Why investors have learned to love EU carbon
Investors have piled into the EU ETS over the past year as prices have tripled, with buyers hunting the lucrative returns predicted amid another doubling of the carbon price seen in the years to come.
Carbon Pulse is gathering carbon traders, analysts, regulators, and a host of other experts in London from Oct. 16-18 for the third annual Carbon Forward conference – an event geared to helping emitters and investors navigate the evolving European and global carbon markets.
Carbon Forward 2018 will devote an entire day (Wednesday, Oct. 17) to the EU ETS, which has seen prices hit a 10-year high of nearly €20 this month amid renewed attention from investors, with Bloomberg dubbing EUAs the year’s best performing commodity.
And the most bullish forecasters have now started to predict that EU carbon prices could average €35-40 over 2019-2023 as the supply-curbing MSR accelerates coal-to-gas power switching among utilities.
“The bull-run still seems to have been driven by the convictions of ‘buy-and-hold’ market participants,” said analyst Trevor Sikorski of Energy Aspects in a report this month, partly attributing the rise in EUA prices to the entry of these new participants.
For the first time, Carbon Forward will devote an entire session to investors, taking a deep dive into speculator motives and what buyers should look out for in the coming months and years. This will include technical analysis, trader insights, and investor strategies.
A series of post-2020 reforms to the EU ETS agreed late last year are widely seen as the match the lit the fuse sparking the latest rally. European lawmakers finally passed long-awaited legislation to bolster the scheme, including regulations to set up a Market Stability Reserve (MSR) to withdraw excess permits from the market, and measures to further reduce supply next decade.
But despite the year-long bull market, many participants are choosing to stay away from the market’s daily spot auctions or exchanged-based dealing in the underlying EUA futures favoured by many of the larger utilities, factories, and airlines covered by the ETS.
Instead, they prefer trading in options, believing that the instruments offer them additional protection against the violent price swings that have become commonplace in the 13-year old market.
“By trading options, you can weather the storm much better,” said Tobias Munk, a veteran energy commodity options trader who a month ago started his own trading firm Munk Trading AG out of Zug, Switzerland.
“In the past year, options have really come back to life in the carbon market, and there doesn’t seem to be any let up,” he told Carbon Pulse, adding that volumes had increased tenfold over the past three years.
“When carbon prices were in the doldrums – around €4-6 – you would see around 2,000 lots a day traded, lately we’ve seen as much as 25,000 lots a day. The volume comes from speculators … They are driving it, they see this market as interesting,” he added.
Munk believes that investors have been attracted not just by the outright returns from going long the underlying, but by the prospect of increased market depth and volatility as industrial companies face a shortage of allowances and utilities adjust their hedging strategies as they rapidly decarbonise.
“As carbon goes up, it becomes a real product again with real supply and demand dynamics … Before there was just oversupply,” he said, referring to the post-recession glut of more than 2 billion tonnes that has overshadowed the market and pressured prices to all-time lows around €2.50 during the past 10 years.
Five years of trading below €10 had made it difficult for some investors to believe that carbon was on the rise again even as lawmakers promised to revive the programme.
One investment manager told Carbon Pulse how in 2016-2017, in an abortive attempt to start a new fund he had failed to convince enough investors that carbon was an attractive proposition.
“I could not find anyone who wanted to buy carbon at €5 and we asked over 25,000 institutional investors globally … Now almost all are kicking [themselves],” he said, asking not to be named.
However, at least one long-term investor is known to have piled in last year when prices were a fraction of today’s levels, in the hope of earning triple-digit returns.
Per Lekander, formerly an analyst with Swiss investment bank UBS and now a fund manager at hedge fund Landsdowne Partners, last September said he bought up 10 million EUAs in spring 2017 at average prices below €5, betting that the election of Emmanuel Macron as president of France had secured the future of the pan-European ETS as the bloc’s flagship climate policy.
The heightened investor interest has in turn boosted demand for those providing access to trade and analytical tools to help traders assess the market.
UK-based technical analysis firm FuturesTechs upped its carbon market analysis from weekly to daily in January due to increasing demand from clients.
Over the past year several traders, brokers, and analysts have also noted an increased interest in carbon, with investment bank Morgan Stanley and brokers Marex Spectron both restarting their emissions trading operations after many years.
Tobias Munk, Per Lekander, Trevor Sikorski, and Clive Lambert of FuturesTechs will all speak during the EU ETS day at Carbon Forward 2018.
***Learn how to survive and thrive in global carbon markets. Book your place at Carbon Forward ahead of Sep. 1 to secure an end-of-summer discount***
CARBON FORWARD FACTFILE:
- Speakers are confirmed from the European Commission, with at least seven carbon market analysts and leading participants from utilities, industrials, banks, exchanges, and trading houses also set to take part. Click here to see the latest speaker list.
- The two-day conference (Oct. 17-18) is being held once more at London’s 5-star Canary Riverside Plaza Hotel, while the venue for the pre-conference Training Day (Oct. 16) is just down the street at the Citigroup Centre, 25 Canada Square.
- Carbon Forward is fast becoming established as Europe’s premier event for companies affected by the growing carbon markets. There is still time to participate – BOOK YOUR TICKETS NOW
- Carbon Forward 2017 attracted more than 200 delegates & speakers, and this year’s event is slated to be even bigger. Participants, decision-makers, and top-flight speakers are drawn from industry, utilities, brokers/trading houses, government, and trade organisations.
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By Ben Garside– firstname.lastname@example.org