The European carbon sell-off extended into a sixth day on Monday, with front-year prices shedding as much as 35 cents or 4.7% to sink to their lowest since Apr. 2015, as traders reported widespread selling that was met with little buying support from utilities.
The Dec-16 futures trading on ICE settled down 29 cents at €7.17 after hitting an intraday low of €7.11 earlier. Volume on the benchmark contract was heavy at 19.6 million units changing hands.
Prices have now dropped by more than 15% since the end of 2015, effectively wiping out all of last year’s gains.
Two traders attributed Monday’s selling to speculators continuing to push the market lower, with the restart of government auctions weighing on prices, which resumed today following a three-week holiday pause.
One suggested that speculators were building up large short positions in anticipation the resumption of meatier auctions coupled with limited demand from warm temperatures.
The other said European utilities, traditionally the largest buyers of EUAs, were still largely sitting on the sidelines due to weak dark spreads and concerns over industrial demand and subdued winter weather.
A third trader said the selling extended beyond the usual suspects.
“Everyone’s selling, especially the industrials,” he said.
“Carbon’s finally getting caught up in the global commodity sell-off, and it’s being exacerbated by selling by industrials that are in real trouble.”
Market participants had not indicated that many industrials were involved in last week’s selling, but two traders have noted that some European heavy manufacturers that have been hit by falling commodity prices and slowing global demand were now dumping carbon in order to raise cash.
One speculated that ArcelorMittal was an example of a firm with a large inventory of surplus EUAs that has come under pressure, as can be seen in the company’s credit default swaps (CDS), which have more than quadrupled to 1100 basis points since last June, and its share price, which has lost two-thirds over the same timeframe.
The Luxembourg-based steelmaker has been the largest recipient of free allowances under the EU ETS since its inception in 2005.
The third trader also cited concerns over China devaluing its currency to boost exports and stem its slowing economy, while simultaneously lobbying the EU to be recognised as a market economy rather than a planned one, which would end anti-dumping and other trade barriers faced by the country.
ENERGY
Falling energy prices also continued to weigh on carbon.
Traders said EUAs were initially pulled lower on Monday by falling European power prices, as the German calendar baseload contracts hit fresh all-time lows below €25/MWh.
Traders said that the low power prices could be prompting a few utilities, facing reduced demand from hurting industrials and unseasonably warm weather, to unwind their hedges.
Meanwhile, British gas prices, also dented by warm weather, continued to slide, nearing the 30p/therm mark, prompting ICE to extend to the downside the range of option strike prices on its NBP contracts to 5p from 25p.
European coal prices dropped further below the $40/tonne mark, partially offsetting some of carbon’s bearish sentiment.
“This is different from 2009 in that we’re not seeing a demand shock, but rather there an oversupply of everything and [commodity] prices are seeing a slow grind lower,” the third trader said.
AUCTION
Monday’s selling was also aggravated by a lacklustre first EUA auction for 2016.
A group of 25 EU member states sold 3.425 million spot allowances for €7.45 each, some 7 cents below the secondary market at the time the auction ended.
The sale attracted bids from 20 participants worth just 6.26 million units, translating into an oversubscription rate of 1.83, which was the lowest for an EEX-hosted auction since last August.
EU governments are due to sell more than 733 million EUAs this year, or around 100 million more than last year due to fewer being withheld under the bloc’s Backloading programme.
That equates to weekly volumes increasing by around 2 million units.
One trader said some industrials with spare EUAs could also be selling a portion of their current inventories in anticipation of receiving their free 2016 allocations from EU governments over the next two months.
By Mike Szabo – mike@carbon-pulse.com
