Commodities | May 10 2006
By Greg Peel
It’s a bit of a mystery. Citigroup reports a pre-release of carbon dioxide emission data from the European Union, covering as yet only 25% of emissions, has shown that there is a likely surplus building in carbon credits. The result of this has been a spectacular fall in the price of the credits.
Has Europe really been extremely good at reducing emissions? Or were the projected levels, based on 1990 estimates, just too high? Or perhaps credits sold into the system from outside Europe have had a greater than expected impact?
Citigroup suggests the reason is unclear. In early 2005 carbon credits were trading at US$10/t of carbon dioxide. By mid-2005 they had spiked up to US$35/t before correcting and commencing another slow trend up to about US$37/t. The price has now fallen vertically to US$15/t.
Is this an aberration or a broader trend? A Citigroup report out of London prior to the figures being released did suggest that a surplus was one possibility. What is clear is that European thermal coal prices have been undermined to date by the cost of carbon credits, at the expense of gas (coal-fired power stations emit twice as much CO2 as gas-fired).
A likely flow-on effect will be increased demand for coal in Europe which will then push up the price of coal in Asia, Citigroup suggests. The biggest potential winner in the Australian market is Excel Coal (EXL) which, Citi calculates, offers 15% earnings leverage to a 10% coal price change. Another big coal exporter, Centennial (CEY), only enjoys 6% leverage.
Other beneficiaries are of course the biggies, with BHP Billiton (BHP) and Rio Tinto (RIO) able to draw some marginal increased earnings.