Citigroup said that it continues to have a positive outlook on China's coal sector, with spot prices still experiencing an "unabated surge."

The price of thermal coal in the key port of Qinhuangdao has risen to 1,015 yuan per ton, "highlighting shortages and bottlenecks" in the Chinese market, Citigroup said in a note.

It said that it favors China Coal and Yanzhou Coal over Shenhua Energy, the country's biggest coal producer. Shenhua's power generation assets mean that it is more exposed to cost problems.

If all coal prices are frozen at current levels, China Coal is still expected to be the best performer of the year with around a 12-pct increase in earnings. The company is better positioned to take advantage of spot price rises than its peers.

Yanzhou Coal should also start to see the earnings benefits of a coal-to-methanol project next year.

Citigroup said that it expects prices to have risen by an average of 55 pct year on year in 2008, and also predicts that contract prices will rise by a further 10 pct for 2009.