Falling carbon price and growing length bring industrials to market, experts say
Industries such as cement and steel added to their surplus holdings of carbon allowances in 2012, provisional EU emissions data show, with top polluting companies receiving free allowances covering more than double their actual emissions.
Yet experts have suggested that selling off their surpluses during the height of the recession in 2011 could have led some companies to be short ahead of their 2013 compliance deadline, helping to lift prices in recent months.
The data show that, in the steel sector, plants emitted 97.61m tonnes of carbon dioxide equivalent (tCO2e) in 2012, a like-for-like increase of 0.7%from 2011.
The industry's emissions rose despite crude steel production in the EU declining by 5% year on year in 2012 to 168m tonnes, according to European steel lobby Eurofer data.
The steel sector's emissions accounted for about 5% of the CO2 footprint of plants that met the EU's 1 April reporting deadline for their 2012 emissions. Overall, the year's emissions from plants covered by the EU emissions trading system (ETS) dropped by 1.4% from their 2011 level (see EDCM 2 April 2013).
The EU allocated allowances worth 166m tCO2e to the steel industry in 2012, so the sector accumulated further length - 68.4m EUAs - in that year alone.
Its emissions figure could prove to be even bigger when the final compliance data are published next month, as 34 of the 254 steel installations listed failed to submit their data by 1 April.
Steel major Ilva's Taranto steel plant in Italy topped the sector's list of greatest polluters in 2012, emitting 1m tCO2e.
Meanwhile, cement makers emitted 126.5m tCO2e in 2012, or 4% of the year's total industrial emissions. The figure is 36% lower than the 198.3m allowances that the EU gave to the sector in 2012, also increasing the sector's allowance oversupply length.
Polish operation Cementownia was responsible for the industry's greatest single emissions volume, at 2mtCO2e, but received no free allowances in 2012.
Other heavy polluters were a plant owned by another Polish cement company, Cement Ozarow, Swedish plant Slitefabriken (owned by the Swedish arm of HeidelbergCement) and Danish site AalborgPortland (all at about 1.7m tCO2e), and Greece's Agrethavol plant, which emitted 1.4m.
Agrethavol, AalborgPortland and Cementoxia all received free allowances matching double the volume of emissions they reported.
Agrethavol was awarded 2.8m free allowances and can now either sell or carry another 1.4m allowances into ETS phase III. AalborgPortland received 2.6m free allowances and Cementownia 2.3m.
The cement industry expects to become short of carbon allowances during ETS phase III (see EDCM 1 March 2013).
Despite the over-allocation to the industrial sector, market experts say industrial players could be short and entering the market as buyers ahead of the compliance deadline at the end of this month.
"When the eurozone crisis kicked off in earnest in mid-2011, industrials' cost of capital increased, which led to a flurry of selling as companies sold their liquid paper assets," Jefferies Bache's carbon analyst Matthew Gray said on Thursday, pointing to it as a factor that might have recently supported prices.
He said industrials sold a large portion of their phase II overallocations between June and December 2011,, which pushed prices down by as much as €10/tCO2e.
"As industrials could have sold their free allocations in advance, some might now be short and will have to enter the market before the end of the month," Gray said.
Jan Frommeyer, managing director of Tschach Solutions, also thought that industrials such as cement and steel companies have sold off their phase II allowances.
He said most will have sold only their expected EUA surpluses, rather than their total allocations. That would enable them to meet their current compliance needs without having to buy back large volumes of allowances before the end of April.
But he added that some might have sold all their EUAs, planning to cover their 2012 emissions with 2013 allocations. He said that, although using 2013 allowance allocations to comply with 2012 caps is forbidden by ETS rules, industrials can swap allowances via the market quite easily.
"Because the allocation for 2013 is likely to be delayed until after 30 April 2013, these companies now have to buy outright EUAs instead of swapping their allocation, which probably contributes to the current price rise," he said.
Any company that sold off its allowances from June to December 2011 would have received an average price of €12.50/tCO2e, according to ICIS data. The carbon benchmark has closed at an average of €5.260/tCO2e to date, indicating that companies could have generated cash and cut their compliance costs by selling off their length in advance and not buying back allowances until now.
A broker's analyst said the firm has seen a recent increase in compliance buyers, the majority of which have been industrials, and that airlines have become active buyeers.
A trader said he thinks that industrial buying activity could have helped fuel a recent uptick in prices.
On 2 May, the European Commission is due to make public information showing how many allowances or offsets respectively installations have submitted to cover their 2012 emissions. Final data will be made available on 15 May. Silvia Motlen and Marie-Louise du Bois
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