Market mulls price impact of reduced carbon auction volumes
The lower supply of allowances from auctions in August has supported carbon prices in the last week of July, with traders and analysts debating wether it is now completely priced in or not.
In line with EU regulations, the volume of spot EU allowances (EUAs) auctioned in August will be less than half of the monthly volume auctioned earlier in the year. The combined volume auctioned on Germany-based EEX and UK-based ICE Futures Europe will be 33.6m EUAs. The monthly average of in the period January-July is 70.4m EUAs.
Market participants have mentioned lower supply as one of the two factors supporting carbon. The Commission's delay in finalising the free allocation of EUAs to industrials is the other. Industrials will not get - and therefore will not sell - any free EUAs at least before October (see EDCM 30 July 2013).
According to ICIS data, the benchmark EUA 2013 has not closed outside of the €4.30-4.35/tonne of CO2 equivalent (tCO2e) range since 23 July. "Carbon wouldn't be at this level if it didn't incorporate the lower expected supply," said one source at a trading house this week.
EEX data - where most of the volume has been auctioned - shows that July had the highest monthly cover ratio ever recorded in the year to date, at 3.41 compared with an annual average of 2.81 in the auctions held between January and June. This is because bidding has been higher compared with the rest of the year at an average 12.2m per auction in July, against 9.9m per auction in January-June.
With the usual news flow from Brussels on back-loading calming down with the summer recess, carbon is left with little to follow, especially now that the Commission provided the time frame for the free allocation.
"There's nothing in the price save for what traders are doing," the trader said.
The utility factor
Market participants and analysts agreed that prices might tick higher in the month, but that it will all depend on whether utilities' hedging will slow down or not.
"Since the demand has been quite strong recently in the auctions, it might be that we now get very high bid-cover ratios, which might give a small boost to the carbon price," said one carbon analyst at a power generator.
On Thursday, the first day the volume on auction was lower, the bid-to-cover ratio was the highest recorded in 2013, with demand outstripping the offer by over six times.
"I think we might edge a little bit higher slowly this month," the analyst said. He predicted a possible maximum €4.76-5.00/tCO2e as the picture "doesn't seem too bullish technically either" and that hedging will probably slow down because of the holidays.
Another trader at a utility mentioned €5.00/tCO2e as the upper limit.
Italian consultancy Nomisma carbon analyst Matteo Mazzoni was more conservative, forecasting prices to remain stable, and said that a possible uptick might come from the absence of industrials on the sell side.
"The benchmark might tick a bit up in the next few sessions, possibly stabilising around €4.40-4.50/tCO2e, but it's unlikely it gets much higher than that," he said, adding that utilities have hedged much of their 2013 production.
Another source at a trading house said: "I would be surprised to see it break through €4.30/tCO2e in a big way."
According to German consultancy Tschach Solutions, now part of ICIS, prices are likely to follow a bullish trend during August, as the market will likely be short at current prices. In a note on Wednesday, Tschach said utilities hedging activity will not significantly slowdown. It added the absence of industrials because of holidays has meant carbon prices have gained in each August since 2008.
A trader at a bank, however, said that other factors might play a role. "If you hedge the clean darks when the market is illiquid, as it is in August, you move carbon, coal and power," he said. He added clean dark spreads could narrow quicker in an illiquid market, and this is not what utilities might want if they do not want their profit margins to narrow too.
A second trader at a bank said: "Yes, there will be a bit less supply coming in, but still in an oversupplied market where nobody is significantly short." Silvia Molteni
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