US: ARB auction settles at $11.50, V17s fail to sell out

Dan X. Mcgraw

21-Aug-2014

Vintage 2017 allowances failed to sell out for the second consecutive auction as the current allowances remained at $11.50/tCO2e, the same price as the May auction settlement price, according to Air Resources Board (ARB) results.

Compliance entities purchased nearly 88% of the 22.5m current allowances on offer during the ARB’s third auction. The vintage settled at $11.50/tCO2e, meeting the expectations of market participants prior to the auction ( see EDCM 21 May 2014 ). The current vintage auction settlement price has stayed within $11.48-11.50/tCO2e since the November 2013 auction.

The Vintage 2017 allowances settled at the $11.34/tCO2e floor price and failed to sell out for the second consecutive auction. The ARB sold 6.5m of the 9.3m allowances on offer, a rise from the 4m sold in the May auction.

Traders said the results are likely a bearish signal for the market because of the relatively low demand and settlement prices for both vintages. A broker said it was too early to know what the results say about the remainder of the year.

“It’s a disappointment,” the broker said of the auction results.

A trader from a compliance entity added the flat prices over the previous three auctions would likely put more downward pressure on prices moving forward. Vintage 2014 California carbon allowances (CCAs) had been valued Wednesday in the $11.75-12.25/tCO2e range based on delivery, according to data from the InterContinental Exchange (ICE).

According to the results, Vintage 2017 allowances attracted slightly more interest from non-compliance entities who purchased nearly 700,000 allowances, or roughly 11% of the 6.5m allowances purchased. Compliance entities purchased all 4m Vintage 2017 allowances sold in the May auction.

The bid-to-cover ratio also decreased from 1.46 in May to 1.14 in August for the current vintages. However, the ratio, which measures the number of bids to allowances on offer, dropped because of an additional 5m additional allowances on offer, according to ARB data.

Overall, the number of bidders dropped to 71, a slight decrease from the 74 bidders in the May auction.

Secondary market see little response

Market participants said some small volume exchanged hands after the auction for $0.05/tCO2e less than the previous day close, but they did not expect a major reaction to the results.

Traders said a little more than 300 allowances traded on the back of the results. Most of the volume traded was on the Vintage 2014 contract, market participants said. However, traders said the low bid-to-cover ratio and low prices would likely temper demand on the secondary market.

“It isn’t going to be a big trading day,” a trader from a trading house said. “Everyone needs to digest this.

According to ICE data, nearly 2m CCA allowances were traded or cleared prior to the auction results. Nearly all of the volume centered on the Vintage 2014 and 2017 contracts, which were on offer Monday.

Traders said the price for allowances should rise in the fall as market participants anticipate the 2015 floor price ( see EDCM 14 August 2014 ). The floor price, which rises 5% plus inflation every year, is expected to be around $12.00/tCO2e. Dan X. McGraw

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