CN Markets: Shanghai CO2 price finds fresh depths as China’s pilot markets face difficult year

Published 11:58 on March 7, 2016  /  Last updated at 11:58 on March 7, 2016  /  China, China's National ETS, China's Pilot Markets  /  No Comments

Shanghai’s CO2 allowance price fell to a record low 8.50 yuan ($1.30) on Monday, with other Chinese carbon prices remaining depressed across the board amid uncertainty surrounding how the pilot schemes will cope with falling emissions and the looming transition to a national ETS.

Shanghai’s CO2 allowance price fell to a record low 8.50 yuan ($1.30) on Monday, with other Chinese carbon prices remaining depressed across the board amid uncertainty surrounding how the pilot schemes will cope with falling emissions and the looming transition to a national ETS.

The Shanghai spot contract fell 5.6% from 9 yuan to close at the lowest price ever seen in any of the Chinese pilots, although it was on light volume of 5,901 allowances changing hands.

“I think it is a mix of thin demand, no support due to there being no auctions, and a lot of allowances borrowed by institutional investors,” one observer told Carbon Pulse.

Last month, a firm owned by UK-headquartered Carbon Trading Capital and local trading house Guotai Junan borrowed a total of 2.4 million allowances from emitters to use for speculative trading.

That is significant volume in an over-allocated market that has only seen 3.9 million allowances trade since it opened in Nov. 2013, and several sources said the additional supply has been weighing on prices.

Analysts ICIS-Tschach has forecast the Shanghai price would stay near 9 yuan in Q1, before slipping to around 8 yuan in Q2.

But one trader dismissed the record low, saying it was a “normal fluctuation”.

TOUGH YEAR

The Shanghai market is not alone in experience falling prices, as allowances in most of the six other pilot programmes are near the low end of their historical trading ranges, with very little volume going through in any of them.

Part of the reason for this is the uncertainty over what will happen to surplus allowances from the pilots when the national ETS launches in 2017, a crucial issue for participants as there is currently a large surplus across all the regional schemes.

China’s NDRC has yet to clarify whether those excess permits would be eligible for use in the national ETS.  This, observers say, has removed a lot of demand from the market because if the units are deemed ineligible, their value would drop to near zero.

The bearish sentiment is reinforced by a slowing Chinese economy and the fact that the country’s carbon emissions fell last year, wiping out some of the pockets of scarcity that could be found within the pilots.

“The economy is sluggish, so the price should go down. The price drop reflects a declining interest in the carbon market,” a second observer said, adding that it’s nearly impossible for trading houses or advisory firms to make money in the market at the moment.

With most of the details concerning the national market set to be unveiled later this year, a growing number of participants are pulling out of the pilots in favour of awaiting the launch of the nationwide ETS, observers said.

By Stian Reklev – stian@carbon-pulse.com

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