Prices in Shanghai’s carbon market tanked Thursday, falling 30% on the day to 12.50 yuan ($2.01), as a combination of offset supply and over-allocated industry dumping their surplus permits overwhelmed the market, observers said.
Shanghai emission allowances, SHEAs, had fallen to record lows of 17.90 yuan in Wednesday trading, but opened at 12.50 on Thursday morning and traded continuously at that level throughout the day.
In total, 180,000 SHEAs traded, roughly equal to half the market’s annual monthly average volume.
The price might have gone even lower, but Shanghai’s ETS regulations stipulate that the permit value can’t move more than 30% on any individual day.
This was the third time in June that Shanghai prices fell to record lows. The value of SHEAs has plummeted 57% since early May, a process primarily driven by an increased offset supply.
Thursday’s crash was primarily caused by surplus dumping, said Chai Hongliang, a China carbon analyst with Thomson Reuters Point Carbon.
Jian-Wei Lim, an analyst with ICIS, agreed.
“Besides the supply of CCERs, another reason for the recent rapid decline in price is that some long players that had not previously touched their surplus are now starting to sell their allowances too,” he told Carbon Pulse.
Shanghai allocates permits to industry based on grandfathering, and unlike many other Chinese markets the government is not making ex-post adjustments based on the previous year’s production levels.
As a result, most manufacturers have ended up long on CO2 allowances as China’s economic growth is steadily slowing down and the government is consciously trying to rely less on industry for GDP growth.
“The lesson learned is that benchmarking is the way to go for China,” said Chai.
ZERO?
Shanghai is not the only Chinese pilot ETS struggling with weak prices ahead of the looming 2014 compliance deadlines over the next month.
In Tianjin, the price dropped to a record low of 13.82 yuan on Monday, and has lingered there untraded since.
The Guangdong market closed Thursday at 16.99 yuan, its third-lowest ever, while Beijing allowances fell to 43.39 yuan, a second consecutive day of record lows.
The only market displaying any strength in price levels is Shenzhen, but that market is primarily driven by a handful of traders playing the spread between the 2013 and 2014 contracts, and does not necessarily represent the real value of carbon.
China’s pilot markets are intended as training grounds for the national ETS, and officials are placing more weight on getting companies to comply with scheme rules than actually reducing emissions.
But many observers now ask whether one or more of the Chinese markets could copy the first phase of the EU ETS, and see prices drop to near zero.
“Theoretically, allowance prices should not fall to zero anytime soon, at least not until the NDRC has confirmed that the pilot allowances will be scrapped – if they are indeed to be scrapped,” said ICIS’ Lim.
“With the bearish sentiments in the market now, falling below 10 yuan is very possible and at this rate, it seems like a race to the bottom between Shanghai and Tianjin,” he said.
Point Carbon’s Chai was also doubtful the price would go all the way to zero.
“As unused permits can be used in the next compliance year, the price shouldn’t sink below 5 yuan… right?” said Chai.
China’s national carbon market is due to launch in mid-2016 but one NDRC official recently suggested this could be pushed back to early 2017, potentially giving banked pilot scheme permits another year of value.
The central government has yet to clarify exactly what will happen to the pilot markets when the national scheme is introduced.
By Stian Reklev – stian@carbon-pulse.com
