Market Development
• Prices fall a further 5% (34c) as continued uncertainty weighs heavily on the market.
• Free allocations likely to be adding to supply side pressure.
• USD coal prices fall, however, EUR weakness leads to EUR denominated coal price rises.
• Latvia sends out formal MSR proposal to member states.
• Global emissions unchanged amid economic growth for the first time in four decades.
• Minor changes in carbon emissions compliance
Auction Overview
• Full week of auctions as 15.075mt comes to market.
Price Action
Prices fell further this week amid plentiful supply and continued uncertainty on the progress of the Market Stability Reserve (MSR). A further 4.96% (34c) was shed from the front December contract as prices closed the week at €6.51. The intra-week low of €6.28 gave us a 62c range last week as prices fell throughout the week with the only real signs of recovery coming on Friday afternoon having hit the week’s low earlier in the day. The falls can be attributed to several factors in addition to the MSR uncertainty, free allocation distribution bringing additional sellers to the market and continued weak clean dark spreads giving utilities no incentive to come to market. As highlighted in last week’s update, markets do not like uncertainty and a working group on the MSR early last week failed to provide any certainty as negotiations on the stance of member states got nowhere with apparently no compromise found. In addition, Latvia put forward a proposal to member states to begin the formal negotiation and compromise phase on the MSR. The proposal was a watered down version of the ENVI proposal and caused further bearish sentiment in the market. You can read more on the proposal in our MSR section below.
Member state governments have begun to distribute free allocations to installations covered by the EU ETS. This is likely to have led to some selling by industrials who have a surplus of allowances and are keen to cash in. The market is tightly balanced so amid a bearish trend and other factors any addition to the supply side more easily tips this balance downwards. We expect that time will reveal some sizeable selling over the past few weeks. That said verification is now essentially over and industrials on the buy side are coming to market. It is yet to be seen if they can outweigh current selling interest however the likelihood is low as they are typically smaller buyers and larger shorts tend to average in during the course of the year. Price Impact: all eyes are currently focused on the MSR negotiations and price moves on news may be sizeable. MSR bad news is probably out of the way so expect further revelations to be neutral or bullish. A continuation of material industrial selling will weigh heavily on the market and could cause further falls absent more supportive trading conditions.
Market Stability Reserve (MSR)
Latvia sent out a formal MSR proposal to member states.
Important MSR Dates
• 16th March – EU Parliament working group to discuss ENVI Proposal
• 25th March – Permanent representatives meeting
• 30th March – possible start of trilogue
Global emissions unchanged
According to a survey by the International Energy Agency (IEA), global emissions were unchanged last year amid 3% global economic growth for the first time in 4 decades. The only other times when emissions are said the have fallen or stayed flat were in times of economic recession. A major contributor to the fall is said to be China, whose emissions fell 2% last year as they increased their renewable energy sources, shifting demand away from coal fuelled power generation. This was despite (or more likely the cause of) the continued fall in the coal price.
