EU Market: EUAs poised to notch 4% weekly loss amid weakened utility spreads

Published 16:30 on May 22, 2015  /  Last updated at 15:05 on May 11, 2016  /  EMEA, EU ETS  /  No Comments

EU carbon posted a 4% week-on-week loss on Friday following a decline in the euro that weakened buying signals for utilities.

EU carbon posted a 4% week-on-week loss on Friday following a decline in the euro that weakened buying signals for utilities.

The benchmark Dec-15 EUA contract settled at €7.34 on ICE, up 1 cent on the day but down 28 cents on the previous Friday settlement on relatively modest volume of under 10 million units.

The contract dipped to a week-low of €7.25 earlier in the session, some 42 cents below the week’s peak of €7.65 hit on Monday.

In a week devoid of any political activity, the major move came on Tuesday when the contract dropped by as much as 27 cents – the most since mid-March – after the European Central Bank said it would ramp up its bond buying programme before summer.

This caused the value of the euro to drop, increasing the costs of coal imports to European utilities which, coupled with dipping power prices, knocked nearly 10% off the Cal-17 and Cal-18 German clean dark spreads.

The narrower spreads dent the incentive for power companies to sell electricity forwards, damping their demand for the EUAs they would buy simultaneously to cover expected emissions.

Meanwhile, EU steel production for the year to April dipped 0.3% year-on-year to 58.1 million tonnes, the World Steel Associated said in a monthly update on Friday.

Yet, in a sign that the big-emitting sector’s fortunes might be picking up, April steel output rose 0.3% y/y to 14.39 million tonnes, the update showed.

Bearish pressure from government auctions is set to ease slightly next week when sales volumes drop to 12.2 million, down from 14.8 million this week.

Next Tuesday at around 1400 GMT, the European Parliament’s environment committee will vote on the MSR text that its envoys approved in trilogue talks earlier this month.

If successful, the full assembly is due to vote on the matter on July 6.

However, the ballots are expected to be a formality as representatives from all the major political parties have voiced their approval for the deal.

The text requires formal sign-off by national ministers at any EU Council meeting, before finally becoming law once published in the Official Journal – something ICIS analysts have said could happen mid-July.

Implied EUA carry trade annual returns German clean dark spreads
Dec-15 Dec-16 Dec-17 Dec-18 Cal Yr Price Wk chg
Spot 0.973% 1.037% 1.158% 1.466% 2016 €4.12/MWh -0.29
Dec-15 1.090% 1.219% 1.559% 2017 €3.77/MWh -0.40
Dec-16 1.348% 1.808% 2018 €3.24/MWh -0.48
Dec-17 2.261% (based on 36% eff. factor)
(does not include transaction costs)

By Ben Garside – ben@carbon-pulse.com