No EUA selling flood from industrials expected in Q4

With the benchmark carbon contract above the “psychological” €6.00/tCO2e mark, large industrial firms could be tempted to sell surplus allowances to raise cash in the fourth quarter of the year, but experts do not foresee a selling flood.

Q4 has typically been a quarter for surplus sales as companies might want to raise cash in the last three month of the year when they close their balance sheets. At year’s end, they also have a clearer idea of how much their annual emissions differ compared with the amount of allowances they received for free.

“The ‘psychological’ threshold is €6.00/tCO2e. If prices are above that mark, those players who are in need sell,” said a sales trader at a trading house.

But the European Commission’s cut in free EU allowances (EUAs) allocated to industrial firms means that they will receive less allowances than many initially hoped for. This, combined with an expected recovery of industrial production, could act as a deterrent.

“Only a few big industrials can afford to sell, and they only do it if they need to boost their balance sheets, otherwise they would wait (for higher prices),” the trader added. “Someone is already selling, there is a bit of movement on the sale side but not too much,“ he added.

A second trader at another trading house thought that industrials will not scramble to sell their length “because the price outlook is bullish and cash constraints are lower.”

Carbon prices are expected to rise as a result of the postponing, or back-loading, of scheduled auction supply. This, on one hand, will make surplus more profitable. On the other hand, a company would think twice about going short if allowances are more expensive farther out.

“From some industrial players, we know that at the moment the attitude is more wait-and-see,” said Italian consultancy Nomisma’s carbon analyst Matteo Mazzoni, adding that this would add up to back-loading in tightening the allowance supply to make the market even shorter. “That said, some thresholds remain [an] attractive [level to sell],” he added, pointing to €7.00/tCO2e.

The likelihood of industrial sales will also depend on how much a firm with a long position is cash-stripped.

Steelmaker ArcelorMittal in the past has made millions from the sale of surplus allowances, typically in the last quarter of the year ( see EDCM 6 February 2013 ).

Philip Ngotho, equity analyst at bank ABN Amro, thought the company is likely to repeat the move this year.

“They have done so in the last five years on average getting cash inflows of some USD 150 million per year,” he said.

The company is in need of cash because it is trying to deleverage its balance sheet to a net debt of $15bn from the current $17.4bn, he said. Plans to take over a steel plant in Italy would also increase its cash appetite.

ArcelorMittal did not comment on the issue. Silvia Molteni