The Anatomy of the CER Price Melt Down
The Anatomy of the CER Price Melt Down and its Effects on the NZETS
Some 6 weeks ago the price of a CER (certified emission reduction created from reducing greenhouse gas emissions in developing countries using the CDM or clean development mechanism of the kyoto protocol) was 13 Euro and the emissions markets were looking healthy.
Then a matter of couple of weeks later a CER was fetching 9 euro. Why the rapid and precipitous meltdown in prices?
Simply the market rapidly lost its liquidity after a series of events starting with renewed concern as to the sovereign debt of the so called PIGS Portugal, Ireland, Greece and Spain, and the likelihood of defaults. Soon after that the EC issued a directive on energy efficiency targets. Simple analysis of this meant that companies meeting these targets would not need as many CER to comply with the EUETS restrictions.
Combining this with the German markets being on summer holidays the market reacted negatively. Soon brokers stop loss triggers started to intervene and the market flooded with CER as speculators dumped CER in the face of large losses. This overreaction cascaded into a slump that went below 9 euro. Then the EC announced any energy efficiency targets would be designed not to damage the carbon markets and the market according to sources bottomed.
Since finding the bottom CER have traded in two tight ranges between 9-9.20 Euro and peaked at 10.50 Euro. Further announcements of substantial CER issuances coming to the market have dampened demand. December 2011 and December 2012 CER sit around 9.80 as of the 27th July 2011.
The effect on the NZETS has been swift. Coupled with a strengthening dollar the NZETS has seen NZU prices fall to the low $16 range before recovering. CER have become very attractive to buyers as they can be purchased as an option for delivery in March 2012 thereby reducing holding costs. The down side of course is an exchange rate risk but this can be managed. Foresters all expecting $20 or more are way out of the money. Should those post 1989 owners who sold for $22 be buying back and covering their risk?
How are buyers and sellers reacting? And how are projects being held up in the face of slumping prices?
Whilst China has a floor price at which CER are not to be sold the floor changes depending on the type of CDM project, for instance biomass CER floor price is 10.50 Euro. Whilst the lowest floor of 8.50 Euro was not breached it would not in our opinion have mattered as the trading was triggered by stop loss orders and not any real rational response.
Buyers that EITG and its consortium partners are working with continue to offer long term off take contracts. These contracts ameliorate risk by providing fixed floor prices of 7.50 and 8.50 euro with purchase at varying discounts to market in staged tranches. Project developers entering into these contracts can in effect fix their down side and keep the upside paying small premium to market.
Project developers are slow to take up such offers as they appear focused on maximising the CER income with no regard to risk. This of course tests the fundamental concept of whether their projects are actually additional? Would the project have happened without the carbon credit income? If the developers can take all the price risk of the CER price you have to ask the question in EITG opinion.
Realistically smart project developers, including those working with EITG are using our expertise in structuring and managing risk with our consortium partners are entering into these type of fixed off take contracts. In certain cases as a further inducement buyers are reimbursing project development costs when certain milestones are achieved. This further reduces project developer risk.
As a world leader in managing risk from plantation forestry carbon credits via its carbon pool system EITG has been extending this philosophy to its ever expanding CDM portfolio on 3 continents.