Softer export markets and shifts to use of natural gas will offset the benefits of lower stocks and consolidation for many coal producers in 2012, according to a report by Fitch Ratings.

To remain stable, the sector should maintain strong cash flows and solid balance sheets, the ratings firm noted.

With domestic steam coal demand in the decline, Fitch said supply will remain controlled due to price, volume and cost visibility. Imports will continue to be softened by the weak dollar while inventories have been lessened to normal levels following this summer's coal burn and supply disruption from floods.

Operating costs have escalated while worsening geological conditions and increased regulatory compliance delay productivity. Fitch said it does not expect relief from cost headwinds over the next 12 months.

In the long run, coal producers benefit from exposure to metallurgical coal, currently in tight supply, and export markets, where demand continues to grow as domestic markets favour low cost and low sulfur production.

Well-capitalised coal producers exhibited strong spending discipline and liquidity control throughout the global financial crisis. They likewise came out with very strong balance sheets relative to their ratings from the recession.