European carbon prices drifted 3.3% in March as utility demand faded amid poor generating margins for coal. The December 2019 futures contract ended the month at €21.54 after trading in a €3 range between €20.50 and €23.50.
Persistent weakness in natural gas prices meant that fuel-switching was the main market driver. Calendar 2020 TTF futures fell 8.7% in March, while API2 coal lost 10% and German power declined 5.5%.
The combination of price moves meant that gas-fired power remains more profitable than coal, with the result that demand for carbon allowances for future hedging was depressed. Utilities were notable for their modest participation in the market.
The onset of milder weather reduced heating demand, while a number of traders also highlighted weakening economic data that may signal a decline in industrial production.
Screen trading activity on ICE Futures declined, with 345 million EUAs changing hands in the benchmark EUA futures contract in March, compared with 415 million in February. However, there was a notable uptick in broker-arranged deals in the second half of the month, with so-called block trades on ICE reaching as much as 35 million EUAs on March 20, compared with the daily average of 8.6 million.
Participants were hard-pressed to explain the surge in block trades; with utilities largely on the sidelines, the most common explanation was investors shifting positions through time spreads.
The continuing uncertainty surrounding Britain’s withdrawal from the EU also contributed to depressed liquidity. British lawmakers twice rejected the negotiated withdrawal agreement, but also voted against leaving the Union without a deal. As of the end of March, the UK faces leaving the EU without a deal on April 14.
April kicks off with the release of verified emissions data for 2018, which analysts expect to reveal a drop of around 3-4%. The decrease is likely to reflect the onset of widespread fuel switching, as well as a strong recovery in hydro generation. Industrial production is expected to be broadly unchanged.
Towards mid-month the Brexit saga will reach another climax, with the current departure date scheduled for April 12. It’s not clear whether Parliament will manage to ratify the withdrawal agreement by then, and most observers are expecting the UK to seek a lengthy extension of the Article 50 deadline.
This may well mean that UK installations could continue to participate in the EU ETS through to the end of Phase 3 in 2020.
The impact on the market is likely to be bullish in the very short term, with traders driving a “relief rally”, but since the UK is generally accepted to emit less CO2 than it allocates in emissions allowances, prices may well decline in the longer term.