Calm Down Already ... The EU ETS
This has been an astonishingly ‘noisy’ year so far: MENA crisis; the Japanese earthquake and nuclear crisis; the closure of 8.3 GW of German nuclear capacity; the EU sovereign debt crisis; and the US credit downgrade – to name a few. The European carbon market has certainly not been immune from these developments and market prices remain low and jumpy – usually trading in the €12-13/t range of late. The question again is where to from here?
By Trevor Sikorski
AS THE YEAR 2011 of noise, noise, noise continues, the European carbon market is achieving a precarious balance between potential upside and downside, suggesting range- bound trading punctuated by periods of heightened volatility. Over the past two months, prices have broadly traded in the €12-13/t range but have displayed continued sensitivity to macroeconomic risks.
really being backed by compliance sellers, it quickly bottomed and recovered as the short positions were closed. The episode taught us that the market does seem to have reached a balance around the €12/t level with the incentive to industrials to sell surplus EUAs. This does not mean no allowances are being sold from
One of the biggest market disappointments we have explored is the lack of any acceleration in hedging volumes by utilities
For instance, prices in early August
dumped to a low of €10.71/t as short sellers entered the market due to the asset sell-off triggered by the downgrade of the US government bonds’ rating. With the sell-off not
Figure 1: EUAs – Must Try Harder
10 15 20 25 30
EUA 2008 5 Jan Sources: ECX, Barclays Capital 68 September 2011 Apr Jul Oct EUA 2009
compliance entities, just that a further sustained sell-off by industrials is unlikely without a reduction in economic activity. We recently reduced our forecasts for GDP and industrial production (IP) growth in 2011 and 2012 [for IP, to 3.4% and -0.6% from 4.1% and 1.2%, respectively], and we expect YoY reductions in a number of ETS sub-sectors (in particular, cement and refining). There has been a recent deterioration on
CDS, with the average over a number of the bigger industrial companies increasing from
about 50 bp in May 2011 to 160 bp by August. While industrial new orders data are starting to ease (but still good) it is the case that the last data is from May, and thus we have little view of business confidence for Q4. We do expect industrials participants as a whole to increase the volumes offered to the market when (if) there is an actual turn-down in economic activity, and not just the threat of that happening. Recent data and our own forecasts suggest that this is beginning to happen and could introduce an even greater sales slide in 2012. While macroeconomic
concerns have emerged as a key bearish factor, some bullish news has been in the background, with power spark and dark spreads increasing. German dark spreads for
EUA 2010 EUA 2011
calendar 2013 baseload contracts have increased from about €7.45/t (June average) to an August average of €9.10/t. Although this is may still
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