Early auction supply puts more pressure on carbon prices
Carbon prices crashed this week on disappointing regulatory news, but analysts are warning that, as phase III auction volumes start to hit an already-oversupplied market, prices could fall even further.
The European Commission sparked a bullish run when it published its long-awaited back-loading proposal, which sets out how to curtail some of its oversupply, but a brief price spike quickly turned bearish (see EDCM 13 November 2012). Analysts have attributed this to continuing uncertainty about when the proposal will be adopted, as well as whether it will be watered down more.
The EUA benchmark alone shed almost 20% of its value from Monday to Thursday. EUA prices were strong when the Commission said on Monday night it would roll its back-loading proposal forward, but prices fell on Tuesday. By Thursday, the benchmark had hit its lowest level since 10 August.
On Friday morning, market participants reported the EUA benchmark had fallen even further as it dawned on the market that early phase III auctions, together with an unambitious back-loading proposal, would exacerbate the oversupply.
"Around 20m [tCO2e] of supply will be added to the system every week until the end of the year," Jefferies Bache analyst Matthew Gray said in a briefing note on Friday, adding: "Given that utilities are well hedged out to 2014, the question we are asking ourselves is what happens if no big compliance buyers show up to these auctions."
Mark Lewis, managing director of Deutsche Bank's commodities research, also said in a briefing note on Friday that he expects a supply swell of up to 270m new allowances by April, because of the auctions and also the second tranche of NER300 sales.
"We expect prompt EUA prices to trade in a range of €6-8/[tCO2e] ahead of a vote in the [Climate Change Committee], which the Commission hopes will come on 13 December," he said. "However, given the very large volume of allowances coming to market in coming weeks, particularly from the pool of 120m [phase III] allowances to be auctioned early, we think there is a risk that prices could fall below €6/[tCO2e] in the short term."
Auctions held on the EEX platform could be delayed if the volume is underbid or if the clearing price is below the secondary market, Gray said. "The former seems unlikely, but the latter is a worryingly real possibility," he said. "If an auction is cancelled, then hold on to your hat because risk will unequivocally favour the downside."
While EUAs dropped sharply this week, offsets continued their more-or-less constant but less steep decline.
As a result, the EUA benchmark premium over its equivalent CER contract shrunk on Thursday to below €7.00/tCO2e for the first time since 25 October, ICIS data show. While the premium has averaged €4.41/tCO2e, it has grown particularly in the second half of the year, averaging €7.24/tCO2e in November alone to date.
Meanwhile, uncertainty persists about a Commission proposal to ban ERU offset credits from EU projects registered after 31 December, with developers sharply criticising the move (see EDCM 29 October 2012).
Gray said the EU Climate Change Committee's failure on Thursday to vote on potentially restricting ERUs was "concerning", as it could now be discussed at the committee's last meeting of the year.
But, as the ERU restriction decision is more urgent than back-loading, according to Gray, the committee will on 13 December vote on both proposals or back loading will be postponed until 2013. "The market has reached saturation point with regard to lofty announcements from the Commission and needs something concrete [action] soon," Gray said. "Otherwise the early phase III auctions will lead to a stampede of selling."
Meanwhile, the auctions continue. Bulgaria raised €2.53m by selling 298,000 EUAs on the EEX on 13 November, according to a statement by the country's environment ministry. Bulgaria will be offering the same amount of allowances for each of the next nine auctions organised by EEX before reducing the amount to 297,000 for the tenth sale.
Germany was due to auction off more allowances on Friday. MLDB
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