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We maintain our view that U.S. thermal-coal contract prices will be meaningfully higher in 2012 and 2013, and that this is still not reflected in the U.S. coal stocks.

Our preferred stocks among the U.S. coal producers remain Peabody Energy (ticker: BTU), Consol Energy (CNX) and Cloud Peak Energy (CLD). We rate all three companies at Outperform.

There are three emerging trends that we believe will serve as key catalysts for higher contract prices in 2012.

1. China is heating up, and it's not even summer yet. China thermal-coal prices have slowly crept higher, up 11% in the past four months, China thermal-coal inventories at the ports have declined about 30% since the beginning of March, and concerns are mounting about summer power-supply rationing, in part due to potential shortages of thermal coal.

2. European prices are high, and likely heading higher. European thermal coal prices are now about $128 per metric ton, up 13% in three months and up 49% in the past year. Looking ahead, we believe European prices will continue to push higher (about $10-$20 per metric ton in increase is a good possibility in our view), in part due to the recent tightening in China domestic thermal-coal supply and demand and the derivative impact on European trade flows (i.e., more European coal moving into Asian markets).

3. U.S. export capacity is expanding rapidly. We believe the U.S. will have sufficient export capacity to increase thermal-coal exports by as much as about 25% next year (on top of this year's run-rate of an increase by 16%). Currently there is about a $10-$15 per ton favorable spread between export opportunities and U.S. utility customer expectations for 2012 contracts (i.e., export price of about $80-$85 per ton, versus utility customers at about $70 per ton). With U.S. ports expanding rapidly, we estimate that U.S. coal producers could move another 20 million-30 million tons of Eastern U.S. coal into the global market in 2012, which in turn we believe would sufficiently tighten the domestic coal supply and demand balance. Longer term, we estimate U.S. coal-export capacity has the potential to grow to about 190 million tons over the next five years.

With global thermal-coal prices well above 2012 U.S. thermal-coal contract expectations, with our view that global prices will likely push even higher in the next few months, and with U.S. export capacity expanding, we believe either U.S. contract prices with domestic utilities need to keep pace with global thermal-coal prices, or the coal producers will move significant volumes into the export market beginning in 2012, when domestic utility contracts start to expire.

Either way, the end result will be the same in our view...higher thermal coal prices in 2012.