According to a recent report by Fitch Ratings US coal producers will see limited upside in 2012 as softer export markets and natural gas displacement outweigh the benefits of lower stocks and consolidation in the sector.

The ratings firm said resilient cash flows and solid balance sheets will sustain the sector's stable outlook.

Fitch said domestic steam coal demand is slowly declining and expects the supply to remain disciplined. The firm added imports are muted by the weak dollar and inventories have been reduced to nearly normal levels following the summer coal burn and supply disruption from floods.

Fitch said coal producers will continue to see operating costs rise next year while deteriorating geological conditions and increased regulatory compliance also hinder productivity.

Fitch said well capitalized coal producers exhibited strong spending discipline and liquidity control throughout the global financial crisis and emerged from the recession with strong balance sheets relative to their ratings. Fitch continues to expect that acquisitions will not stretch capital structures or liquidity, given the greater risk aversion in financial markets.

The firm noted coal producers should benefit over the longer term from exposure to metallurgical coal which is in tight supply and export markets where demand is growing. Meanwhile, the domestic market will favor low-cost or low-sulfur production over the longer term.

(Sourced from online.wsj.com)