Thermal coal prices hit decade high due to gas shortage

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Coal prices have reached their highest level in a decade, making coal a hot commodity in a year when governments pledge to cut carbon emissions.

A shortage of natural gas, a recovery in electricity consumption and scarce rainfall in China have boosted demand for thermal coal. Supplies have been cut by a closed mine in Colombia, flooding in Indonesia and Australia, and trade flows distorted by China’s ban on Australian coal.

As a result, the prices of thermal coal – which power plants burn to boil water to steam, run turbines and generate electricity – have more than doubled in the past year. Coal delivered to northwest Europe earlier this month hit its highest price since November 2011, having climbed 64% in 2021. Prices for coal exported from Newcastle in Australia, most of which are heading to Asia, rose 56%, according to Argus Media.

Both benchmarks of coal prices have outpaced gains in oil, copper and other commodities markets which are benefiting from a surge in economic activity triggered by vaccines.

The rally recalls that efforts to wean power systems off coal to limit global warming emissions are in their infancy and may turn out to be stalled as fuel competes with other sources of energy. energy. The global appetite for coal peaked in 2014 and is unlikely to return to pre-coronavirus levels, according to forecasts by the International Energy Agency. But analysts say surges in demand, coupled with a shortage of investment in new supplies, could lead to periods of rising prices.

Prices are expected to remain at high levels for several months, offering a boon for companies that have held onto coal mines amid pressure from some investors to abandon them. Glencore PLC will be the main beneficiary among large western miners, according to UBS Group analyst Myles Allsop.

The British commodities giant has said it will close its mines in Australia, South Africa and Latin America rather than divest them. BHP Group Ltd.

, on the other hand, seeks to get out of thermal coal. Anglo American PLC this month divested its coal business in South Africa, whose shares have gained 47% since they started in Johannesburg.

“Supply is shrinking and it’s probably shrinking faster than demand,” said Tom Price, head of commodities strategy at Liberum. “Everyone had turned their backs on these [thermal-coal mining] assets. Companies that have clung to it have made a small fortune in recent months. “

Analysts say the rise in European coal prices is most surprising as it has occurred alongside an increase in the continent’s market for carbon offsets. European Union emission allowance prices climbed 69% to over € 50 per metric tonne, the equivalent of around $ 60 per tonne, and recently hit a series of all-time highs.

In theory, high compensation prices should cool demand for thermal coal, which produces more than twice as much carbon per unit of electricity as gas. Instead, consumption increased because gas and electricity prices also jumped. This has made gas consumption less profitable while increasing the attractiveness of coal and its twin, lignite.

Coal is barely available, said Jake Horslen, editor of the Coal Daily International at Argus. Glencore’s Prodeco mine in Colombia, a major exporter to Europe, has been closed since spring 2020. Australian miners cut back last year and flooding in the port city of Newcastle disrupted exports in March.

High prices in Asia, in part boosted by China’s decision to ban Australian coal over Canberra’s call for an international investigation into the origins of Covid-19, have drawn cargoes from the Atlantic to The pacific.

In the long term, analysts say the outlook for coal producers is bleak. Leaders at the Group of Seven summit this month said coal-fired power plants were the main source of greenhouse gas emissions and pledged to step up efforts to reduce fuel consumption.

But for now, demand for coal is on the rise again. German utilities are on track to produce 35% more electricity from coal and lignite in the first half of the year compared to the same period last year, according to data from Argus.

Chinese import demand, meanwhile, was boosted by a drought that hit hydropower production in Yunnan province.

Write to Joe Wallace at Joe.Wallace@wsj.com

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