US: Low demand weighs down ARB auction settlement price

24 February 2014 23:03 Source:ICIS

Lower-than-expected demand for California carbon allowances (CCA) caused the Air Resources Board (ARB) auction to settle in the mid-$11.00/tonne of CO2 equivalent (tCO2e) for both the vintages on sale, data published on Monday show, sending a bearish signal to the secondary market.

The ARB, the governing body of the state’s cap-and-trade programme, sold all 19.5m Vintage 2014 allowances auctioned on 19 February for $11.48/tCO2e, or the same settlement price of the previous auction held in November 2013. The ARB also sold all of the 9.3m Vintage 2017 allowances for $11.38/tCO2e, at a $0.04/tCO2e premium over the $11.34/tCO2e floor price.

Prices were weighed down by low demand, as the ratio between the volume on offer and the bids submitted was one of the lowest in months. The bid-to-cover ratio slipped to 1.27 for Vintage 2014, the lowest for a current vintage since November 2012. The ratio for Vintage 2017 was 1.11, the lowest since May 2013.

The auction attracted the fewest qualified bidders ever recorded in an ARB auction, or 71, an 8% drop from the 77 bidders in November.

Compliance entities still purchased the bulk of the CCAs on sale, or 84.5% for the current vintage and 83.5% for the future vintage, but their share was the lowest ever recorded as the share purchased by speculators grew.

Market participants said the lower demand was likely due to the oversupply of CCAs in the market.

Market reacts to the results

“It cleared lower than I would have thought given the drought,” said a trader at a compliance entity. “It was definitely bearish.”

The March ‘14 Vintage 2014 contract was reportedly trading at $11.70/tCO2e after the results were posted, down from $11.95/tCO2e prior to the announcement.

But the results are not expected to have a significant impact in the long term, traders said. “I think we will stay in the $11.50-12.00/tCO2e range for sometime,” said a broker at a trading house.

Traders are hopeful that liquidity could increase in the coming weeks, after the run up to the auction dried up the secondary market. So far, 3.4m allowances have been traded or cleared on the InterContinental Exchange, compared with 19.4m traded in all of January, data from the exchange show.

ARB’s next auction is scheduled for 16 May.

Before that, Quebec, whose carbon market recently linked with California’s cap-and-trade programme, will hold an auction on 4 March. The Canadian territory will be selling 1m Vintage 2014 allowances and 1.5 Vintage 2017. The floor price is $10.27/tCO2e, or CAD $11.36/ tCO2e. Dan X McGraw

By Dan X. McGraw