US weekly review: CCA volume drops ahead of the auction, compliance deadline

Dan X. Mcgraw

31-Oct-2014

Demand for California carbon allowances (CCAs) dropped on the secondary market as compliance-side buying declined, but prices saw marginal increases as the market adjusted to next year’s price levels.

The Dec ‘14 Vintage 2014 contract rose $0.06/tCO2e week on week to settle at $12.15/tCO2e during the 23-30 October period, according data from the InterContinental Exchange (ICE). The front-month Vintage 2014 contract rose $0.07/tCO2e to finish the week at $12.12/tCO2e.

The Dec ‘15 Vintage 2016 rose $0.02/tCO2e to settle at $12.57/tCO2e. The contract, which is the most liquid CCA contract, has seen a steady drop since hitting $12.62/tCO2e on 2 October. Traders attributed this month’s decline to a switch to the Vintage 2015 and 2017 contracts.

Traders said this week’s price increases are due to the market readjusting to the 2015 floor price and potential prices next year. A broker said the market declined earlier this week on lower than expected inflation rates for September, but it rose as market participants determined CCAs would not trade at the floor price.

“I think people are seeing these prices as pretty good buys now,” the broker said. “CCAs are getting stronger.”

Other market participants said the price increase is due to the small amount of volume that caused marginal rises on CCAs prices.

Despite the price rise, weekly volume dropped to 2.4m, a significant fall from the 4.4m traded or cleared on ICE in the 17-22 October period ( see EDCM 23 October 2014 ). More than 20.7m allowances have been sold in October.

Traders said the market saw low interest from compliance entities ahead of the first partial compliance deadline. The low compliance-side demand created a lull in the market as most of the activity centered on the Vintage 2014 and 2015 contracts, which cannot be used for compliance this year. “It is getting to the point where people are just waiting for the next auction,” a trader at a trading house said. “It is still 20 days away, but everyone is pretty much done for the compliance deadline.”

Compliance entities will have to surrender 30% of their 2013 emissions with either Vintage 2013 allowances or valid offsets on 3 November. Market participants do not think many companies will struggle to reach that compliance obligation.

Traders said they expect the market to remain at these prices levels until the next auction on 19 November, which will also mark the first joint auction with Quebec. Market participants said they believe the auction to clear above the $11.48/tCO2e clearing price for the August auction. Dan X. McGraw

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