Fear not the funds, coal analysts say

By Jackie Cowhig

LONDON (Reuters) - Hedge funds have piled into the booming coal market, but are chasing already bullish fundamentals rather than creating a potentially fragile investment bubble, analysts said on Tuesday.

Fund activity will give coal greater liquidity and does not spell the end of its price boom, they said.

"Coal has been the best performing commodity this year, better than oil and natural gas -- that's not because of fund buying, but because the market is fundamentally strong," said Francisco Blanche, head of global commodities research at Merrill Lynch.

"Coal is no different to any other commodity from the perspective of funds and other institutions. They look for opportunities," he added. "It's been a one-way trade for coal this year. We don't see that changing in the near-term."

Coal was for long seen as a backwater in the enery complex and over the counter derivatives trading took off less than five years ago.

Unusually for a commodity market there are no more than a handful of traders of substance in coal, and only one physical broker of any size.

Traders say attitudes can be conservative among the established market players. They point to concern that coal may echo oil, where speculation has been blamed by producers for inflating a price spiral increasingly unrelated to supply and demand realities.

"The funds invest huge amounts of money but when they pull out, they pull out quickly and prices plunge," one senior European utility source said.