ChinaCarbon.net.cn, June 01, 2017: This has been a special year in the Chinese carbon markets. To begin with, initial plans did not foresee pilots running for the 2016/17 period and jurisdictions revamped their programs in the name of the new phase of carbon pilot trading in China. This resulted in a year where financial derivatives were introduced, fundamentals were changed mid-way, markets were put on hold, and new pilots started. Now judgement day is nigh!
The most unmistakable behaviour seen in all the secondary carbon markets in China over the course of their three year histories is that demand and price volatility always peak during the final two months preceding individual compliance surrenders, viz. the next two months. While failure to plan ahead has a part to play in it, this behavior can mostly be attributed to the lack of choices regarding forward contracts in the Chinese carbon markets.
However, not all markets behave similarly, nor do they necessarily behave in the same manner every year. Beijing for example saw prices increase by 27.8% between June and July in 2014 and fall back the next month. However, in 2015, prices slid by 14.7% during the same months only to rebound again by 12.2% after the surrender deadline. This year stands out for the Beijing carbon market in the sense that market fundamentals changed mid-cycle as the scope of the program expanded and fresh demand was added to the market. So far prices have maintained around the Y50s mark, but the trend of the monthly price average points upwards as we head into the final leg of compliance period and that’s when momentum on prices comes to full strength.
Shanghai had a delayed start this year as the market awaited new regulations and allocations. After trading resumed in January, the SHEA market ran a steady upward trend – which has now slowed – with prices climbing to the high Y30s. Total traded volume in the SHEA spot this compliance year is 1,371,757 tons – slightly lower to the 1.5M seen in 2014 and 1.99M seen in 2015, and massively short from the 3.5M traded in 2016 which was an aberrant year for the market.
This was the first year that Hubei offered a forward contract in the May17 delivery. It will be interesting to see whether the market positioned early to maintain its composition in face of the compliance surrender or if speculative interests will take charge in Hubei as entities come to the spot market for last minute allowances. For comparison, the May17 sold a total of 252,492,735 tons for an average price of Y23.91 which were delivered towards the end of last month. Much of this volume was contracted early at higher prices which slowly fizzled down to close at Y18.27 on 19 May 2017.
Shrinking liquidity and declining prices in Fujian raises questions whether its carbon market, which has traded robustly till now, will crash under its first compliance pressure like many of the other Chinese pilots did in 2014/15.
Guangdong had been enjoying a spell of price stability until last week when prices began to move by notable margins in a day. Whether volatility has in fact increased due to end-moment demand, or if auction volumes can placate the market remains to be seen. Tianjin, on the other hand, has awaited activity on the secondary market since 22 March 2017. The market sparks with a flurry during June and July while prices reach a steep peak. Among all the pilots, liquidity peaks most evidently during the end of a compliance year in Chongqing. With prices near the bottom, last minute buyers will find the secondary market cost effective for meeting compliance obligations. However, given the market’s history, it would also not be surprising if prices climbed by exceptional margins due to panic demand.
The CCER market has not been averse to the pressures of the impending compliance surrender. Over the past three weeks, liquidity has increased by leaps and bounds averaging at 780,694 tons per week.
Beijing CCERs traded in the range of Y13.84 to Y19 last week, with a volume-weighted average of Y17.88. This is significantly lower than BEA prices leaving a wide margin for CCER prices to rise if economic fundamentals are to be followed. The Tianjin CCER market made a rare trade of 50,000 CCERs, while Sichuan traded 2,000 tons for Y10.
Check the Weekly Carbon Review for more details and commentary on the secondary market.
Rahul Rana (firstname.lastname@example.org)