Market developments:
- Carbon gives back all of previous week’s gains to finish at €4.56, a fall of 8.5%
- €5.08 high hit intraday on Monday but carbon failed to hold onto gains
- Relatively muted trading with below average volumes
- Clean dark spreads fall back towards record lows
- European Commission plans to allow some nations to cancel part of their post 2020 ETS auction volumes to meet targets
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Auction Overview
- Auction supply falls slightly this week to 17.260Mt in 5 auctions, down from 18.178Mt last week
- Last week of full auctions before the August slowdown.
- August brings just 26.8Mt to market (compared to 70Mt in July)
- See auction table below for more details.
EUA Price Action
The EUA market retraced all of the previous week’s gains to close down 8.43% at €4.56, poor fundamentals have overcome August auction dearth bulls for now. The week began in bullish fashion as prices climbed from the open to hit €5.08, the high of the week. As we pointed out last week, further gains were only likely if there was a close above €5 but the bulls couldn’t quite manage this. The gains were short lived as wider energy prices fell and clean dark spreads stayed low which left short term demand fundamentals in charge. The mixed pricing signals we highlighted last week – the August EUA auction slowdown and economic uncertainty / poor clean dark spreads reducing utility demand – tipped in favour of EUA losses. Although clean dark spreads did not set new lows, they did fail to recover significantly as power prices fell and the strong dollar limited falls in Euro denominated coal prices. Despite the price movement, trading volume remained relatively muted throughout the week, we assume the holiday season is dampening activity in the market as hedging activity has decreased despite the near year-low prices. The further falls on Friday paint a bearish picture coming into this week. Price Impact: so close to the August auction scarcity we see mixed signals again so we’re neutral and expect sideways tracking overall. Through €4.30 we could be on for a big drop but with severely limited supply on the horizon it’s unlikely. Assuming the speculative longs have been washed out in this latest rout there is still the chance for August’s sizeable supply scarcity to tip prices upwards but there’s no need to get excited unless we close above €5.00.
European Commission plans to allow some nations to cancel post 2020 auction volumes to meet targets
The European Commission (EC) have released a plan to allow some member states to cancel post 2020 ETS auction volumes to meet their non-ETS emissions reduction targets. The target to cut non-ETS emissions by 30% below 2005 levels by 2030 apportions individual targets on member states ranging from 0% for Bulgaria up to 40% for Sweden. Under the plan up to 100Mt (in total in Phase IV) of EUAs could be cancelled by certain member states to meet non ETS goals more cheaply but potentially increasing the cost of compliance for Europe’s industrials. The countries able to take advantage of the proposal include Belgium, Denmark, Ireland, Luxembourg, Malta, Netherlands, Austria, Finland and Sweden. With any potential removal having to take place over the 10-year Phase IV period the impact on price now and indeed each year in Phase IV is likely to be negligible.
The week ahead
Carbon would appear to be trading in a range at present with support around €4.50 and €4.30 and resistance when prices come close to €5. Signals remain mixed going into this week: the August auction shutdown looms but poor clean dark spreads and economic uncertainty are weighing on prices. Therefore, it is hard to say where the market goes next. A break through either of these levels could be significant but with the holiday season upon us it is likely we see periods of muted volumes and price action.
