” plays in either venue. Investors would do well to own at least one, but whichever they choose, they should do so soon while shares are cheap (there’s talk of a “carbon tax” in Australia). The market seems to have more than priced in the worst case scenario from this pending legislation, so I see 30% to 40% upside for both stocks within a year.

P.S. — We found an obscure mining company that tossed back 19% in dividends last year (plus another 34% in capital gains). If you think that’s impressive, wait until you see this video…