Macro Outlook
July EUA price action was again driven by consequences of the war in Ukraine and the EU’s reaction.
Please note that all performance figures are showing net
data. Past performance is not a guarantee of future performance and when you invest in ETFs, your capital is at risk.
Fundamentally, the utility complex remains bullish EUAs, while the looming slowdown of industrial production softens this effect somewhat. Rallying gas prices keep emissions intensive coal and lignite fired power plants running across Europe.[1] This is further intensified by the low availability of French nuclear plants which need to be compensated for by more fossil fuel burn.[2] Overall, this means that the power sector is on the path to increase emissions significantly compared to 2021.
However, the parties managed to forge a more stable compromise quickly and the files came back to the plenary for vote on June 22nd. In the meantime, prices returned to the previous levels of 86.00 €/tonne before trading rangebound 84.00 €/tonne. [2]
On the flipside are the fears of lower industrial output increased with the EU’s announcement to reduce gas consumption by 15%, the larger than expected ECB interest rate hike as well as the negative IFO index publication.[3] Consequently, carbon prices softened in the last weeks of July, dropping below 80€/tonne.
On the regulatory side, the EU Parliament rebuffed the EU Commission’s plan to finance parts of the RePowerEU plan (that aims to render the EU independent from Russian gas) with EUA sales from the Market Stability Reserve.[4] This feeling was echoed by member states in the Council, so that is looks increasingly unlikely that such sales will hit the market over the coming years.
On top of the political developments at EU level, Germany’s Economy and Climate Minister, Robert Habeck, announced on June 23rd, that Germany triggered the second stage of its gas emergency plans.[6] This means that the German lignite and coal reserve power plants, roughly 10 GW, will likely come online this winter increasing German power sector emissions. [7]
EUA Market Outlook
August usually sees a slowdown in carbon trading, as Brussels is in summer recess and auction volumes are cut in half. However, this year it is likely that volatility will persist: any further development around power plant capacity (such as further outages due to low water levels on rivers) or gas flows can have a significant impact on the bullish side, in particular as EUA auction volumes are curtailed. [5]
On the regulatory side there should be little news, however this year might see announcements from the EU Commission that could impact the EU ETS in both directions.
Events to watch
Several utilities’ H1 report which could include surprises on EUA hedging in Q2
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1M
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3M
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6M
|
YTD
|
12M
|
SI
|
|
SparkChange Physical Carbon EUA ETC
|
-12.94%
|
-7.11%
|
-12.31%
|
-2.26%
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NA
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32.73%
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|
EEX EU Spot (Phase 4)
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-12.88%
|
-6.90%
|
-11.93%
|
-1.76%
|
46.85%
|
33.60%
|
Please note that all performance figures are showing net data.
Source: Bloomberg / HANetf. Data as of 31/07/2022
Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product.
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