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CO2 price correlation to electricity and coal hits 2013 low in May

22 May 2013 14:14:34 | edcm

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The relationship between the European carbon market and the fuels complex has weakened in May to the lowest level since the start of the year, ICIS data shows.

If the trend is sustained, this could indicate that utilities are scaling back the hedging of their near-term carbon exposure, with news of political developments to back-load emissions allowance supply instead driving the carbon market, according to analysts.

The correlation between the Germany Calendar Year 2014 Baseload - often cited as a benchmark driver for carbon markets - and EU allowances (EUAs) with December 2014 delivery has dropped in recent sessions.

The coefficient of determination between the contracts has dropped to 0.635 since the start of May, compared with 0.979 in April, on the back of cheaper coal and more expensive oil.

The closer the figure to 1.0, the stronger the positive correlation.

Similarly, the carbon benchmark contract's correlation to the coal CIF ARA Cal'14 contract has also weakened, from an average of 0.349 in April to -0.184 in May to date.

"It is too early to ascertain whether these moves imply near-term utility hedging is subsiding, especially given the possibility of fresh back-loading information flows this week," Jefferies Bache carbon analyst Matthew Gray said.

"But the manner [in which] the correlation has tapered off does not bode well for near-term carbon prices."

"In this period [after compliance], the correlation with the fuel complex is weaker because the only factor which has an impact is politics," environmental broker Vertis' carbon analyst Bernadett Papp said.

Companies have now handed in emissions allowances to match their 2012 emissions, with the next compliance deadline not until next spring. Marie-Louise du Bois

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