The end of the annual compliance cycle saw carbon prices slip towards the end of April, as demand from installations ebbed away as the deadline neared.
December 2017 futures prices dropped by 6% during April, closing on April 28 at €4.58/tonne. This compares to a 21% fall in March. The contract also reached a four-month low of €4.45/tonne on April 25.
April’s activity was dominated by the publication of verified emissions data for 2016, and the completion of the 2016 compliance process, as companies acquired any remaining shortfall of permits before transferring EUAs to their compliance accounts.
According to EU data, total emissions covered by the EU ETS declined by 2.7% on a like-for-like basis in 2016. Emissions from the power sector declined by 4.4% as coal-fired generation declined significantly in the UK. Industrial emissions dropped by 0.5%.
The market had been expecting a drop in emissions, and consequently there was almost no price reaction to the data; in fact, the December 2017 contract was higher during the two weeks following the news than it had been in the lead-up to the announcement.
Spot trading surged in April, with more than 15 million EUAs trading on ICE Futures’ day-ahead contract; that’s the most since April 2015. The jump in spot activity suggests that more industrial installations may have found that their free allocation no longer covers their annual emissions; this trend may be repeated next year.
Trading volume in the December 2017 futures was down by about 40% from March’s total, suggesting that utility hedging demand was largely covered by the daily auctions. At the same time some daily trading patterns emerged that suggested speculative traders may be making a return to the market.
After a strong start, particularly around the time of the daily auction, prices tended to weaken towards the end of most trading days, suggesting that speculators were building portfolios of spot EUAs in order to sell short in the afternoon.
Some traders were surprised by the weakness. The clean-dark spread, a measure of the profitability of coal-fired power generation, was relatively higher in late April than it had been for the previous two months, according to one European trader.
A higher profit margin for coal would normally encourage utilities to sell forward power and lock in their margins by buying coal and carbon permits.
However, the overall weaker trend was attributed to the prospect of daily auction supply averaging 4 million tonnes over the rest of the year, which many participants believe will cover much of the utility demand.
“It’s the end of the cold wave, end of compliance, there are auctions every day and no real news out there that could support price above the danger zone of €4.50/tonne,” one broker explained.
Source: Allcot Group, EU ETS report, April 2017