* Front of CER futures curve in backwardation since June 9
* Developers with cash can withhold sales until upturn
* Curve should return to contango by year's end
By Michael Szabo
LONDON, Aug 3 (Reuters) - A shortage in supply is pushing up the price of near-term contracts for Kyoto Protocol carbon offsets and may be partly due to sellers sitting on inventory as they await an uplift in demand, analysts and traders said.
Under Kyoto's Clean Development Mechanism (CDM), companies in the developed world can invest in clean energy projects in emerging nations like China and India and in return receive carbon offsets as a cheap way to meet their climate change targets.
Prices for offsets called Certified Emission Reductions
(CERs) for delivery in December 2009 A December 2009 premium of up to 30 cents may show that
project developers, the intermediaries who establish projects
and sell offsets to buyers, are waiting for a rise in carbon
prices and saving money on the bureaucratic cost of verifying
their emissions cuts. "They're managing supply for better times," said Emmanuel
Fages, a carbon analyst at Societe Generale/orbeo. "If they estimate that CER prices will increase and if
they're not pressed for cash they prefer waiting to avoid the
cost of verification associated with issuing the CER." Project developers steer projects such as wind farms from
inception through to producing emissions cuts, when a U.N. panel
called the executive board issues them CERs. Developers in the past have often complained about the cost
and slow pace of offset project approvals by the U.N. panel. "Sellers, which often say that there's a squeeze due to the
slow issuance pace by the CDM's executive board, could now
themselves to some extent be restricting the supply." December 2009 CERs were trading at 12.5 euros at 1000 GMT on
Monday, up 18 percent from a two-month low of 10.61 euros on
June 15. Fages estimated they would trade near 13 euros ($18.52) by
year's end, rising to 14 euros by next summer and to 15 by the
end of 2010. "These held-back volumes will be sold when sellers are
satisfied with the market price, probably before the end of the
year. If this analysis is right, we should see a quite
backloaded issuance in 2009, with H2 volumes being significantly
higher than H1 ones," he said. "SUPPLY SHOULD NOT BE AN ISSUE" One carbon trader who requested anonymity said an absence of
sellers could explain a drop in volume and the backwardation in
the curve. "Backwardation" is the situation where a commodity costs
more today than in the future, hinting at a shortage of supply.
Normally prices rise into the future in a so-called contango. The rest of the CER curve is in contango, with Dec-12 CERs
trading some 30 cents above the Dec-10s. The volume of issued CERs is rising, suggesting the
backwardation was more attributed to the selling behaviour of
project developers than a bureaucratic backlog, the trader said. "There have been more CERs issued this year than last, and
less used for 2008 compliance than expected, so supply should
not be an issue." The U.N. panel issued nearly 40 million CERs in the first
six months of 2009, 15 percent up from the second half of 2008
and 44 percent higher than the same period last year. The biggest project developers are not under pressure to
sell offsets to raise funds because of strong cash balances and
profit margins as a result of past hedging policy. For example, EcoSecurities, the world's largest developer,
said in May it had an average forward sales price of 13.60 euros
versus an average cost of 8.12 euros on its pre-2012 CER
portfolio, as well as a cash balance of 53 million euros. Dec-09 CER volumes traded on the European Climate Exchange
have dropped over the past few months, falling from a daily
average of 1.76 million tonnes in April to 0.7 million in July. The fall reflects an economic downturn whereby demand for
emissions permits has fallen alongside manufacturing output. Companies participating in the European Union's Emissions
Trading Scheme used 81.7 million CERs to help them comply with
carbon emissions limits last year, well below the average annual
allowed quota of around 130 million from 2008-2020.
(Editing by Gerard Wynn and Anthony Barker)