COLOGNE, Germany, May 29 (Reuters) - European carbon prices will double before the end of the year as supply cuts take hold and utilities ramp up their demand for emissions permits in the face of hesitant industrial sellers, analysts said.
Front-year EU Allowances will rise to 10.80 euros per tonne by the end of the third quarter, from current levels around 5.25 euros, and finish 2014 around 12.30 euros, said Tschach Solutions, which is owned by publisher ICIS.
Carbon prices in the EU Emissions Trading System are struggling under the weight of a permit oversupply estimated by Tschach at nearly 2.2 billion units.
But the analysts said much of that glut is being stored by emitting companies for future use, leaving a smaller surplus of around 170 million permits in the market from new supply introduced between October 2013 and March 2014.
“Once all that surplus is soaked up by compliance players, prices will increase because the demand is still there,” said Tschach Solutions analyst Philipp Ruf, speaking at the Carbon Expo conference in Cologne, Germany on Thursday.
The analysts forecast that EUA prices would climb to around 16.70 euros by the first quarter of 2016.
The European Union earlier this year started to choke new permit supply in an effort to raise EUA prices, which have traded below 10 euros since 2011.
Under its "backloading" plan, the bloc will remove 900 million allowances from government sales between 2014 and 2016, with a view to reintroducing them by the end of 2020.
This will bring the market’s oversupply closer to the roughly 1.3 billion permits Tschach said is required to meet the needs of power generators without causing prices to spike.
European utilities buy allowances to cover the emissions to be generated from the power they sell several years in advance.
Ruf said some have also built up small strategic reserves, buying extra allowances at current low prices for future use.
Of the 2.2 billion oversupply estimated to be in the market at the end of 2013, the analysts said 1.3 billion units were being held by utilities, 850 million by industrial manufacturers such as steel and cement makers, and 50 million by speculators.
While most utilities must buy their permits, industrial firms receive their quotas for free to offset the higher cost of energy, as well as to help them compete internationally.
While many industrial companies are saving their permits until the end of the decade, when they are predicted to start experiencing shortfalls, market participants believe that some firms may be persuaded to cash them in as carbon prices rise.
“There is always some selling, but we don’t believe industrials will bring large volumes to market under 10 euros,” Ruf said.
He added that of the 850 million units being stored by industrial firms, around half are owned by smaller companies that are unlikely to sell even if prices rise substantially, mainly because the firms have limited access to market and do not closely follow prices.
(Reporting by Michael Szabo, Editing by Dale Hudson)
((michael.szabo@thomsonreuters.com)(+44 0207 542 9242)(Reuters Messaging: michael.szabo.thomsonreuters.com@thomsonreuters.net))
