Carbon permit prices slid to all-time lows in both Beijing and Shanghai on Tuesday as companies held off buying allowances in the hope they will still be able to snap up newly available cheap offsets in time to meet June compliance deadlines, according to analysts.
Beijing permits fell nearly 5% on Tuesday to close at 47.83 yuan ($7.70), only the third time since the market began in November 2013 that they have dipped below 50 yuan.
In Shanghai, allowances fell by just over 1% to 23.80 yuan, the second consecutive day of record low prices.
Emitters in both markets have finalised verification of their 2014 emissions and must hand over allowances to their respective governments on June 15 (Beijing) and 30 (Shanghai) to cover for those.
“Low prices might be due to a current slight mismatch of the supply and demand in the markets,” said Jian Wei Lim, director of Chinese carbon markets with analysts ICIS-Tschach.
Some buyers may be waiting for the possibility that CCERs eligible for use in Beijing and Shanghai might reach the market ahead of compliance and are holding back on buying the more expensive permits, even though supply for those is already there, he explained.
Beijing and Shanghai both have strict offset rules in place, ruling out nearly all CCERs issued so far, but some offsets from an Apr. 29 issuance meeting may enter the market soon, although the government has yet to announce how many units will be issued following the meeting.
A recent analysis showed that fewer than half a million CCERs issued so far are eligible in Shanghai, a market with a cap of 160 million tonnes of CO2 per year.
But while rules in Beijing are strict, the local government has issued additional local offsets, which Lim says it enough to cover around 5-7% of demand from Beijing emitters that are short.
PRICE RISES MORE LIKELY
“Given current price levels, ICIS sees more upside possibility than downside risks before the respective compliance deadlines, especially if CCERs do not get issued in time and demand starts to enter the market,” Lim told Carbon Pulse.
In the weeks ahead of last year’s compliance deadline, prices in Beijing soared from the mid-50s to as much as 76 yuan. In Shanghai, demand from a small number of electricity generators kept prices in a tight 37-40 yuan range despite the estimates suggesting that the market was long overall.
Beijing allowance prices remain the highest in all of the Chinese pilot markets on average, although that does not necessarily reflect any market fundamentals, but rather the local governments’ preferences of which ranges permits should trade in, according to market participants.
VOLATILITY ON DEADLINE
Prices in most of the Chinese markets are relatively stable, with the exception of Guangdong and Shenzhen, where speculative trading often moves prices by as much as 10% in a day.
However the approaching compliance deadlines have seen recent changes elsewhere too.
In Hubei, the most liquid of the Chinese schemes, the price soared to an all-time high of 27.90 yuan on May 8 and closed Tuesday at 27.07.
The Hubei market launched in April 2014 and is approaching compliance for the first time, meaning there is a fair bit of uncertainty as to the market’s balance.
“Several big companies are short, but overall it is still not clear,” one Hubei-based carbon trader said.
By Stian Reklev – stian@carbon-pulse.com
