The decline in EU emissions allowances (EUAs) prices has raised questions about the source of sell-side pressure in the market. Redshaw Advisors suggests that a utility undergoing strategic changes or an industrial entity seeking to raise cash are the most likely explanations. With the global economy facing challenges, selling excess EU allowances could provide a much-needed boost to balance sheets.
However, Redshaw Advisors argues that utilities are unlikely to engage in aggressive EUA selling due to their experience as carbon traders and concerns about the impact on the power market, which they prioritize. If utilities were selling, one would expect to see large volume trades across different maturity dates, but the pressure has mostly been on the Dec 16 contracts, indicating a different source.
On the other hand, if an industrial entity is raising cash, it would typically sell spot contracts, but spot volumes have not been particularly large. In such cases, large industrials often rely on banks to handle the sale, with the bank financing the purchase and using the most liquid contract, such as Dec 16, to hedge. The selling strategy employed in this case appears to have been ineffective given the drop in prices.
The oversupply in the EU ETS market is primarily held by a few industrials, particularly in the steel and cement sectors. Their involvement in the market is uncertain and unpredictable, and if they decide to sell in significant volumes, it can catch the market off-guard, as seen in the past.
Selling coinciding with the resumption of auctions after a break and the global economic meltdown has contributed to the downward spiral of EUA prices. Market participants who were hoping for further price appreciation in 2015 were forced to join the sell side, with some even turning short, exacerbating the decline. Even dip-buying tactics failed to reverse the slide.
Once the market reaches its bottom, the reaction will likely be swift. As the compliance deadline approaches, buyers are becoming more sensitive to a potential correction, particularly as many industrials prepare for their annual EUA purchase.
Redshaw Advisors offers to keep interested parties informed of signals indicating the bottoming-out of prices and provides daily updates in the coming weeks upon request.
