* Strike at Colombia's Cerrejon could end soon
* Colombia's Drummond has export ban lifted
* Coal overcapacity clashes with weak demand globally
By Henning Gloystein and John McGarrity
LONDON, March 4 (Reuters) - European coal futures prices dropped to their lowest since the start of the 2008 financial crisis as supply from major exporter Colombia looked likely to return to normal following the expected end of a month-long strike by next week.
API2 2014 coal futures contracts were trading around $96.60 a tonne at 1445 GMT on Monday, over 30 percent below their most recent peak around $138 a tonne reached in spring 2011, when the Arab spring, Australian floods, and the nuclear disaster at Japan's Fukushima reactors caused a spike in energy prices.
It is also the lowest level in the contract since the peak of the financial crisis in 2009 and prices, are down 1 percent on Friday's close.
Traders said that the price drops were mainly in reaction to an expected improvement in supply from Colombia as a strike at the country's largest producer Cerrejon could end within a week after the company reported progress in talks with union officials. [ID: nL1N0BW3B5]
Another major disruption to Colombia's coal sector is already coming to an end atter a regulator lifted suspensions on the country's No. 2 exporter, Drummond Ltd, and on the main railway.
"An already oversupplied market will receive even more coal, and that is causing the price depression," one coal trader with a utility said.
Another trader said that dealings in the physcial market for coal delivered from the Americas into northwestern Europe had more or less come to a standstill over the past few weeks as power generators waited for developments at Colombian producers.
Across the Atlantic in Africa, Mozambique reopened its Sena railway line on Monday, the only available rail coal export route for mining giants Vale and Rio Tinto , after a two-week closure due to floods, state logistics group CFM said.
The line, which connects the northern Tete province with the coast, was shut on Feb. 12 after heavy rains and a derailment, forcing several cases of force majeure on a number of coal shipment contracts.
However most deliveries from the African country are of metallurgical coal rather than supply that is burnt in power stations.
The healthy supplies of coal from major producing countries are clashing with weaker demand in many key markets.
In North America, the ongoing shale gas boom has led to a collapse in domestic gas prices, reducing North American coal demand, forcing its miners to sell abroad, mainly to Europe.
In Japan, power generation fell 7.0 percent in February from a year earlier, marking a second straight year-on-year decline, a Reuters calculation based on industry data showed on Monday.
In China, analysts say a change in environmental regulation could lead to further dents in coal demand, as the world's top coal burner struggles to cope with its rising pollution, much of which comes from coal-fired power stations.
WEAK COAL CONTRAST WITH GAS SPIKE
The weak and oversupplied coal market contrasts with a gas supply squeeze hitting Europe in the closing days of winter.
Gas supply outages in Britain and Italy, two of Europe's three top gas users, caused benchmark UK spot gas prices to shoot to 5 year highs.
As a result of coal's oversupply clashing with the supply squeeze in Europe's gas markets, electricity generated from coal gained further competitive edge over power produced from gas.
Coal is now almost 20 pounds per megawatt-hours (MWh) more profitable for electricity generation in Britain than gas, its highest margin this year.
Producing baseload electricity from coal for sale the next quarter currently delivers around 22.65 pounds per MWh to generators, the highest level since the beginning of the financial crisis, while the equivalent gas margin is at a mere 3 pounds per MWh.