Weak economy hinders EU carbon price from reaching level needed to meet emissions reductions targets
In September, we expected the carbon price to fall to €66 /tCO2 from €72 /tCO2, but the price dropped further than expected to €64 /tCO2. This was driven by mainly increased wind output that, after months of underperformance, saw substantial recovery. Low power demand, symptomatic of a still-weak economy and poor industrial activity, also contributed to the decline.
Despite a very slight m/m increase in power demand, the ongoing weak demand created significant downward pressure on the carbon price in September. There were some small upward pressures on price in September, including reduced nuclear output from some forced closures in France and reduced hydropower output. Coal use in Germany increased slightly in comparison to gas use, so there was some gas-to-coal switching. However, the overall impact was minimal.
Over the next month, we expect the price to drop further, driven mainly by strong winds, increased hydro output and the weak economy.
Windy, rainy weather will push the carbon price down for another month in a row
In September, wind output increased significantly m/m, increasing from well below average levels to nearly average levels. This placed substantial downwards pressure on the carbon price over the last month and was the main driver for the price decrease. Strong winds are expected to continue over the next ten days. Even if windspeeds drop to average after that, given October has a higher average wind output than September, this will still put downwards pressure on the carbon price.
Hydropower output declined in September but stayed above the historical average for the time of year, which put a slight upside pressure on the carbon price. However, reservoir levels have been increasing over the last month and reservoirs in Sweden are nearing their highest levels for the time of year. Rainfall in October is forecast to be slightly above average so we expect hydropower output to pick up over the next month, which will put a downwards pressure on the carbon price. Overall, renewables will put a downwards pressure on the carbon price in October.
Economic struggles continue to depress power demand
European power demand was below average for another month in a row, despite a small increase m/m. This reflects decreased industrial production caused by a struggling economy. As per our latest data, steel, fertilizer and auto production all dropped m/m in July. Our outlook for steel profitability – a leading indicator of economic activity – has been downgraded for 2024 Q4.
This suggests worsening economic conditions. Despite the European Central Bank's rate cuts, economic growth expectations have also been reduced. Warmer temperatures are forecast for October, further suggesting power demand will stay low. Overall, the impact of the economy, industry and power demand on the carbon price will be a slight downward pressure in October.
Nuclear power output drops in September, though the outlook for October remains positive
Nuclear output decreased m/m in September across Europe, with France also seeing a drop. This went against our expectations – particularly as nuclear output has been outperforming recently. The French nuclear fleet, one of the largest nuclear fleets in Europe, faced years of strikes, closures and maintenance, but has recently made a recovery. Despite this, there was a decline in output over the last month.
There were some forced closures at some reactors causing output to drop, and operators also faced some problems with the new Flamanville reactor coming online, which has already experienced two automatic shutdowns. Nonetheless, the outlook for nuclear is good over the next month, although it does pose an upside risk to the carbon price if there are further shutdowns.
October will see minimal gas-to-coal switching
In September, both gas-and-coal prices fell, and there was some gas-to-coal switching. Coal and gas use both picked up in Germany last month – however, coal use increased more relative to gas. This caused gas use in Germany to fall further into the historical relationship of gas use versus gas price. Over the next month, gas and coal prices are expected to be relatively stable, with gas prices dropping slightly compared to coal. This means there will be minimal switching over the next month and the impact on the carbon price will be minimal.
If you want to hear more about carbon market developments and our short-, medium- or long-term carbon price forecasts provided as part of CRU’s Sustainability and Emissions service, please email us at [email protected] – we’d be happy to discuss this with you.
About The Authors
Lottie Zayed, Sustainability Analyst
Lottie joined CRU Sustainability in 2023. Prior to this, Lottie obtained her M.Res. in Green Chemistry, Energy and the Environment from Imperial College London and her B.Sc. in Chemistry from Cardiff University. She has also gained experience through an internship in the sustainability team of a chemical fertilizer company, where she researched the use of new technologies on reducing emissions. Lottie is based in CRU's London office.
Paul Butterworth, Research Manager
Paul moved to CRU's newly-formed Sustainability team in August 2021 where he is working closely with clients and internally on carbon market and energy transition issues. Paul joined CRU in 2012 and, latterly, was responsible for CRU's analysis across the whole steel value chain, from raw materials through to finished steel, as well as CRU's Steel cost services, a comprehensive suite of cost models covering iron ore mining, coal mining, steelmaking and ferroalloys operations worldwide.
Mark Jeavons, Head of Sustainability
Mark has over 15 years’ experience in a variety of leadership roles spanning sustainability and investment. He is the Head of CRU’s Sustainability division, providing thought leadership and guidance on sustainability, climate change and their market implications, which helps clients to better understand, address and integrate sustainability themes into their decision-making.
FEATURED MEDIA COVERAGES
China mining firms partner with Zimbabwe on lithium mine
CRU's data on the booming lithium sector plays a pivotal role in this recent BNN Bloomberg article, covering China’s latest partnership with Zimbabwe in developing a major lithium mine.
Discover how CRU’s insights are shaping discussions around this critical mineral.
Read the full story here
Copper jumps to 10-week high on China stimulus measures
CRU’s He Tianyu provides insightful commentary on the recent surge in copper prices driven by China's economic stimulus, as highlighted in Reuters and republished by Zawya and La Nacion Argentina.
“Demand in the past several weeks has been good. Wire rod production in September was quite good because the price was low” says He Tianyu.
Read more insights from this article
CRU Breakfast 2024 Recap
Thank you to everyone who joined us at the highly anticipated CRU Breakfast 2024, held at London’s Waldorf Hilton!
The event was a tremendous success, bringing together industry leaders to dive into “The Transformative Forces that Will Define the Next Era of the Metals Industry.” From insightful presentations to lively panel discussions, attendees explored key topics like commodity outlooks, decarbonization challenges, and the impact of emerging technologies.
We hope you left with valuable insights and new connections. Stay tuned for more updates, and we can’t wait to see you next year!
UPCOMING WEBINAR
Shortage of copper and lead/zinc concentrates: What to expect in the coming year
The copper and lead/zinc concentrate markets are facing significant deficits, creating both risks and opportunities for industry players. While market imbalances are shaping today’s landscape, this moment offers a critical opportunity to reassess strategies.
Join us on Thursday, 17 October 2024, at 11:00 AM PET for the "Shortage of copper and lead/zinc concentrates: What to expect in the coming year" webinar, where our experts will explore the forces driving these shortages and provide insights to help you navigate the evolving market dynamics.
(Please note that this webinar will be in Spanish.)
#Commodities #CRUWebinar #Copper