EU carbon firmed on Monday in spite of weak auction interest as European coal prices dropped by a 1.5% to near their lowest levels in more than a decade, increasing profitability for the continent’s dirtiest power plants.
Front-year EU Allowance futures trading on ICE ended up 6 cents at €8.57 by 1638 GMT, with volume on the strong side at 15.1 million.
The benchmark units hit a five-day low of €8.47 earlier following the EU auction, breaking below a technical support level identified around €8.50 by at least one analyst.
A group of 25 member states sold 2.918 million spot EUAs for €8.46 each, in an auction that attracted bids worth a total 6.8 million units and cleared some 5 cents below market – the largest discount notched since Nov. 11.
But allowance prices climbed back amid steady demand through late morning and early afternoon, peaking at €8.58 in the final 20 minutes of trade.
They were helped by Cal-16 ARA coal prices, which shed 73 cents to $45.75/tonne on ICE. Combined with flat German baseload power prices, it boosted German clean dark spreads by as much as 6% to levels last seen two weeks ago.
Coal was knocked by a research note from Swiss investment bank UBS, which said:
“Prices to remain cool … China continues to retreat from the trade, as authorities lean on demand growth and support domestic supply. India’s imports are subject to rising uncertainty as policies there encourage domestic supply and other energy to fill the power shortfall. Globally, momentum continues against relatively carbon intensive coal-fired power. Seaborne trade is down from peak levels and we aren’t sure it will recover on at least a 5 year view, given above developments. New mines will be needed to replace depletion by which time capex and opex intensity will likely have eased from China boom peaks. We cut our long term thermal coal price from US$82/t to US$55/t real.”
Opinions were mixed as to where EUAs would head through the rest of the week.
“EUA prices are likely to test the downside this week as indicated by the bearish technical outlook,” said analysts at Thomson Reuters Point Carbon.
But that view was countered by Vertis’ Bernadett Papp, who said the EUAs’ short-, mid- and long-term increasing trends remained intact.
“The MACD crossing the signal curve last week is another reason to be optimistic. In a positive scenario, there are not many resistance levels before the price could retest the 2015 high at €8.71.”
“The sell-off on Friday, however, is a warning signal,” she noted, referring to the 1.5% drop recorded that day.
“In a negative scenario, the price could retest the 50-day moving average at €8.34 that [supported] the price twice in October and in November.”
Traders at Redshaw Advisors noted that this week features a full auction schedule that will offload a further 15.08 million units.
“Contrasting this, December’s auctions bring just 32.7 million tonnes to market … Against this backdrop and the rejection by the EUA market of recent weeks’ bearish fundamentals, the grind higher into year-end seems inevitable,” they said.
“Expect some volatility after [2015’s] auctions end on Dec. 17,” they added, highlighting 47.8 million units remain to be sold before the end-of-year holidays.
Meanwhile, CERs were flat on Monday despite more spread activity taking place at the highly-backwardated front-end of the futures curve.
At least 323,000 units changed hands on the Dec15-16 spread, locking in a differential of 8 cents, which translates into a return of more than 13% before any trading fees or borrowing costs are factored in.
A further 480,000 credits appear to have been involved in a similar spot-Dec16 play.
By Mike Szabo – firstname.lastname@example.org