Auctions and prices prompt debate over CO2 broker future
Falling prices and large auction volumes on an oversupplied carbon market could change the way that emissions are traded, a utility has suggested. But experts in the market say that while conditions have changed, the commodity will continue to be traded over the counter (OTC).
The head of Dutch utility Eneco's carbon desk has said that bearish emission prices and high auction volumes would prompt OTC brokers to leave the carbon market within half a year.
The European Commission is due to auction 818.9m EU allowances (EUAs) in 2013 almost daily via EEX and ICE, according to a provisional calendar.
"The consequence of auctions is that pretty soon brokers will be gone because everybody can get what they want from the auctions now," Eneco's Mark Mayrick said at the Argus European Emission Markets conference in Amsterdam last week.
"With these low prices and these volumes on auction, I suggest they've got maximum six months And once they're gone, they're probably gone for a while."
On Tuesday the EEX cancelled another EUA auction because it would have cleared "significantly" below the secondary market price in the first half of the session, it said in a statement. It will now split the volume over the next four scheduled auctions, the exchange added. This is the latest auction cancellation amid lackluster prices and muted demand.
On Monday, the EUA benchmark contract closed just above €4.00/tonne of CO2 equivalent (tCO2e), according to ICIS' assessment.
Margins and volumes had been high at the start of phase I (2005-2007) of the ETS, which had attracted many brokers to the carbon market. As prices fell over the course of phase II, volumes and margins have narrowed, which has made emissions deals less attractive for brokers, Mayrick said.
As prices have fallen and the oversupply risen, some large players have left or reduced activity in the carbon market in recent months, notably Deutsche Bank and Barclays. Most of the big energy sector brokers as well as some niche carbon ones are currently still active.
But brokers and analysts polled by ICIS disagreed with Mayrick's outlook, with one source even saying that the number of potential clients for brokers in the carbon market would increase in phase III despite the difficult market conditions brokers face.
One broker source said that those offering more specialised service would still be able to make money in a low-priced market. The source cited knowing "why Russian emission reduction units are no good" and "why it is worth buying EU allowances and not EU airline allowances" as examples of expertise that would allow brokers to operate successfully in the carbon market.
Also, for some market participants it is too expensive to buy in the phase III auctions, the second source said. "Not everyone has money today, plus you need a clearer and approval for auction," he said. This meant that some players would trade OTC instead.
If a proposal to back-load supply pass into EU law, prices could rise and again provide an incentive for less specialised brokers to enter the market, he said. Until then, he expected four to six brokers to have a large enough client basis to stay in the market.
A second broker source called Mayrick's view overly "pessimistic" despite low prices driving down margins. ETS operators still need a service to buy and supply allowances as they are expected to move from being long to short in phase III (2013-2020), he said.
A third source echoed the view that the market was over-brokered, which meant that some, but not all, would likely exit.
"There will always be OTC" because of expensive exchange fees and industrials' preference for forward contracts, he said. The EEX, for instance, charges an annual fee of €10,000 for trading emissions alone, according to its website.
ICE charges a $2,500 (€1,925) general participant fee for emissions, and again a $2,500 fee per trade participant, before value-added tax. In addition, there is a contract levy fee that exchange participants would have to pay.
Large volumes were nothing new to the market, the third source said. "Volumes are as high as they have ever been, I think the challenge for brokers is more to do with the move from OTC to screen," he said.
A fourth source said falling prices bore little relevance to brokers.
"Low prices should not impact their earnings, as they are normally paid with a fixed price per tonne rather than a fraction of the deal size," he said.
Even though the high auction volume threaten brokers' business as companies can cover a large quantity of EUAs themselves, this could be cancelled out by the fact more companies would start off in a short position as free allocation is phased out and the emissions cap is tightened.
"The significant increase in demand as the free allocation is significantly reduced balances the increased supply, so that the effect should be small," the fourth source added.
Many of these companies that will become short under a tighter cap would lack direct access to an exchange and they are potential broker clients, he said. "So the number of customers for brokers is likely to increase in the coming months and years." Silvia Molteni/Marie-Louise du Bois
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