Carbon Match Market Update

Wednesday 23 Jun 2021

Carbon Match Market Update - This week so far NZUs have continued their journey north, last trade $40.75. - Volumes are fairly modest - certainly many compliance buyers have an eye to next week's auction, wondering if it will again bring the opportunity to secure a "deal".

That hasn't stopped buyers snapping up NZUs and since the release of the Climate Change Commission's report, prices have pushed up from $39.00 to $40.75. But thin supply is a contributing factor - natural sellers still have an eye on the horizon and perceived upside, buoyed by talk of much higher carbon prices required to drive abatement, and supported by strong if not record log prices.

Meanwhile funding costs remain low. And as carbon prices move up, some sellers then require less volume to be sold to make financial budgets.

Others point to European carbon prices, still close to $90 NZD equivalent, a notable value gap even in the absence of fungibility.

So what will happen in next week's auctions? We don't know and it's not for us to speculate, but conceptually we tend to think of four different broad scenarios, which sit across a spectrum. Any are possible in theory and you can have a think and attach your own private likelihood to each in your own mind.

Scenario 1: Auction does not clear. In the event the Government does not receive sufficient bids next week at levels above the confidential reserve price, it will not sell its 4.75 million units. That scheduled volume will then roll forward to become available at the 1 September auction, which would then have 9.5 million NZUs on offer.

While this might seem like a bearish outcome, what overseas experience has shown us is that sometimes the participants who missed out, but nonetheless have genuine buying interest, then hit the secondary market to get that done, perhaps causing an uptick.

Scenario 2: Auction clears below ex-ante secondary market price levels/ sufficient but modest interest. This was the situation that pertained to the inaugural 17 March auction earlier this year. What happened there is that in a market that the day before had traded $38.70, and had recently been as high as $39.50, the auction was fully subscribed but cleared at $36.00 flat. The secondary market then retraced to lower levels. Only in the last couple of weeks have prices recovered to, and pushed on higher from, pre-March auction levels. So, very crudely put, in our view scenario 2 for next week is a rinse and repeat of 17 March and the weeks that followed.

Scenario 3: Auction clears above ex-ante secondary market levels/strong interest. This would be a situation where strong buying interest and layering tactics see the auction clear at some price higher than recent price levels seen on the secondary market. In our view, such a scenario would be supportive, and perhaps drive further bullish sentiment in the weeks that follow.

Scenario 4: Auction clears at or above $50, bringing the cost containment reserve into play. Clearly the market would then find itself working off a whole new basis.

Of course, in reality, a myriad possibilities exist with many nuances. But broadly speaking, if you have something you're looking to do or a liability you wish to close off, or an asset you're trying to decide how and when to monetise, it's worth thinking through each of the above and how your decisions might play out for you under each scenario.

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Source: Carbon Match

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