Auction to Auction – what to expect next week

It could be a “game of two halves” when it comes to carbon auction reactions this year.

Fundamentally the market wasn’t in a good place for upside at the beginning of 2024, peaking close to $74 in January, prices were in steep decline leading into the March auction – there were several bearish factors in play:?

• The stockpile was close to 160 million
• Available auction volume in 2024 was over 14 million
• Large volumes were trading through the secondary market – there was ample supply being offered
• There was regulatory uncertainty about which way the government would go in response to ETS settings

The March auction was a shocker when it came to the market reaction, it delivered almost 3 million NZUs - below what was on offer (3.525 million) into a saturated market, with a large stockpile and regulatory uncertainty. This caused prices to crash from $65 to $50 on auction day and then below $50 a month later.?

The large gap between this low and the auction floor of $64 saw some recovery in prices back to the mid-$50’s but it was always going to be a steep mountain to climb heading into the June auction which had no chance of clearing. Continued selling by small to medium sized forest owners kept the rise in check.?

The June auction had over 4 million NZUs on offer and for the first time saw zero participation. Prices tumbled from over $55 to under $50 and meant over 7.5 million NZUs would be available in the September auction.?

Regulatory uncertainty and allowance oversupply had pincered the market.?

However, since the June low of $48 – prices have been climbing – reaching an almost 6-month high of nearly $62 this week. This time, there has been several positive factors at play:

• The stockpile dropped by almost 25 million in June – the largest drop in memory
• The government adopted the Climate Change Commission recommendations signaling its pre-election pledge to allow the ETS to do its work
• Auction volumes were slashed starting in 2025, which combined with EITE & forestry supply, meant the surrender (demand) was now twice this available new supply?

The questions now are what the September & December auctions will bring in respect to supply and market reaction?

?For September - there are 7.5 million tonnes on offer – it’s might partially clear or not clear at all unless someone sees an opportunity to pick up a large chunk of units. There won’t be a Confidential Reserve Price (CRP) – so the auction reserve will be the floor of $64.?

We could get a repeat of the March auction result but it’s unlikely we would see similar price action in the secondary market. We’d see any dip as a buying opportunity.?

The December auction could be the most interesting given that auction could clear in full, partially clear, or not clear at all – it all depends on where the secondary price is and whether there is a CRP.?

Assume the auction is for 10 million NZUs - if December has a CRP – it most likely will fail as it’s unlikely there is demand for 10 million NZUs above the CRP. If there is no CRP - then it could partially clear.

?For those confused by some of this. The auction rules regarding clearance are:

• If there is no CRP – it can partially clear at the $64 auction floor – it can’t clear below that.?
• If there is a CRP - and any of the bids equating to the available volume are below the CRP – the entire auction fails.?
• It can partially clear with a CRP if there are bids above the CRP and no bids below it - that is extremely unlikely.?

The key point here is that this current “price cap” is temporary, as any unsold auction volumes are not carried through to 2025, and at that point we move to a $68 floor with only 1.5 million NZUs available at each auction.?

As an FYI – we are not counting the Cost Containment Reserve (CCR) volumes here as those price levels are too far away.?

Our view remains, given the procurement nature of the market, that prices will most likely move higher for the rest of this year before starting to see more upside in 2025.?

Time will tell, hang on to your hats and let’s see what next week brings.