Carbon Match: Riding the Updraft
Wednesday 28 Aug 2019
We are not seeing significant supply much below $24.50 so if you've some to let go by all means get in touch and it'll find a new home on Carbon Match.
The previous week had seen a bit of a stand-off, with good supply shown at $24.50 and higher but buyers sitting stoically lower, or off the board altogether. Many have made the argument that on paper it would be better to wait and just pay the FPO in May. But yesterday saw several buyers just get on with it and pick up what was available up the $24.35 mark.
Can we remind the buy-side again of the risks you face:
- we are a closed domestic scheme currently without the safety valve that a formal link to international supply could provide;
- to date the only plan for NZU generation that could be scaled up significantly is forest sequestration but that's a slow process;
- forest owners have now endured a number of policy changes that not all have appreciated and to our mind, are engaging with ever-increasing caution in the ETS. Witness the disappointment of owners of older forests who now find that they are not to have the option of "averaging", but rather will continue to face harvest liabilities in respect of forests planted before 2019. This won't help supply;
- buyers have been put on notice that the days of the fixed price option are numbered. To date there has been great security for a buyer in knowing that if push came to shove, it would be possible to comply by simply paying the $25. Yes, at lower price levels that would have hurt, but even out of the money options have value;
- the CCR will be an entirely different beast and is not directly comparable to the very simple sleep-easy-at-night FPO.
On the flipside, sellers need to keep real. 2020 is an election year, and anything can happen. And in this very politically driven market, if things DO get too hard, history has shown us that there could be some kind of response.
As a seller, you need to bear in mind that the removal of the FPO appears to peg off the commencement of auctions.
The MfE has said that they are aiming to have auctions up and running by the end of 2020, but if that timeframe slips we could well see the fixed price option continue for longer. If that were to be the case it would continue likewise to keep a lid on prices, artificially depressing prices below the cost of most of the real abatement opportunities this country can pursue.
So while there is a general sense of optimism among NZU holders, it's certainly not silly to be a seller of something at some level - NZUs are not cash in the bank until they are sold.
Carbon Match - every weekday from 1-5pm.
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