Demand for coal to generate electricity and make steel in China and India is expected to grow by 7 percent to 8 percent annually in the next five years, leaving the world "chronically" short of the fuel, the head of U.S. coal miner Peabody Energy Inc (BTU.N) said on Tuesday.

He also outlined his company's plans to double exports from Australia to handle Asian demand and to develop its joint venture in Mongolia to produce coal for the Chinese.

The coal shortage, as industrial activity rebounds from last year's economic downturn, is driving up prices and Peabody forecast steam, or thermal, coal selling for 0 per tonne by 2012, up from around today. It also said metallurgical, or coking, coal is already selling for 0 per tonne -- way above this year's benchmark of 9.

"We believe China is short of met (steel-making) coal and demand is shredding supply and pushing prices north," Chief Executive Greg Boyce told Wall Street analysts on a conference call to discuss Peabody's third-quarter earnings.

"India will turn to seaborne markets and in the next five years we see the region with 7 percent to 8 percent growth compounded annually, which is 300 million to 400 million tonnes per year.

"That will leave the world chronically under-supplied," Boyce said.

Peabody President Richard Navarre noted that China had become the company's biggest metallurgical coal customer in just one year, as the country had imported 25 million tonnes so far in 2009, more than 10 times last year's pace.

Through August, China's net imports of thermal coal totaled 38 million tonnes compared with net exports of 7 million tonnes last year, he said.

"Peabody is very well positioned with access to the fastest-growing markets globally, where we see shortages of metallurgical coal and growing strength in the Pacific thermal markets," said Navarre.

He said Peabody's mines in the Powder River Basin of Wyoming and Montana would likely produce the extra coal needed to supply the Pacific market.

Also, Peabody has opened an Asian trading hub in Singapore, established a new business center in Indonesia and plans to further expand international investments, Navarre said.

Asked about plans for Mongolia, where Peabody has a 50 percent interest in a joint venture for Polo Resources'(3PO.L) coal interests, Boyce said: "We believe Mongolia will play a role in supplying the largest coal market in the world, which is China."

On thermal coal, which is burned in power plants, Boyce said global electricity demand was expected to increase.

"The vast number (of new coal-fired plants) are in China and India and we have not seen any slowdown," he said. "They continue to be major drivers of coal demand. They are the ones building most extensively."

India may be as much as 200 million tonnes short of its needs in five years, positioning it as the fastest-growing coal importer, Peabody said. 

In its earnings announcement, Peabody said it intends to double exports of Australian metallurgical and thermal coal over the next five years to serve the Asian markets.

This year, the company is targeting 2009 sales of around 190 million tons in the United States and 21 million to 23 million tons in Australia.