Coal prices have climbed to their highest level in a decade, making the fuel a hot commodity in a year when governments are pledging reductions in carbon emissions.

Thermal-coal pricesSource: Argus/McCloskey’s Coal Price Index ReportNote: European prices include insurance, freight andother expenses; Australian prices are for coal only.

shortfall of natural gas, rebounding electricity usage and scanty rainfall in China have lifted demand for thermal coal. Supplies have been crimped by a closed mine in Colombia, flooding in Indonesia and Australia and distorted trade flows caused by a Chinese ban on Australian coal.

Prices for thermal coal—which power plants burn to boil water into steam, spin turbines and generate electricity—have more than doubled over the past year as a result. Coal delivered into 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 heads to Asia, have risen 56%, according to Argus Media.

Both coal-price benchmarks have outstripped gains in oil, copper and other commodity markets that are benefiting from a vaccine-fired burst of economic activity. The upswing in fuel markets is contributing to higher electricity prices in the U.S. and Europe. Central banks are grappling with a jump in inflation powered in part by rising raw-material costs, though highflying commodities such as lumber have lost steam of late.

The rally is a reminder that efforts to wean power systems off coal to limit planet-warming emissions are in their early stages, and may prove halting while the fuel competes with other energy sources. The world’s appetite for coal peaked in 2014 and is unlikely to return to pre-coronavirus levels, the International Energy Agency forecasts. But analysts say spurts of demand, coupled with a dearth of investment in new supplies, could lead to spells of higher prices.

Prices are expected to stay at elevated levels for several months, delivering a windfall for companies that held on to coal mines in the face of pressure from some investors to abandon them. Glencore PLC will be the chief beneficiary among big Western miners, according to UBS Group analyst Myles Allsop.

Natural-gas storage levels in EuropeSource: ICIS*Average gas in storage
billion cubic metersDAY OF YEAR2016-19*202020211100200300365020406080100

The U.K.-listed commodities giant has said it would run down its mines in Australia, South Africa and Latin America rather than divest them. BHP Group Ltd. , in contrast, is looking to exit thermal coal. Anglo American PLC this month spun off its South African coal business, shares of which have gained 48% since their debut 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. Those companies that have clung on to them have made a small fortune on them in just the past few months.”

Analysts say the jump in European coal prices is most surprising because it has taken place alongside a surge in the continent’s market for carbon offsets. Prices for European Union emission allowances have shot up 69% to over €50 a metric ton, equivalent to about $60 a ton, and recently hit a series of all-time highs.

Coal is hardly in ready supply, said Jake Horslen, editor of Argus’s Coal Daily International. Glencore’s Prodeco mine in Colombia, a big exporter to Europe, has been closed since spring 2020. Australian miners cut back last year and floods in the port city of Newcastle disrupted exports this March.

Profit margins for German power plants withdifferent fuels*Source: ICIS*Assumes power stations lock in margin with month-ahead power and fuel prices and December carbonprices
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High prices in Asia, partly spurred by China’s decision to bar Australian coal over Canberra’s call for an international inquiry into the origins of Covid-19, have drawn cargoes away from the Atlantic and toward the Pacific.