EU carbon prices have slumped 15% in one week, as a slew of bearish news took its toll on the markets.
The benchmark EU allowance (EUA) contract for December 2011 delivery has suffered an eight-day losing streak, dropping to €13.29 in trading this morning, a low not seen in the December futures contract since April 2010. The market recovered slightly as the day progressed, reaching €13.65 at lunchtime – but that still represents a 15% drop from last Thursday’s close of €16.10.
“It’s just been carnage these last few days,” said a trader at an investment bank in London. “There has been a huge amount of liquidation from funds, banks and utilities.”
“In my view, it’s been a battle between financials,” said a broker based in the Netherlands. “Industrial companies are holding back from selling.”
Concerns over the Greek debt crisis hit many financial markets, but carbon has fared far worse than other energy commodities it is commonly traded alongside, such as coal, natural gas and power.
December 2011 EU allowance settlement, 3 January-22 June. Source: ECX
Carbon markets have also had to contend with an increasing supply of carbon credits, while political wrangling in the EU has led many to think that demand for carbon will weaken.
An EU vote last Friday approving the new regulation on registries in Phase III (2013-2020) of the EU Emissions Trading System (ETS) created more certainty that extra supply – some 300 million EUAs for use in Phase III – will begin hitting the market in the fourth quarter of the year.
Issuance of carbon offsets from projects under the UN’s Clean Development Mechanism continues apace. Analysis firm IDEAcarbon this week raised its forecast for 2011 issuance to 256 million tonnes of carbon dioxide equivalent (tCO2e) – almost double the amount issued in 2010.
“Last year we were seeing 8 million tonnes issued per month,” said Carine Hemery, analyst at Société Générale/Orbeo in Paris. “Now we’re seeing 20 million-25 million per month.”
Demand from utilities – who are the major buyers of allowances in the EU ETS – has been weaker than expected, as they appear not to be hedging their forward power sales at the levels many analysts were previously expecting.
Meanwhile, the market also appeared to digest the threat from the EU’s energy efficiency directive, which under some scenarios could see the carbon price falling to zero. This was despite the draft directive, published yesterday, including language on setting aside some allowances to compensate for the reduced demand that the directive would entail.
Poland’s rejection of Europe’s 2050 low-carbon roadmap on Tuesday, citing a reluctance to subscribe to emissions reduction targets, only added to the selling pressure.
Trevor Sikorski, analyst at Barclays Capital in London, said: “Against the limited current demand, the recent news was a sign for participants to sell, which triggered stop losses on the way down. This abrupt downward movement in price does run the risk of moving the market to a lower range and without better demand, sustained EUA price upside this year may be off.”
The shaky economic outlook in southern Europe and the concerns over the ETS were the major factors in Mark Lewis, a Paris-based analyst at Deutsche Bank, on Tuesday lowering his 2011 year-end EUA price forecast to €17 from €21, and the year-end 2012 forecast to €19 from €22.
Lewis said he does not expect emissions in the ETS to ever to return to their 2008 levels of 2.12 billion tCO2e.
By. Christopher Cundy
Source: Environmental Finance