Spot allowances in the Hubei carbon market plunged 6.8% on Tuesday to all-time lows, while speculators drove the new May 2017 forward contract higher on record volumes, leaving traders and analysts questioning what was going on.
Hubei Emissions Allowances (HBEAs) have been among the most stable in China’s seven pilot markets since their 2014 launch, mostly trading in a 20-26 yuan ($3-4) range.
But after dipping slightly below the 20-yuan level last week, spot HBEAs plummeted to 17.14 yuan in Tuesday’s trade, setting a new record low for China’s most liquid carbon market.
Meanwhile, the May-17 contract launched last week – China’s first exchange-traded carbon forwards – and on Tuesday it climbed to 23 yuan, some 34% above the spot contract.
“The market is worried about a surplus based on the emission verification results,” one trader told Carbon Pulse, referring to why the spot price dropped.
Other observers agreed the spot price was mostly driven by fundamentals.
Emitters in the Hubei cap-and-trade system recently finished the verification process of their 2015 emissions, and companies with excess permits are coming to market to sell off their surplus, much like what has recently driven Shanghai prices down.
But several traders and analysts struggled to explain the gains in the Hubei forward market, which has seen more than 18.4 million HBEAs trade since the debut last Wednesday.
In comparison, China’s second most liquid pilot market in Shenzhen has seen a total of 11 million units change hands since it began in June 2013.
Several sources said one or two speculators were primarily behind the forward trading, even though Hubei ETS rules dictate that no company can have an open long/short position of more than 1 million allowances.
One source said holders of large amounts of HBEAs were trying to push up forward prices in the hope that spot units would be dragged higher. This would enable them to sell off larger volumes at a higher price.
But most traders said they were not involved, drawing parallels to the Shanghai CCER market. In that scheme, a small handful of companies traded some 20 million offsets over the course of November and December at prices that rose to double those for allowances, only for trading to eventually fade away.
“We are not active in Hubei at the moment. If the forward price is that high, forwards should be sold and spots bought. We’re just staying away,” one trader said.
“I’m confused too,” added an analyst who expected the spot price to rebound eventually.
“Let’s give Hubei a little more time. If the spread remains or even widens, then the forwards would be just another joke in the market,” he told Carbon Pulse, asking not to be named.
By Stian Reklev – stian@carbon-pulse.com
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