Buy NZUs now because May to December has historically provided the best returns.

With just over six weeks until the first carbon auction of 2025 on March 19th, NZUs are currently trading well below the auction floor of $68, last at $63.50.?

Forestry owners are beginning to secure their 2024 vintages, and some are choosing to sell now. We alluded to this being the driving activity last week in our report - the question some are asking us is why they are selling now when prices are so far below the auction floor.?

The reality is that it’s all about generating needed cash. It has been challenging economic times for many in the New Zealand economy over the last few years – however it has generally always been tough for a lot of beef and sheep farmers who depend on the annual generation of NZUs to bring in much-needed income. That is the driver of the market at present. Our advice has always been – if you don’t need the cash right now – don’t sell and wait for the market to rally but if you do need the cash – then do what’s best for your financial position.?

Two points to note here:?

Point 1 - January to April is when a lot of these sellers come to market and a lot of these volumes are quite modest – 1,000 to 10,000 tonnes - they just hit bids– and there can be a lot of them especially this time of year.?

Point 2 - It’s historically a quiet time of year for the buyers in the market – January to April is when liable entities are finalizing their emission returns for the previous year (due by March 31) and must surrender by May 31. They don’t tend to focus as much on the market - that comes later in the year and its these periods of the year you need to be aware of.?

Since 2014 – January to April - market prices have either fallen, been flat and risen slightly ?– not every year (2016 & 2022 were quite good)? - but historically – it’s been the best time to actually accumulate NZUs.?

For May to December – since 2014 - NZUs have rallied every year between 15% and 80%, except for 2023 when the market ended flat. We call this trade “Buy in May & Go Away” because you can literally buy in May and sell in December and it’s been a winner every year since 2014 except one year.?

The reality is that NZUs have gone up every year (except 2023 & 2024 which was due to a regulatory debacle started in 2022) – but it’s a matter of timing if you want to get the best return. When you understand what is happening within that year – you see this pattern repeating itself again and again.?

Our view is that this year is likely to be the same - the main reason behind this is that liable entities tend to focus on the current emission year from Q2 to Q4 and by then a lot of these small sellers that need cash are gone.?

There are other facts lining up to support this event that are unique ?- if the secondary carbon market doesn’t trade above the auction floor of $68, up to 6 million NZUs will not come to market. This is estimated to be about 30% of expected supply against a projected surrender of 35 million tonnes.?

This is the first year that we have seen such a deficit between supply and demand (surrender).?

The NZU market has remained within a relatively tight range for almost six months, trading between $60 and $65 since August. What’s also particularly interesting to observe is that whenever prices drop to the lower end of that range, the market tends to rebound relatively quickly.?

Our view remains – NZUs are cheap. Now is the time to secure volume at favourable prices. New Zealand won’t decarbonize at these prices and whilst past performance is no guarantee of future returns, we anticipate a strong rally from May to December like we have seen every year bar one since 2014.