Market Developments
Market Developments
- Week closes at €5.94, a fall of 2.3%.
- 29c trading range is smallest since week beginning 21st March 2016
- Week closes near the low of €5.89
- Large gains in the coal price leads power prices higher
- Strong EUR nonetheless boosts clean dark spreads following weak US jobs data
- MEP Ian Duncan’s reform proposal bittersweet for Industry.
Auction Overview
- 13.770Mt comes to market in 4 auctions, slightly lower than last week (13.835Mt)
- Last of the lower auction weeks as the following 3 weeks in June all bring more than 17Mt to market
- June auctions bring ~72.5Mt EUAs to market, a marked increase on ~56Mt in May
- See auction table below for more details.
EUA Price Action
In a subdued week for carbon, prices closed down 2% at €5.94. It was the smallest trading range since March 2016. The release of the Phase IV reform proposal on Monday provided little impetus for the market to move substantially as it resisted increasing the ambition of the EU ETS. As stated in last week’s update we held a bearish view for the week and the market still managed to fall despite strong power gains. The rise in power price is likely a consequence of the huge gains in coal and to a lesser extent gas over the last few weeks. The USD denominated week-on-week rise for coal was $3.75 on the Calendar 2017 contract and even higher down the curve. A weaker than expected US jobs data release on Friday sent the EUR surging against the USD and so despite rising coal prices, returns for coal fired power producers, measured by the Clean Dark Spreads (CDS), actually went up. The CDS strengthened by more than 6% across the Calendar 2017, 18 and 19 contracts and coupled with the gains in power will have the utilities out in force hedging their carbon requirements. This idea is corroborated by an uptick in longer dated carbon trading contracts. Price Impact: carbon prices fell slightly despite the strengthening clean dark spreads. Carbon has traded in a 58c channel (€5.65 and €6.23) since the 6th May and last week the price remained firmly in the middle of this channel. It seems the move out of this channel will either be decided by continued rising energy prices or rising auction supply. See the week ahead section for a full summary of our thoughts for the coming week.
Bittersweet Phase IV reform proposal for industry
The reform proposal released by MEP Ian Duncan last Monday has left a bittersweet taste for Industrial EU ETS participants. The introduction of a tiered leakage list is opposed by many participants particularly by those who would fall out of the 100% free allocation band. However, Argus Media report Duncan’s proposal actually increases the total number of allowances made available for free to industry. The alternative proposals from the Industry Committee and the joint UK-France proposal include a bigger buffer to protect against the Cross Sectoral Correction Factor (CSCF) implementation, Duncan’s proposal uses some of this volume to hand out more allowances to the lower end of the carbon leakage scale, potentially limiting the impact of tiering on Industry. The proposal covers the risk of the CSCF being triggered by allowing up to 2% of the volume ear-marked for auctioning by the member states to be used instead. This would ensure industry get their free allocation but would leave the pot available to be auctioned in the market and in particular, the utilities, lower. It is possible this proposal will fall foul of member state support as it would reduce their auction revenue in the event of a CSCF trigger. There was also mention in the reform proposal of opting out those installations that emit less than 50kt per year. This gives those trying to risk manage their exposure a particular headache but a reduced scope ETS is likely to be resisted by the Commission.
To understand the impact that these political machinations may have on your free allocation, and therefore risk exposure, in Phase IV please get in touch with Redshaw Advisors on +44 (0)203 637 1055.
The week ahead
The close near the week’s low of €5.89 and the looming auction supply make a move towards the bottom of the €5.65 - €6.23 channel the most likely medium term outcome. The coming week is the last of the lower auction weeks in June with each of the 3 following weeks bringing more than 17Mt to market including the week beginning 20th June when the volume will swell to more than 18Mt as the monthly Polish auction takes place. The Polish auction is a higher volume as it includes EUAs from the auction cancelled 2 weeks ago. That said, wider energy prices are currently surging and yet speculative traders, knowing the facts above, are likely positioned short carbon. This means that circumstances may well overtake the fundamentals in the short term. We are overall bearish but the power price and CDS surge are the likely drivers in the short-term.
