Market developments
- Late compliance buying fails to bring about price rise, EUAs end the week flat
- Tight trading range of just 29c
- Falling energy prices put additional pressure on carbon
EU Allowance Auction Overview
- Auction volume falls to ~17.9Mt from ~22.1Mt last week
- May brings 82.8Mt to market, up from 78.5Mt in April
EUA Price Action
The end of the compliance window failed to bring about price rises as the week ended virtually flat at €4.57, a 1c week-on-week gain. It is the first April in 4 years in which compliance buying before the deadline has failed to spur price rises with April 2017 actually ending down 2.5%. The week began with a small rally as prices moved higher on the back of positive sentiment following Sunday’s first round of the French presidential election. The vote for the pro-European candidate Emmanuel Macron allayed some fears of a European exit that had been promised by Marine Le Pen. Carbon hit the high of the week at €4.74 but ultimately could not hold the gains, slipping back into the close before tumbling further on Tuesday as wider energy prices (power, coal and gas) fell. The rest of the week played out inside the range already set. The EUA trading range narrowed so much that prices could only muster a 7c range on Friday as compliance buying had all but ended and traders opted to lie-low ahead of the long weekend. Price Impact: much of the emissions trading in April was in a fairly tight range but ultimately prices ended up at the bottom end of that range. The failure of carbon to rise through April, and indeed through the first 4 months of the year, provides yet more evidence that we may be in for even lower prices in the coming months….
Week ahead
The end of the ‘once a year’ buying does not necessarily signal a price crash as much of the bigger volume hedging that takes place in the EU ETS is by the utilities and occurs throughout the whole year, but it certainly removes a support factor from the mix. The market is over-supplied this year and compliance buying from January to April will have been playing its part in avoiding larger falls. So, what now for carbon? Each of the next 3 months see the auction volume grow (82.8Mt – May, 83Mt – June & 91.5Mt – July), with July in particular looking very heavily supplied in a time of relatively low demand and lower participation as the holiday season kicks in. Supporting the market will be dip-buying larger industrials trying to pre-hedge the doubled MSR proposal, currently set to pass with the Phase IV reforms and utilities continuing their usual hedging patterns. Utilities could surprise the demand side if there is a particularly strong power price rise. However, normal demand is unlikely to be able to prevent prices falling below €4, maybe even further, at some point in the next 3 months. Our outlook for 2017 has always been bearish and thanks to April’s price drop we see even less reason to change that view now – hold tight it could be a bumpy ride!
Window of opportunity? The compliance deadline is out of the way for everyone for another year but carbon risk doesn’t go away so conveniently. The medium-term outlook is bleak for carbon prices but longer term the forecasts tell us that they are set to move substantially higher. To discuss your exposure and how we can help you get on top of it before the market reacts to the MSR, please give us a call on +44 203 637 1055
Other News
Carbon Forward is back and Redshaw Advisors announced as official partner
Redshaw Advisors are pleased to announce that we will once again be the official conference partner and training day provider for the annual Carbon Forward conference to be held in London on 26th-28th September 2017. The conference will give carbon market participants from all over the world a greater understanding of the risks and opportunities they face in ever-changing carbon trading, regulation, taxation.
Brexit, the ‘Trump factor’, an ambitious Phase IV reform package, the Chinese ETS launch in 2017 and the development of a global offsetting system for the aviation industry mean carbon risk is higher than ever. To successfully manage this risk companies need a thorough understanding of how carbon markets and regulation across the globe affect them and their competitors, Carbon Forward is designed to provide that understanding.
Interested in attending or finding out more? Fill in your details here and you will receive regular updates on the latest speaker announcements, program developments and special offers. More information can also be found at www.carbon-forward.com.
Alternatively, if there is something you would really like to see in the conference program please drop us an email with your suggestion(s) and we will let you know what we can do to make it happen.
EU adopts rules that look set to curb fossil fuel power generation
Rules on emissions of nitrogen oxides, sulphur dioxide and particulate matter have been adopted by EU Member States and will impose strict limits from 2021. The rules will apply to large combustion plants burning fossil fuels. Member states will be forced to impose limits that will likely force many of Europe’s lignite plants to either retrofit, if possible and viable, or close.
The rules, although good for the environment, are another potential source of conflicting policy with the EU ETS which is struggling to set an effective price signal to utilities and industry. Additional legislation that reduces emissions with no corresponding reduction in the EU ETS cap continues to hamper the ability of the market to set an effective price and increases the risk of price intervention.
IETA open letter calls for UK firms to remain part of the EU ETS until at least the end of Phase III
In an open letter addressed to Nick Hurd, the UK minister for climate change and industry, the International Emissions Trading Association (IETA) have called for UK firms’ continued participation in the EU ETS until at least the end of Phase III (2020) to avoid damaging disruptions to UK and European businesses.
Citing concerns over hedging strategies, market impacts, climate objectives, job losses, financial performance and investment certainty, IETA has said any environmental policy post-2020 should be closely aligned with that of Europe to ensure there are no on-going risks to competitiveness. They have also called for UK business to be provided with clarity on the matter as soon as possible.
