Analysis: Industrial sellers await higher carbon prices
Carbon traders expect industrial companies to wait to liquidate long positions until prices hit at least €6/tonne of CO2 equivalent (tCO2e), after finding out last week how many EU allowances (EUAs) they will get for free and when.
And even if prices reach that level, a wide sell-off is unlikely to be triggered, according to analysts.
The Commission announced last week it will cut by an average of 12% the number of free EUAs countries requested for industrial plants for phase III (2013-2020) of the EU emissions trading system (ETS) ( see EDCM 6 September 2013 ). Free EUAs will be handed out one to three months from now, several months later than the original deadline in February.
The delay was broadly perceived as bullish by market participants and was cited among factors supporting prices in the summer, as many said it was preventing carbon surplus sales from industrial companies. “Industrials have been fairly cautious sellers of EUAs this year due to the uncertainty of allocation and the fact there was always the possibility of the commission pro-rating down,” said Trevor Sikorski, head of natural gas, coal and carbon at consultancy Energy Aspects.
Despite the cut, at the EU-wide level the cement sector will remain significantly long, together with the paper and glass/ceramics sectors, said Ingo Tschach, head of market analysis at carbon analytics firm Tschach Solutions, now part of ICIS.
The metal sector is instead expected to be just slightly long in 2013, but turn short in 2014 due to the cut.
“On a company level, the cross-sectoral reduction factor will in most cases not turn a company from long to short, but either render it less long or more short,” Tschach told ICIS on Wednesday.
€6.00/tCO2e the level to watch out?
The idea that industrials will start selling their surplus as soon as they get free EUAs is challenged by the fact some companies want to make the most of this asset. Two cement companies openly said this summer they were withholding their surplus because carbon prices are too low ( see EDCM 26 July 2013 and 2 August 2013 ).
“In the current environment where CO2 prices have gone so much down, there is a real question of whether one wants to completely forget the value which is behind those CO2 credits. So I’m not saying we made any definitive decision on the subject but it could be that we have over the whole year as was the situation in the first half – very low CO2 sales,” said France-based Lafarge's CFO Jean-Jacques Gauthier in a conference call.
Several sources polled by ICIS said that for many the selling target price is at least €6/tCO2e. A sales trader at a trading house said earlier this year, “There are many operators that tell me they don’t want to sell below €6-8/tCO2e.” A trader at a second trading house said, “I have some lined up to sell at €6/tCO2e or better, so €6/tCO2e is a sell level for sure.”
Matteo Mazzoni, carbon analyst at Italian consultancy Nomisma, agreed that some are adopting the €6/tCO2e-level strategy, as it is common for industrial companies to identify a price level under which they do not want to sell, so they can put expected carbon revenues in their balance sheets.
But before a decision over back-loading is taken, prices are unlikely to hit that sell-point, he added. “If rumors of Germany [being] pro-back-loading in case of a Merkel victory are confirmed, there is space for those sales orders to be executed. But the effect of a heavy selling would bring prices back below €6/tCO2,” Mazzoni told ICIS on Tuesday.
Caution might prevail
But analysts doubted that a surge of surplus EUAs would flood the market, even if carbon prices start to look attractive to industrial companies.
Tschach did not think there is a certain price level that could trigger a large share of long positions to be sold. Any increase in price will trigger some additional selling, but not on a “massive“ scale.
“The main sales historically came from the cement sector which is also able to use the futures market to sell long positions. After the publication of the [allocation cut] the sales targets for 2013 will have to be reduced, thus little will be left for selling. The other sectors are not that long... and they are not selling that much or that regularly,” he said.
According to Sikorski, few industrial EUA sellers have a fixed price target, and they will likely start to sell once the EUAs hit their accounts. “Most will sell just to generate cash flow, provided they do not think they will need it anytime soon,” he said, adding that this is usually done by selling spot, as that gives an immediate cash injection. But he was cautious too: “For them, selling now and buying back later is not a risk they want to take at any price.” Silvia Molteni
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