Thermal coal oversupply in the Atlantic market and logistics costs have led to very poor performance at Brazilian miner Vale's Colombian coal mines, a Vale official said on Wednesday.

In July Vale reported that its overall Q2 profits fell 84 percent from the same period of 2008 due to lower iron ore output and prices.

The official did not give details of the Colombian mines' financial performance.

Vale bought 100 percent of the coal assets of Cementos Argos S.A. in Colombia in December 2008 for $305.8 million.

These consist of the El Hatillo opencast mine, which produced 1.8 million tonnes for export in 2008 and the Cerro Largo reserve.

In the short-term, the Colombian operations faced several problems that led to a very poor financial performance, the Vale source said.

On the demand side, the Atlantic market for thermal coal was oversupplied, which restricted sales to a minimum, thus leading to inventory building.

On the operating side, we faced problems with service suppliers and the cost of logistics.

Weak end-user demand in Europe and the United States, the two key markets for Colombian coal, has hit all Colombian exporters to varying degrees, producers and traders said.

The larger producers such as Drummond Coal, Cerrejon and Glencore have been cushioned by term contracts linked to the South African API4 index, signed before coal prices fell and freights rose.

Small to medium sized producers and co-operatives have been struggling to sell their output throughout this year.

Vale has sold less than a third of 2009's output - probably around 500,000 tonnes, said a trader.

Vale has been forced by low sales and logistical problems to almost fill its stockpile capacity at the mine, traders said.

However, Vale says the operating problems are being solved and demand conditions are slowly improving.

For instance from August onwards the El Hatillo thermal coal mine sales start to be transported to the port by rail, instead of trucks, which will mean a significant cost reduction, the Vale source said.

It will certainly help with costs to use rail not trucks, another trader familiar with Vale added. But they still have to sell the coal.

Colombia's thermal coal exports are expected to be around 61 million tonnes in 2009, slightly down from 2008's levels. (Reporting by Jackie Cowhig and Bruce Nichols, editing by Anthony Barker)

Energy