EU ETS - any fundamental drivers left? 4 th annual European Emissions Markets conference 26 Sept 2012, Brussels Marcus Ferdinand, Senior Market Analyst
Setting the scene Market awaked from a long sleep beginning of 2011 EUAs very volatile so far in 2012, but staying at low price levels Market reacts very often to movements in surrounding energy markets The market is long between 2008-2020 Why is the EUA price > 0/t and what is driving prices? Why is the market reacting more to a Bernanke statement than to changes in SRMC?
The context: market is oversupplied 600 2100 400 1400 Mt annually 200 0-200 -400 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Surplus of 1.8 billion (EUAs + credit limit) 700 0-700 -1400 Mt cumulative -600-2100 EU 20% annual EU 20% cumulative
Uncertainty leads to higher volatility 90% 20 40d volatility (%) 80% 70% 60% 50% 40% 30% 20% 10% 18 16 14 12 10 8 6 4 2 Dec-12 EUA pice ( /t) 0% 0 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Monthly average EUA volatility (40d in %) Monthly average Dec-12 EUA price ( /t)
Market fundamentals lose importance a new era or just a snap-shot? 1.6 1.03 EUA price indexed (%) 1.4 1.2 1 0.8 0.6 0.4 0.2 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 EUA price indexed (Dec-12) Emissions change indexed (only fuel price & weather effect) Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 1.02 1.01 1 0.99 0.98 0.97 0.96 Emissions change indexed (%)
Fundamentals change over time Power economics and fuel prices Trading behavior CDM/JI volume+ policy Politics and regulations Economy Investment decisions
5 What would it take to balance the market until 2020? Either a higher GDP... EU real GDP growth (%) 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Annual average GDP growth of around 4.8%! 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 July 2012 GDP forecast
...or political action Annual demand-supply balance (Mt) 400 300 200 100 0-100 -200-300 1200 Mt back-load 1200 cancellation Business-as-usual No back-load No cancellation 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 1600 1200 800 400 0-400 -800-1200 Overall demand-supply balance (Mt) -400 Note: Includes assumptions on power forward hedging, use of credits Source: Thomson Reuters Point Carbon -1600
It s all about policy...or not?! Back-loading and permanent cancellation Depends on political willingness to tighten the system Back-loading only does not play the trick Only permanent cancellation significantly changes the balance Link between EU ETS and Australian scheme One way link from 2015 EUA demand from Australia low Price impact depends on permanent cancellation
EUAs & CERs - A long relationship is over?! 1.2 100d correlation Dec-12 EUA and CER prices 1 0.8 0.6 0.4 0.2 0-0.2 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12
Conclusion: fundamentals fundamentals Carbon market is reacting to fundamentals...but it is long! In a long market the price is set by sentiment rather than abatement potential Main fundamental driver is the discussion on system design (and this won t change soon) Return to more fundamental price driver is dependent on the political agenda Towards the end of phase 3 the market is expected to react to traditional fundamental price driver again For now, the visible fundamental driver is market sentiment
Thank you for your attention! Marcus Ferdinand Senior Market Analyst, Point Carbon Phone: +47 22404991 Mobile: +47 90812506 marcus.ferdinand@thomsonreuters.com
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Price impact of back-loading/cancellation ( /t) 2013* 2014* 2015* 2016 2017 2018 2019 2020 (2013-2020) No political intervention 4 4 5 6 8 9 10 12 7 Back-load Back-load and cancel 400 Mt 6 8 7 5 6 7 9 11 7.5 900 Mt 10 12 11 5 5 6 6 8 8 1200 Mt 13 14 13 7 5 5 6 8 9 400 Mt 6 8 7 7 9 10 11 13 9 900 Mt 10 12 11 11 12 14 15 17 13 1200 Mt 13 14 13 16 17 19 21 24 17 *During 2013-15 we assume that market participants consider equal likelihood for the possibility of a re-injection and a permanent cancellation. Therefore, the price path between 2013 and 2015 is equal for the comparable two scenarios (backloading-only and cancellation) during these three years.