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German carbon auction cancelled again as reserve price not met

22 Feb 2013 16:04:51 | edcm

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The European Energy Exchange (EEX) cancelled an auction on Friday of German phase III spot EU allowances (EUAs) for the second time this year because it would have cleared below the reserve price, something market experts had predicted.

The auction pressured the benchmark EUA 2013 on Friday morning, which had already opened weakly because of bearish EU macroeconomic data. The contract was said to have fallen from €5.18 per tonne of CO2 equivalent (tCO2e) to €4.80/tCO2e after the cancelled auction was announced. However prices recovered later in the session.

A German auction was cancelled in January for the same reason as Friday's (see EDCM 18 January 2013). Analysts had previously said it was unavoidable that another auction would be cancelled because of the current oversupply on the market.

"The problem with failed auctions is it creates a vicious cycle. Speculators are disinclined to hold positions, due to the risk of back-loading failing. This ultimately causes the price to fall further, because of the 2013 demand-supply balance," carbon analyst Matthew Gray of investment company Jefferies Bache said in a note on Friday.

The run up to a key vote this week on back-loading by the European Parliament's environment committee caused a wave of speculative buying following a "buy the rumor, sell the fact" strategy (see EDCM 11 February 2013). After the vote, speculators were said to have lowered their risk appetite after selling off their long positions following the outcome of the vote.

However, Gray told ICIS that because prices did not come off more on Friday morning, the appetite for risk might be increasing, leading up to next week.

The Jefferies Bache analyst estimates the market is oversupplied by 220m EUAs in 2013. "Speculators will have to go long at least 75m EUAs to prevent auction supply outstripping utility demand. We do not think there is the desire or ability for speculators to increase their exposure by this margin."

Some 4.02m spot EUAs were supposed to be auctioned on Friday on EEX. The bourse said that this volume will be evenly distributed over the next four scheduled auctions.

As German auctions are held on Fridays, this means that on 1, 8, 15 and 22 March some 5.025m EUAs will be offered. Silvia Molteni

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