Emissions trading should cost steelmakers less than expected

The changing state of the European carbon markets has led analysts to regularly alter their price forecasts for phase two of the Emissions trading System (2012-2020). New forecasts suggest the cost of carbon trading to Europe’s steel industry could be some €8bn less than Eurofer’s first estimates. To see how environmental regulations will affect your business and how you can make your company competetive in a greener economy, come to Steel Business Briefing‘s third annual Green Steel Strategies Conference in Berlin on 19-20 April. For more information, click here.

SBB 2 December The cost to steelmakers of the European Emissions Trading System (ETS) is likely to be far below initial Eurofer estimates because of a collapse in carbon credit prices, Steel Business Briefing estimates. According to the latest price forecast by Barclays Capital, the true cost of the ETS in 2013-2020 could be around two thirds of its earlier estimate.

However, the effect on producer margins could still be disastrous, Eurofer says. Any additional cost is expected to reduce profits, not increase prices, it notes.

According to a Barclays Capital’s forecast of €22 per EUA on average over 20113-2020, the total cost to the steel industry in that period would be around €15.9bn, compared with Eurofer’s first estimate of €24bn. €8.2bn of the costs would be faced by integrated producers, €400m as direct costs for EAF producers and €7.3bn as indirect costs because of higher energy prices for EAF producers, Eurofer calculates.

Eurofer confirms SBB’s calculation that an average price of €22/t would mean an increase of approximately €5/t on average in 2013-2020 in theoretical production costs for EU integrated steelmakers with the lowest emission, more for those which are more polluting. Meanwhile, EAF steelmakers could see added costs of €7.6/t.

This does not account for any offsetting with even cheaper UN carbon credits or using up credits saved during 2008-2012. During this period, steelmakers received far more free carbon credits than they needed. The true cost is therefore likely to be less than €5/t for the low-emission steelmakers.

Steel industry may support carbon prices in medium term

SBB 14 October Demand for carbon credits from the European steel industry will help to support prices in phase III (2013-2020) of the European Emissions Trading System (ETS) says carbon trader and researcher, Marius Frunza. This source of demand has not been properly factored in by many carbon market analysts, Frunza claims.

As steel production was cut in the aftermath of the financial crisis, the industry was left with an over-allocation of European Union Allowances (EUAs). But from 2013 the industry will need to buy in EUAs, especially if production levels are high. This will result in an entirely new source of demand for EUAs, Frunza points out.

On the other hand, the surplus EUAs built up over 2008-2012 could take some time to be exhausted and so the effect on EUA prices may not be large, counters Barclays Capital’s Trevor Sikorski. The electricity sector will continue to be the main source of demand for EUAs in 2013-2020 and so should have a far more significant effect on prices, he adds.

In the short term, with the eurozone debt crises unresolved, EUA prices are unlikely to move from their current levels, Frunza believes.

Carbon markets may exacerbate steelmakers’ costs

European steelmakers are expecting costs from the Emissions Trading System (ETS) to increase. By how much they will increase depends largely on what happens to the price of carbon. However, just as steelmakers have limited experience of the carbon markets, market traders and analysts have little experience of the steel industry. Dialogue between the two sectors could be beneficial to both sides.

SBB 11 April Both the European and global carbon markets could significantly increase costs for EU steelmakers, while at the same time reducing the potential for offsetting those costs, speakers at Steel Business Briefing’s Green Steel Strategies conference in Brussels argued.

European Union Allowance (EUA) prices are expected to rise to around €40/tonne by 2020, according to forecasts presented by Carine Hemery of carbon market analysts Orbeo. Moreover, the amount by which steelmakers can cut their costs by offsetting with UN carbon credits, called Certified Emissions Reductions (CERs), could fall from around €3-4/t currently to just €1-2/t in 2013-2020, she adds.

The December 2011 contract, which has the most liquidity, has consolidated slightly over the last week to €16.97/t on 7 April on the London-based European Climate Exchange (ECX). The December 2011 CER contract also consolidated to €12.97/t.

The carbon markets will have to adjust to a situation in which industrial sectors are buying rather than selling EUAs, says Barclays Capital carbon trader Ben Readman. Utility companies tend to hedge their EUA costs up to three years in advance. However, industrials do not want to sell this far forward, especially as in three years’ time they are also likely to have a shortfall of credits.

Some EU carbon credit registries could be closed ‘for weeks’

The European Emissions Trading System has often been at the centre of controversy. However, in spite of the uncertainty surrounding the market, prices have remained stable and even risen. This may suggest the market is more resilient than many assume.

SBB 27 January Europe’s carbon credit spot markets remained closed for business yesterday as national carbon registries remained unable to transfer credits. Furthermore, the most troubled registries could remain closed for far longer than expected. OTE, the company responsible for the Czech registry, has told Steel business Briefing that re-opening could be ‘a matter of weeks’ rather than days.

The theft of 450,000 European Union Allowance (EUA) carbon credits from the Czech registry and a hacking attack on the Austrian registry led the European Commission to block transfers of carbon credits until at least 26 January, as previously reported.

The registries hold the carbon credit accounts of participants in the Emissions Trading System (ETS). EUAs can be used to account for greenhouse gas emissions equivalent to one tonne of carbon dioxide each by European industrials in the ETS. It does not appear that steelmakers’ EUAs have been taken.

Registries will now remain closed until an independent assessment of security has been carried out on a country-by-country basis and this has been verified, the European Commission says. However, registries which have been affected by theft must also prepare a full report, which will delay re-opening even further.

The carbon market is unlikely to be strongly affected, analysts tell SBB. Spot trade can be as little as 5% of an exchange’s trading volumes, says Trevor Sikorsky, head carbon analyst at Barclays Capital. “It is a big blow to the image of the market…but it does not change the fundamentals,” Emmanuel Fages of carbon market analysts Orbeo adds. March 2011 EUA futures were settled at €14.69/t ($20.13/t) on 26 January on the London-based European Climate Exchange, up some €0.50 from a week earlier.