London, 28 January 2012
Thomson Reuters Point Carbon analysts have slashed their price forecasts for EU Allowances and U.N.-backed offsets for the second time in two months to reflect swelling supplies and the demand destruction caused by the euro zone debt crisis.
In a report published late Thursday, the Oslo-based analysts forecast EUAs will average 9 euros this year, 13 percent above current levels, and around 8 euros in 2013 as the market becomes even more oversupplied.
This is down from respective estimates of 12 euros and 10 euros made by the team in late November last year.
Front-year EUAs rose above 8 euros on Friday for the first time in a month, and although they are up 27 percent since hitting an all-time low of 6.30 euros on Dec. 14, they remain at less than half of 2011’s peak.
The analysts said several euro zone economies are likely to have descended back into recession, with this depressing effect on carbon prices being compounded by an increased flow of new supply coming to market this year.
“However, EUAs seem to have stabilised around 7 euros (and) it now appears that compliance operators have adjusted their portfolios to the weak economic outlook,” the report added.
The analysts foresee growth in demand this year compared to 2011, with airline buying and utility hedging into the start of the third phase of the EU Emissions Trading Scheme (ETS) as the main price drivers.
All airlines using EU airports must from Jan. 1 secure emissions permits to cover their flights.
The analysts warned that sales of hundreds of millions of allowances by the European Investment Bank, the European Commission and several member states this year, as well as a spike in issuances of U.N. carbon offsets, will weigh on prices.
However, discussions within the EU Parliament over setting aside up to 1.4 billion EUAs from the market in a bid to boost prices may deter selling by industrial companies covered under the ETS.
Industrial installations historically get a surplus of carbon permits to help them compete with non-EU rivals.
“The ongoing discussions on a set-aside will probably make these market participants more reluctant to sell off large parts of their extra length,” the Thomson Reuters Point Carbon analysts added.
But by 2013, the market balance is expected to look further oversupplied as another 100 million EUAs expected from the EU’s 300-million unit post-2012 reserve will likely offset modest demand growth from utilities and airlines.
“On the bullish side, we expect the set-aside proposal still to be on the agenda for 2013, providing support for EUA prices,” the report said.
The analysts also slashed their outlook for Certified Emissions Reduction (CER) prices to an average 4.50 euros this year, around 50 percent of EUA prices and down some 42 percent from their previous 2012 estimate of 7.80 euros.
“A combination of continued high issuance levels together with a considerable share of unhedged CER contracts is expected to put a constant pressure on secondary CER prices throughout 2012,” the report said.
CER issuances grew by 141 percent year-on-year to 320 million in 2011, and a similar number is expected to be handed out again this year.
More than 850 million CERs have been issued to date, U.N. data showed, but the analysts reckon that a portion of these credits still need to be sold by their investors, another potential burden for prices.
Front-year CERs were priced around 4 euros on Friday, off an all-time low of 3.28 euros touched on Jan. 16.
Point Carbon analysts expect EU companies will in April surrender roughly the same number of CERs and ERUs as last year to cover their 2011 ETS emissions, despite a ban on industrial gas offsets – the cheapest and most abundant type – from the scheme starting in May 2013.
Last year, EU installations turned in a total 137 million U.N. carbon credits against their 2010 emissions, up 67 percent from the previous year.
Source: Thomson Reuters Point Carbon