Guangdong’s Shaogang Steel had a surplus of almost 900,000 CO2 permits for 2014, an industry magazine reported, an indication of the over-allocation that has dragged prices down in China’s biggest carbon market.

Shaogang, majority-owned by Baosteel, China’s second biggest steel producer, had been allocated 12.45 million allowances for 2014, and was left with a surplus of 892,300 after compliance, industry magazine Opsteel reported.

Guangdong ETS participants handed over allowances to the government to cover their 2014 emissions last month.

At current low market prices Shaogang can sell the allowances for around $2.2 million, or hold on to them to get a head start for next year’s compliance.

While only one company, Shaogang’s 7% surplus provides an indication of the assumed over-allocation in the Guangdong carbon market, which covers nearly 400 million tonnes of CO2 per year.

The Guangdong DRC aims to give manufacturers 97% of the permits they need for free, but with the economic slowdown hurting production levels, some industries emit far less than expected.

The provincial government has not released emissions data for the scheme, but after it removed the controversial 60 yuan minimum price for auctioned allowances last year, secondary market prices have drifted from 60 yuan to 15 yuan currently, the lowest price in any of China’s seven pilot schemes.

In April the government launched a project to deal with over-allocation to the cement industry and has also promised further market fixes but a significant permit glut is thought to be carried over each year from previous over-allocation.

Meanwhile, the China Iron and Steel Association on Thursday reported a 1.6% drop in steel output in the first five months of the year compared to the same period in 2014, suggesting emissions from the sector may continue to drop.

Forty member companies, some 40% of the total membership, reported a 15 billion yuan ($2.2 bln) loss in the Jan-May period, the association said.

By Stian Reklev – stian@carbon-pulse.com