NEW YORK - Most U.S. coal miners are looking at sharply lower third-quarter earnings, but those who produce coal for steelmaking and export should enjoy higher prices in the longer run than those whose coal is sold for power generation, analysts say.

Last year's economic downturn hit both steel and electricity demand hard and miners were forced to cut back on production as coal prices slumped. But now there are signs that coal demand, at least from steelmakers, is coming back.

We generally favor coal producers with international leverage, especially those tied to steel production via metallurgical coal, over thermal coal producers, analyst Jeremy Sussman of Brean Murray, Carret & Co said on Thursday.

And Morgan Stanley's Mark Liinamaa and Wes Sconce said they expected premium hard metallurgical or coking coal for steelmaking to be selling at $160 per tonne in 2010, with prices trending higher through 2013. In June, the benchmark price for coking coal was $129 per tonne.

Our commodity team sees higher seaborne thermal coal prices going forward but we do not expect demand for U.S. thermal coal exports for the next 12-18 months, the Morgan Stanley analysts said in a research note.

This week, Dahlman Rose & Co downgraded Peabody Energy, Arch Coal and James River Coal to hold from buy, saying the weak outlook for thermal coal does not support their current valuations.

Peabody kicks off the earnings season for coal miners next Tuesday, followed by Arch, Consol Energy, Massey Energy and Alpha Natural Resources.

Of those producers, only Consol is seen posting a profit bigger than in the 2008 quarter, according to Thomson Reuters I/B/E/S. Analysts on average expect Consol's earnings to be 66 cents per share, compared with 49 cents a year earlier.

Consol has one big met mine (in Buchanan, Virginia) and we expect it to do better than expected as there has been a lot of spot demand from China, said Sussman.

He said Arch had the least metallurgical coal of the major miners and analysts currently expect its profit to be 4 cents per share, way off last year's 68 cents.

Peabody produces coking coal at its Australian mines, but analysts expect a big drop in third-quarter profit from $1.38 per share to 22 cents. Earnings of Massey, which has about 25 percent metallurgical coal, are expected to drop to 18 cents per share from 86 cents a year ago and Alpha's profit is expected to drop to 39 cents from 90 cents a year earlier.

Sussman said lower electricity demand from industry since last year's economic downturn has hurt coal miners that produce thermal or steam coal, which is burned in power plants.

Inventory levels at utilities are still way too high (70 days, or 50 percent above average) for thermal coal producers to speak positively about the thermal coal market, he said.

According to Edison Electric Institute, for the 52 weeks ended Oct. 10, U.S. power production was down 3.4 percent from the corresponding period in 2008.

On the other hand, there have been a number of recent positive data points in the met coal space, which should help met coal producers' earnings, said Sussman.

Sussman said lower electricity demand from industry since last year's economic downturn has hurt coal miners that produce thermal or steam coal, which is burned in power plants.

Inventory levels at utilities are still way too high (70 days, or 50 percent above average) for thermal coal producers to speak positively about the thermal coal market, he said.

According to Edison Electric Institute, for the 52 weeks ended Oct. 10, U.S. power production was down 3.4 percent from the corresponding period in 2008.

On the other hand, there have been a number of recent positive data points in the met coal space, which should help met coal producers' earnings, said Sussman.

He noted China imported about 8.7 million tonnes of met coal during the third quarter, 30 percent more than in all of 2008. Also, Australia has slowed shipments to China recently and the United States appears to be picking up some of the slack.

U.S. met coal companies should see a meaningful pickup in activity levels in the second half of the year versus the first half, said Sussman.

Morgan Stanley's analysts said investors seeking exposure to the coking coal upside might consider Cliffs Natural Resources, an iron ore pellet producer, which also operates some coal mines.

Cliffs' U.S. coking coal mines can grow to 4.5 million tons by 2011, ahead of the market's 3.5 million-ton outlook, Liinamaa and Sconce wrote. Analysts expect Cliffs to report a 6-cent loss in the third quarter, after a $2.13 per-share profit a year ago.

(Reporting by Steve James; Editing by Phil Berlowitz)

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