European carbon prices dropped the most since mid-March on Tuesday as German power prices fell and the euro plummeted on news the European Central Bank would ramp-up its €1 trillion bond-buying programme.
Front-year EUAs dropped by as much as 27 cents or 3.5%, as selling gained speed in the final two hours of the day. The benchmark contract closed down 23 cents at €7.40 on ICE.
Volume on the Dec-15 futures was moderate at more than 15.4 million units traded, including a sizeable 2.8 million done between 1440 and 1450 GMT.
“More than 300 (basis) points have been wiped off the euro in the past day, and that’s affected the entire energy complex,” one trader said.
The currency plunged after an ECB board member said the bank would accelerate its asset purchase programme in anticipation of less market liquidity in this summer.
At the time of writing, the euro was trading at $1.1141, down from levels above $1.14 seen early on Monday.
Carbon prices had held steady around Monday’s settlement price of €7.63 through most of the session, before succumbing to selling pressure on the back of weaker German power prices.
“German power is trading below €31.50, which is affecting the dark spreads. We’re entering the summer session, so we’ll likely see more low prices as renewable generation, for example from solar, rises,” the trader.
According to energy bourse EEX, baseload German electricity prices for delivery in the next two calendar years fell by as much as 38 cents or 1.2%.
This, coupled with the weaker euro increasing the cost of European-delivered coal, knocked nearly 50 cents or more than 10% off the Cal-17 and Cal-18 German clean dark spreads.
A weaker euro makes coal, which is traded in US dollars, more expensive, thus eroding the dark spreads – the profit margins for coal-burning utilities – while denting their demand for EUAs.
Coal for delivery in Europe also slipped, but not enough to offset the effect of the slumping euro or support the German dark spreads.
EUAs are also under pressure this week from inflated auction volumes.
Governments are due to sell 14.8 million spot units this week, compared to 12.2 million last week.
Tuesday saw the EU sell 2.9 million for €7.51 each, in an auction that cleared 3 cents below market and attracted bids worth a total 8.5 million units.
Poland will sell 2.85 million spot EUAs on Wednesday, followed by the normal weekly EU and German auctions on Thursday and Friday, respectively.
By Mike Szabo – mike@carbon-pulse.com
