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Correction: New price drivers emerge for carbon benchmark in phase III

14 Mar 2013 20:04:00 | edcm

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Correction: The ICIS article headlined 'New price drivers emerge for carbon benchmark in phase III', published on 15 March 2013, in the fifth paragraph please read ...The usual premium of the benchmark over spot has averaged €0.10/tCO2e...  instead of  ...€0.01/tCO2e....  A corrected story follows.

The fate of phase III auctions and the future of the back-loading proposal have replaced traditional carbon price drivers, data collated by ICIS suggests. As the auctions continue and the positions of some member states remain outstanding, the combination of oversupply and uncertainty is expected to drive prices to new lows in coming sessions.

Since the start of the year, the EUA benchmark contract has averaged €4.90/tonne of CO2 equivalent (tCO2e). This is close to the spot average, which has closed at €4.80/tCO2e since the start of the year. The EUA 2014 contract has finished at an average of €5.20/tCO2e.

The EUA average closing price has seen the contract rise to as high as €6.35/tCO2e in the first month, on 7 January; and fall as low as €3.45/tCO2e on 31 January.

But on 13 March, the contract broke this low by closing at €3.40/tCO2e.

Spreads

Wednesday was the first day this year that the benchmark closed below the less liquid spot price, at a €0.05/tCO2e discount. The usual premium of the benchmark over spot has averaged €0.10/tCO2e over the course of 2013 to date.

The EUA contract's move south also eroded its premium over the equivalent CER contract. As CERs have consistently closed below the one euro level since the start of phase III (2013-2020), the EUA Dec '13 has held a considerable premium over the CER Dec '13 contract. This premium has closed at an average of €4.55/tCO2e, starting off at a high of €6.30/tCO2e on 1 January.

On Wednesday 13 March, however, it narrowed to €3.05/tCO2e, the slimmest spread between the contracts this year.

Disconnected

Traditionally, there has often been a correlation between carbon and other commodities in the energy mix, with power prices, such as German baseload power and CIF ARA coal prices playing a guiding role in particular.

However, as more volume has flooded the carbon market via phase III auctions, this relationship has eroded over time.

The premium that the German power Calendar Year 2014 contract usually holds over the EUA 2013 contract has oscillated since the start of 2013, with carbon prices showing little reaction to peaks or troughs in the German power price.

Similarly, the decline of coal's benchmark Calendar Year 2014 CIF ARA contract since the start of the year has failed to boost the price of the benchmark carbon contract.

While the power benchmark contract has shed 10% and the equivalent coal contract 7% of its value, carbon has shed almost 50% over the same period starting in 2013.

New drivers

Market participants said this week that the new low marked a clear departure for the contract from responding to traditional signals, such as power and coal prices or even macroeconomic data.

One source said that the two factors taking over traditional signals were, firstly, any news on the back-loading proposal and, secondly, auction results.

The 21% drop in value for the EUA contract since last Friday (7 March) to where it closed on Wednesday, was largely attributed to disappointing auction results and continued uncertainty over the proposal's future.

On Monday, prices crashed and the benchmark closed €0.25/tCO2e lower on the back of a disappointing auction result and the news that Greece, which holds 12 of the 91 votes in the EU parliament, would oppose the proposal.

This brought the number of opposing votes to 43, with another source pointing out that this may increase when some undecided member states make up their mind. Crucially, Germany's position on the proposal remains unclear.

On Tuesday, prices took a further beating and the benchmark lost another €0.25/tCO2e when the EEX cancelled the auction of EU permits and the Flemish region's auction under-whelmed the market. Vertis analyst Bernadette Papp pointed out that this was the first EU auction to be cancelled, while already two German auctions had been cancelled in the past.

On Wednesday, the UK's offer of 4m EUAs via auction to the market again drove prices down, as the auction price again failed to meet that in the secondary market and the bid-to-cover ratio remained low. This drove the benchmark €0.40/tCO2e lower.

An analyst warned that another German auction was scheduled for Friday, when the country would offer 5m EUAs to the market via the EEX. If this auction also fails because of lackluster demand, the volume will be split over coming auctions. "That means that they will auction off 6m [on 21 March]. But if they can't sell 5m this week, how will they sell 6m next week?" Marie-Louise du Bois

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