Bad idea to run out of coal during a cold spell. But that’s exactly what’s happened to China’s utilities. Near panic spot buying has sent the price of thermal coal above $100 a metric ton for the first time in a year.

China imported about 50 million metric tons of coal in 2009. That huge shift from China’s traditional role as a coal exporter came as Beijing worked hard to shut illegal coal mines concentrated in Shanxi. When a heavy snowfall in northern China disrupted other mining operations and rail road service, utilities found themselves short of coal to burn.

Supply shortages are likely to continue until warm weather reduces the need for coal and resolves the railroad bottlenecks. Australian miners would love to meet the surge in demand from China sooner but infrastructure in that country isn’t up to the job. In Newcastle, Australia’s chief port for the export of thermal coal, the line of ships waiting to load coal is 60 ships long, a two-year high.

China’s need for coal and the surge in spot prices couldn’t come at a better time—if you’re a coal producer about to negotiate your annual contract with Japanese and other Asian utilities for the fiscal year that starts in April 2010.

Spot prices are well below their $210 a metric ton all-time high of 2008, but the recent move above $100 a ton has convinced analysts to forecast a 20% to 25% increase in the annual contract price to $85 to $90 a ton from the $71 a ton price negotiated in the spring of 2009.

What stocks to look at?

Two big beneficiaries of the increase will be BHP Billiton (BHP) and Peabody Energy (BTU). Both companies have big Australian production capacity. (BHP is also the beneficiary of what looks like a big increase in the price of the iron ore it mines as a result of those annual negotiations with Japanese steelmakers. For more on that potential iron ore price increase see my post https://jubakpicks.com/2010/01/13/iron-ore-wars-get-nasty-higher-ore-prices-and-more-acquisitions-by-china-ahead/ )

If you want to make a buck on coal, I suggest you move either very quickly or very slowly. Stocks like BHP Billiton and Peabody have already run strongly on enthusiasm for China’s projected return to 10% growth. I think a fast trade could still catch a profit out of the current good news but I certainly wouldn’t stick around waiting for the return of warmer weather and the probable drop in spot prices. (Or to see if Democratic Senate majority leader Harry Reid (NV) will live up to his pledge to start climate change legislation in motion in the Senate this spring.)

A more patient and less risky trade would be to wait for a pull back in these stocks, especially BHP Billiton on any pull back or correction in China’s stock market. The long-term supply/demand imbalance in coal doesn’t look like it’s going away soon. India is expected to join China this year in seeking to expand coal imports to meet growing demands for electricity.

Full disclosure: I don’t own shares of any company mentioned in this post.