EU carbon prices selling below value

The barrage of short selling by financial institutions after a plunge in German power and UK gas prices caused European Carbon Futures prices to fall to €13.81 in July. Further changes in price were caused by the lack of buying support of the EU Allowances (EUA) from utilities- the main financial backing of the EU Emission Trading Scheme.

Even though prices have fallen since May highs, prices are still nowhere near the January 2010 low of €12.25. As analyst Bernard Kellner of PAN Energy Markets predicts, EUAs are trading at a discount of their fundamental €15.50 value and will quickly return to these levels despite the recent fall on utilities, "The rebound will come in early Autumn when we might see a rise to around 16 euros.

This juxtaposed with signals of economic recovery might push prices up to 17.50 euros by the end of 2010." Market analyst Matteo Mazzoni also predicts an €18 high for end of 2010, "We will find less surplus selling by industrial firms while larger participants will start to buy more EUAs for Phase 3. For the rest of the year I think we will stay range bound between €13.20 and €16 with a peak at the end of 2010 around €18."

Further losses could now result if the price lowers below technical support levels, even though analysts predict that utility buyers will re-enter the market once EUAs can be bought at the lowest possible price- opportunistic buying is predicted to begin at around €13.50.

Utility buyers will have to eventually buy EUAs to comply with the European emissions trading scheme wherein the EUAs have to be equivalent to the annual emissions released each year.

Prices are sure to rise for utilities in the near future if the EU decides to raise their current reduction targets to 30 per cent instead of 20 per cent below 1990 levels. A rise in utility prices are also being predicted due to an unusually cold winter forecasted for the end of the year.

EUAs have also been affected by the Euro's recent poor performance. As carbon market research analyst Rodney Boyd explains, the EUA is essentially a euro-traded product and if the euro is weak, the EUAs are weak, "The euro has lost almost three per cent in two days … the biggest driver is the demand for EUAs from power firms and industry, so if the recovery is slower than expected, that will impact on carbon demand."

The fall in prices below the EUAs fundamental value were most likely due to recession-hit industrial firms (such as steel and cement procedures) selling off their surplus EUAs for cash.

Trevor Sikorski, an analyst for Barclays Bank, predicts that industrial sales and government permit auctions will continue to create a fundamental weakness in the EUA scheme, "The recovery in industrial production is uneven between sectors and, with some sectors and countries still suffering difficult times, monetizing EUAs will remain attractive to some participants."

While another 30-40 million EUAs are predicted to be bought by the end of the year, these will be offset by government auctions that are predicted to buy another further 36 million EUAs.

 

Author: Edurne Scott | Climate Action

Image: openDemocracy | Flickr