Shanghai carbon crashes to record low as demand falls away

Published 13:42 on June 1, 2015  /  Last updated at 14:44 on June 1, 2015  /  China, China's Offset Market, China's Pilot Markets  /  No Comments

Carbon permit prices in the Shanghai ETS fell 23% on Monday, dropping to an all-time low of 18.10 yuan ($2.92) as fresh supply coincided with news that emitters accounting for nearly half the scheme’s emissions have already finalised their surrender.

Carbon permit prices in the Shanghai ETS fell 23% on Monday, dropping to an all-time low of 18.10 yuan ($2.92) as fresh supply coincided with news that emitters accounting for nearly half the scheme’s emissions have already finalised their surrender.

Shanghai permit (SHEA) prices have been steadily waning for two months but found new depths on Monday amid turnover of 37,900 units as demand crumbled after the registry authority announced that emitters accounting for 47% of emissions in the ETS had already handed over permits to the government to cover their 2014 emissions.

Among the emitters that are no longer in the market to buy for 2014 compliance are the Shanghai Wujing Power co., Shanghai Waigaoqiao Power Generation Co., Baosteel and the Shanghai operations of Sinopec and BASF.

The news came just days after the NDRC issued around 3 million fresh CCERs, including nearly a million eligible for the Shanghai market, which spurred a bout of trades late last week.

“The recent issuance of credits and the simplified project registration and issuance procedures both send a bearish signal to allowance prices,” said Chai Hongliang, an analyst with Thomson Reuters Point Carbon.

“But the elephant in the room is that emitters have more free allocated allowances than they need to meet the compliance obligation,” he told Carbon Pulse.

Last week’s CCER issuance came as a surprise to most analysts, who had thought the previous May 18 issuance would be the last ahead of the pilot markets’ compliance deadlines.

Compliance companies with relatively large short positions ‘desperately’ needed these CCERs to avoid covering their positions from the allowances market, which would have had a positive impact on the price of SHEAs, said Jian Wei Lim, a China carbon market analyst with ICIS-Tschash Solutions.

“The magnitude of the drop in price, however, is slightly larger than what we expected. This might be due to a strong market reaction from the long players in the market,” he said.

The compliance news and CCER supply coincided with an increased SHEA supply due to compliance companies trying to offload their surplus before it was too late, one trader told Carbon Pulse.

But most of the fresh permit supply came on the exchange, whereas demand is mostly reserved for bilateral negotiations, the trader said.

“There are few trading institutions in the Shanghai market, so when some compliance companies sell allowances, the market crashes instantly,” the trader said.

The deadline for Shanghai firms to surrender permits to the municipal government is June 30.

By Stian Reklev – stian@carbon-pulse.com