Carbon Match market update

Wednesday 22 Apr 2020

NZU Update - NZUs have firmed a little, last trade $24.50 - Please get in touch with Carbon Match if you have been thinking of selling. We currently have good demand from a large number of buyers who are willing to pick up NZUs this side of the surrender deadline at these levels.

But many buyers will be moving forward to tidy up their compliance liabilities soon, and ahead of the end of May surrender deadline. Meanwhile, the NZ Government is still happy to effectively sell any entity with a liability under the scheme an NZU at $25 flat.

Going forward, we are a whole lot less sure about what demand will look like - or price. There are a large number of factors at play. It's impossible to pick the over- riding direction in the face of so much macroeconomic and political uncertainty.

Some of us might actually be trying not to think about that right now. What's the point of worrying about something you can't control?

For the moment, NZ has pulled up the drawbridge. And for the have-enoughs, it's not all bad in the bubble. We are sitting here surrounded by the moat of the Tasman Sea and the Pacific Ocean. The weather has been reasonable and the national payroll is being buttressed by a generous Government which has already, in a very short time, distributed $9 billion, with lots more to come.

Unfortunately it is in fact just a dream and very soon - perhaps even today at 4pm - we might see lockdown ease. When we do, we will wake up to discover the mayhem - or the lack thereof - on the high street.

In the real world, according to the IMF, we are facing the deepest recession since the 1930s. The global economy is projected to contract by 3% in 2020, with much deeper decline being experienced in the US and in the Eurozone.

China's economy is still expected to grow over 2020, but only slightly. Meanwhile New Zealand's performance is not expected to be very much better than that of the EU, with real GDP expected to decline by 7.2%.

The IMF's expectation? That this is much worse than the GFC. "The economic fallout depends on factors that interact in ways that are hard to predict, including the pathway of the pandemic, the intensity and efficacy of containment efforts, the extent of supply disruptions, the repercussions of the dramatic tightening in global financial market conditions, shifts in spending patterns, behavioral changes (such as people avoiding shopping malls and public transportation), confidence effects, and volatile commodity prices. Many countries face a multi- layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices. Risks of a worse outcome predominate."

In just 3 weeks the US unemployment went from 2% to 10%. That will cut discretionary spending and rekindle frugal behaviour.

While the IMF's projections for NZ have unemployment for 2020 hitting 9.5%, the NZ Treasury is contemplating worse scenarios that would see potential rates of unemployment peaking from 13% up to 26%.

Even the low end of this range, pointed out Matthew Hooton last week, hasn't been experienced since the early 1990s, and would be a level commensurate with that experienced in the UK at the height of Thatcherism.

Meanwhile homeowners and landlords have a fresh worry, with the ANZ for example, publishing research earlier in the week that said house prices will fall by 10-15%, with further downside possible.

There's an argument that all of this hits not only our emissions, but also unfortunately our collective willingness to pay for them. That in turn heightens political risk around carbon prices. And all NZU holders should bear that in mind.

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Source: Lizzie Chambers, Carbon Match

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