ALLCOT EU ETS Report – July 2017

2nd August 2017 by CMIA

European carbon prices remained above €5/mt in July, despite analyst warnings of possible weakness due to an increase in auction supply.

December 2017 EUA futures ended the month at €5.24/mt, a gain of 1.9% from July 3’s closing price.

In a six-week spell from June 19 to July 31, EU member states sold 135 million EU allowances, compared with 115 million EUAs over the same period last year.

This boost in supply had prompted some analysts to warn that prices could fall below €5/mt, but demand remained strong as profits from burning coal to generate power increased, encouraging utilities to buy more carbon.

The clean-dark spread, the measure of coal plants’ profitability, has remained strong as international coal prices and German baseload electricity have both flirted with multi-year highs this month, and helped carbon reach a four-month high of €5.62/mt on July 13.

However, prices could not sustain these advances as sellers moved in to take profits, and carbon fell back to nearer the €5/mt mark late in the month.

The market is about to begin its traditional summer recess, during which auction supply will drop to half the regular rate. This drop in volumes may help hold carbon prices steadily during a period of lower demand, most sources agree, and indeed, prices have typically ended the month of August higher than where they began.

The difference this year is that auction supply in general is higher than it has been for the last three years. Starting in 2014, the European Commission held back a total of 900 million EUAs from auctions as part of its emergency “backloading” initiative that was meant to prop up carbon prices.

While these 900 million EUAs remain out of circulation and may eventually be transferred to the Market Stability Reserve, supply has returned to “normal” levels this year. As a result, the outlook for next month remains in the balance, with auctions scheduled to offer 20 million more EUAs than last August.

“There’s no obvious reason for high demand in August; it’s hard to see where 20m tons of extra demand will come from,” one source said.

EU member states have continued to negotiate a compromise deal on EU ETS reform with the European Parliament and the Commission. Little progress was achieved at their final meeting before the summer recess, and it now appears as though a deal will only be reached after Germany’s federal elections in September.

Reported by Allcot Group