In its 2010 coal outlook report, Fitch Ratings says the US coal industry will experience modest recovery in domestic steam coal prices and scant increase in production volumes beginning in the second half of 2010 on partial recovery in domestic industrial power demand and less gas for coal substitution. Resilient cash flows will sustain the sector’s stable outlook. Fitch says well-capitalised coal companies have solid liquidity and modest near-term debt maturities. Leverage should remain in a range with scant new borrowing and solid earnings. ‘We’re seeing more producers exhibiting both supply and capital discipline to conserve liquidity,’ said Monica M. Bonar, Senior Director, at Fitch Ratings. ‘Looking ahead, we expect to see more instances of building cash balances than either debt repayment or share repurchases and little opportunistic merger and acquisition activity, generally financed through cash on hand or with a high equity component.’

According to the report, coal stocks at domestic electric power producers remain stubbornly high and are currently problematic. Even if the high current weather related coal burn persists for the remainder of the heating season, stocks will be high going into the shoulder season. Export volumes should improve from 2009 levels given weakness in the dollar as well as demand pull of competing coals from Asia.

Regulatory uncertainty about carbon emissions has stalled plans for many new coal plant builds, which will cap domestic demand in the medium term. Despite expectations for lower steel, consumable and energy prices, cost inflation is expected to persist given labor and safety cost escalation.

The full report, titled Coal Outlook 2010: Modest Recovery in Second Half, is available on the Fitch Ratings web site www.fitchratings.com. Financial summaries for the major global coal producers are provided in the report.