Longer-term hedging of carbon positions by industrial companies is likely to pick up in the future, according to analysts, which could support emissions permit demand.
Industrial firms in sectors such as steel and cement production are required to take part in the EU emissions trading system (ETS).
However, only the largest companies have historically used the market dynamically to manage carbon costs, according to Louis Redshaw, director at carbon traders Redshaw Advisors, with many smaller firms simply making a one-off purchase to cover their compliance needs. This could change.
“Under the market stability reserve, hedging might accelerate,” Redshaw said at an Argus emissions markets conference in Amsterdam on Wednesday.
EU emissions allowance (EUA) prices are forecast to push upwards, into double figures, if a market stability reserve is implemented by the EU. The reserve would act as a buffer mechanism to tackle existing oversupply in the EU ETS. In contrast, the benchmark EUA contract settled at just €6.80/tCO2e on Thursday, ICE Futures Europe data showed.
“They’ll need to do more risk management,” Philip Ruf, lead EU carbon analyst at ICIS energy analysts Tschach Solutions said on Friday said of industrials.
A further factor that may entice industrials to hedge is that the number of EUAs industrial firms receive for free from governments will decline from 2013-2020 under EU rules.
A company with an original 50,000 EUA allocation could go from zero compliance costs in 2012 to €250,000/year in 2020, according to Redshaw.
There could be a positive feedback loop with EUA prices.
“With industrials hedging more, we’ll just get to the higher prices quicker,” Redshaw added.
Historically, utilities have been the biggest source of hedging demand in the EU ETS, with industrials instead on the sell side, but changes in company behaviour could be a factor in the future, co-head of commodity solutions at German Commerzbank, Ingo Ramming, said at the conference in Amsterdam on Thursday.
However, there are factors which limit how far out industrials will be able to hedge their carbon exposure.
“You don’t sell cement three years out, like utilities do [with power],” Ruf said. Ben Lee