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NER300 sale to focus on most liquid carbon contracts

31 Oct 2013 16:33:00 | edcm

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The upcoming sale of emissions allowances by the European Investment Bank (EIB) is likely to focus on the 2013 contract before switching to the 2014 contract, sources said.

The EIB plans to start the sales of allowances from the EU’s NER300 programme in mid-November and has been exploring whether to sell contracts with delivery beyond December 2014 ( see EDCM 11 October 2013 ).

However, an EIB spokesperson confirmed last week “while there are no restrictions on what maturities could be used, the EIB aims to place the EUAs in the most liquid December contracts”.

In the first round of the sales in mid-November, December ’13 will be the most liquid contract, making the product the likely candidate for the sales then.

As the EIB sales will take place over five months, the focus is likely to shift to the 2014 contract after the current benchmark product expires in December.

Martin Berg, product specialist in carbon markets at the EIB, said recently that the bank could sell contracts beyond 2014, if the liquidity is there.

If the EIB does this, the bank will have to factor in not only liquidity, but also how soon it needs the money and the cost of carry, traders said.

“If the EIB is able to get money from the market with a very small premium on interest rates compared with a standard operator, it would make sense to sell Dec ’14 [in November], but there must be a trade-off with liquidity,” one carbon trader said.

The curve is currently in contango (see graph), with the 2014 contract €0.15/tCO2e more expensive than 2013 product on Wednesday, according to ICIS data.

As longer-dated contracts are priced higher, selling these products could yield more income for the bank, dependent on the EIB getting favourable interest rates.

Some traders thought the EIB sale could extend to Dec ’15 contracts.

The sale will add to a flood of allowances already entering the market in EU- and state-run auctions, but most of the bearish impact is already factored into prices, one source said.

And although the EIB sale is likely to add some pressure, it will happen at the same time as discussions on back-loading, said Trevor Sikorski, natural gas and carbon head at London-headquartered analysts Energy Aspects on Wednesday. News on progress towards reaching an EU-wide decision on back-loading auction supply of allowances tends to cause prices to rise. Ben Lee

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