EU carbon prices fell to a fresh 15-month low below €6 on Thursday before climbing back to end 2.4% lower, as the 2016 EUA price rout approached its fourth week.
While some traders nervously await a rebound to what they see as a speculator-led overselling, others suspect carbon could fall further as European industry continues to reel, utilities shy away from bulk buying, and the next major supply-curbing measure remains years away.
The Dec-16 EUA futures fell to an intraday bottom of €5.87 on ICE in volatile afternoon trade, a decline of 7.7% from Wednesday’s settlement, before they clawed back most of their losses to end down 15 cents at €6.21. The late gains were attributed to bearish speculators taking some profits off the table following carbon’s deep losses.
Volume was very heavy at 49 million allowances changing hands on ICE, with 38.3 million units transacted on the Dec-16s and 10.6 million down the rest of the EUA futures curve.
“There’s a high level of speculation in the market at the moment, with many people ignoring fundamentals,” one trader said.
But peripheral energy prices helped pull carbon lower on Wednesday, another trader added, as next-year German baseload power prices settled down nearly 3% at €22.75/MWh.
That, along with firmer coal and a weaker euro, contributed to some 20% being slashed from German clean dark spreads compared to Tuesday, sending them back to levels not seen since last year and dealing a blow to hopes that utilities would return to the EUA buyside this week.
Meanwhile, equities rose and crude oil prices rebounded off their 13-year lows hit yesterday following comments from ECB President Mario Draghi that hinted at more monetary stimulus to be announced in March.
At Thursday’s lows, the benchmark carbon contract had lost nearly 30% from end-2015 prices, having broken through key psychological support levels of €8, €7 and now €6 – selling that many traders initially blamed on speculators but now say is being exacerbated by a few large industrials dumping allowances to raise cash.
Should front-year EUA prices resume their descent, €5.75 was identified by a few market participants as the next technical support level, the breaking of which would put the Dec-16s at their lowest since Mar. 2014.
A third trader noted that nearly 3.5 million are coming to market almost daily via government auctions, and that with the absence of utilities there were few other demand sources to absorb the extra supply, which is around 2 million units/week higher than last year.
A group of 25 EU member states earlier on Thursday sold 3.425 million spot EUAs for €6.04 each, in an auction that cleared 2 cents above market and attracted bids from 19 participants totalling 9.6 million units.
Analysts at Thomson Reuters Point Carbon joined the growing chorus of market observers noting that the EU carbon sell-off appeared to be overdone and disconnected from underlying fuel prices and the market’s supply-demand dynamic.
“In the current market situation it is all about not cutting your fingers by touching that falling knife. Hence, I think that the market needs one or two days of consolidation by some traders taking profit from the current downward move before a rebound can happen,” said Point Carbon’s manager of EU carbon analysis Marcus Ferdinand.
“The current bearish move is too steep to be a fundamentally driven development. Quite the contrary, I think that the move is speculator-driven, utilizing the lower trading activity around the festive season as well anxiety created by the bearish developments in the wider commodities and macroeconomic complex to short-sell the Dec-16s. From a fundamental perspective, little has changed since last year and I expect a rebound any time. From a technical perspective, the market is heavily oversold, which is an argument in itself that a rebound is due. There are not many stop losses left to trigger – but it depends really on a calming of the current bear trend for traders to feel confident enough to enter long positions and bet on a rebound again.”
Several observers suggested that EU ETS-regulated industrial companies hit by other falling commodity prices, for example steel, cement and oil, were now offloading EUAs in a manner that evoked images of the panic selling seen in 2008 and 2009, at the onset of the global recession.
However, with few spot buyers around these days, such companies may need to rely more heavily on banks and other trading firms to monetise their allowances.
Financials are able to buy spot EUAs from their clients and book an internal spread trade to lock in an attractive yield, before selling the units on via the more liquid futures market, likely through the benchmark front-year contract.
A few traders suggested that banks and trading houses were also likely the main EUA short-sellers, but this was difficult to ascertain due to most of this month’s trading volumes being done via ICE’s screen-based futures.
“Our industrial clients are buying at these levels, and it’s mainly the banks they’re buying from,” one eastern European broker said.
Several major industrial manufacturers have been visibly reeling, with steel giant ArcelorMittal’s shares falling by more than 60% over the past year, while its credit derivative swap (CDS) spread has almost quadrupled to 1120 basis points in the same timeframe.
Tata Steel has been shedding jobs at its UK facilities, while Italian steelmaker Ilva, which was put into special administration by the government in 2013, has suffered a turbulent few months.
Ilva’s owner Riva Group in 2014 overtook ArcelorMittal as the recipient of the largest annual EUA surplus, getting 7.2 million more EUAs than it needed, according to Carbon Market Data.
That oversupply, most of which stems from the company’s Taranto steel plant – the largest in Europe – is likely to have ballooned in 2015 due to the depressed European steel market and the company’s ongoing woes.
In December, the Italian government set a June 30 deadline to sell the firm, and it launched a tender earlier this month. Prospective buyers have until Feb. 10 to make offers, with ArcelorMittal, Arvedi, Duferco and Marcegaglia potentially interested, local media reported.
Ilva received more bad news this week when the EU Commission said it would challenge the legality of €2 billion in state aid it received over the past few years.
“It wouldn’t surprise me [if Ilva was selling] as [it] had a huge surplus,” said one Italy-based market participant who had had business dealings with the company.
Meanwhile, Swiss-based steel trader Duferco was also on Wednesday ordered to repay €211 million granted to it by Belgium’s Walloon government to prop up several small producers it owned over 2006-2011.
EUAs had posted solid gains over the past two years on the back of the bloc’s Backloading and MSR initiatives, both of which were aimed at cutting the massive supply glut overshadowing the market.
But one bearish market participant highlighted that Backloading – which will withhold 900 million EUAs from the market in 2014-16 – is nearly over, and that the next measure to help chip away at the massive EU ETS supply glut of over 2 billion units is not scheduled to start until 2019.
“The MSR is still three years away, and by then we’ll have more renewables, fewer coal plants, and possibly less industrial demand and more conflicting [EU energy] policies,” he said.
“Based on this, even at these levels there’s still more downside than upside. I’d give it an 80% probability that we drop to €5, and 50% probability that we have a full retracement to pre-Backloading levels around €3.”
By Ben Garside and Mike Szabo – firstname.lastname@example.org