A SHARP pullback in benchmark Australian thermal coal prices is a natural correction after a recent surge, according to analysts.

Market commentators also said prices in Asia were set to stay high with all the indicators pointing to ongoing tightness in the market.

The Newcastle spot coal price fell sharply today, following on from a 20 per cent drop in spot thermal coal prices in Europe overnight, sparking heavy selling in Australian coal stocks.

However the price drop is only a partial retracement of gains seen in recent weeks when the spot coal price surged ahead of the recently agreed contract prices for Asian buyers of $US125 a metric tonne, and appears to be a temporary reversal.

Brendan Harris, mining analyst at Macquarie, said the coal market remains tight with prices set to stay high and the pullback overnight would not be prompting him to downgrade earnings for the Australian miners he covers.

"People have got to keep the coal move in perspective and have a look at where the spot price is relative to the recent (contract) settlements that have been struck," he said.

"The reality is that we have a long way to fall before we get at all worried about our forecasts."

Alan Heap, commodity analyst at Citi, said the Newcastle spot price for thermal coal has fallen by about $US13 to $US185 a tonne from $US198 a tonne.

This was still above last week's average of $US172 and much higher than in mid-May when it was about $US135, he said.

"The spot price has been running very hot and an intriguing issue is that we are seeing a new level of volatility introduced into these markets, which begs the question, does this reflect increased speculative activity?" he said.

Heap said the driver of the fall was Europe, with Asian prices experiencing a knock-on effect, and that the fundamentals of the coal market in Asia remain very robust.

All the indicators in Asia certainly point to ongoing tightness in the thermal coal market.

In May, China reverted to being a net coal importer, with imports exceeding exports by 250,000 metric tonnes, as local output failed to keep pace with demand.

Between January 2008 and May 2008, China's coal exports fell 4.1 per cent on year, to 18.5 million tonnes, the General Administration of Customs said on June 23.

Vietnam said today it will reduce its coal exports by 10 million tonnes or 31 per cent this year to meet growing domestic demand.

Currently a major coal exporter in the region, Vietnam has said it plans to progressively reduce its exports until 2015 when it plans to halt them altogether, as it redirects coal to domestic electricity generation to power its booming economy.

Macquarie's Harris said that while the spot price may have gotten ahead of itself recently, the thermal coal market remains tight, the coking coal market is particularly stressed and the outlook for prices is strong.

"It is not surprising to see volatility, but we believe the fundamentals will support prices at very strong levels into 2009," he said.

In a recent note, ANZ analysts said spot coal prices could ease in coming months, but infrastructure constraints in Australia and rising demand in Asia were likely to keep a high floor on prices.

Analysts' confidence in the fundamentals of the coal market did not stop investors savaging Australian coal stocks today, amid a broader sell off of resource stocks.

In late afternoon trading, Macarthur Coal shares had tumbled 12 per cent, Gloucester Coal sank 13 per cent, Centennial Coal Company dropped 12 per cent, Felix Resources 9.1 per cent and New Hope Corp dipped 10 per cent in an Australian market down 2.2 per cent.

Coal stocks have been running hard on higher prices and the pullback today has seen most of them return to the levels seen in May.

Australia is the world's largest supplier of sea-borne coal and Newcastle, in the state of New South Wales, is the world's biggest thermal coal shipping port.