Weak economic output suggests the carbon price will remain low
Last month, power demand fell well below expected levels, suggesting a weak, or weakening, economy and the carbon price fell as a result. Next month, we forecast the carbon price will be stable at these lower levels as power demand will show only a slight recovery, and wind output is expected to improve towards average levels, with minimal gas-to-coal switching anticipated. Power demand poses a downside risk to the carbon price if industrial output doesn’t recover, or indeed weakens further. Wind poses an upside risk if it remains well below average levels for the whole month.
Power demand dropped in June and will recover only slightly in July
European power demand dropped m/m in June and was well below the historical average for the month. This suggests the economy is struggling and industrial output was much lower than expected, which is reflected in weak manufacturing PMIs for June. Average summer temperatures are expected next month, so this will not add to power demand. The economy and industrial output are expected to make a small recovery in July, so power demand is expected to recover slightly. However, a downside risk to the carbon price remains if industrial output doesn’t pick up and power demand remains well below average levels.
Renewables will have little differential impact on EUA demand in July
Wind output dropped m/m in June and was below average levels. This had an upwards impact on EUA demand (n.b. which was more than offset by much lower power demand overall). Over the next ten days, windspeeds are forecast to remain at below average levels, but are expected to recover thereafter.
Wind will have minimal impact on EUA demand in July, but poses an upside risk if output stays below average levels for the whole month. Hydro power increased m/m in June, but as the forecast is for average precipitation in July, hydro is not expected to pick up further.
Solar power performed slightly above average in June. However, the impact on EUA demand was minimal. Solar output will continue to be at average levels in July and in our base case, renewables will have minimal impact on the carbon price in the upcoming month, but wind poses an upside risk.
Gas-to-coal switching has concluded in June and will not continue into July
There was some gas-to-coal switching in June as gas use in Germany – which sat at the top of the historical relationship of gas use versus gas price – fell back into the relationship, i.e. within a more normal range. There were also some disruptions to LNG supply as a gas pipeline cracked in Norway. Over the next month, gas and coal prices are expected to be stable, so we expect minimal gas-to-coal switching. We believe there is little risk of gas prices rising over the next month due to supply disruptions, as supply in the system is sufficient to deal with shorter-term issues.
Little change in the outlook for European nuclear power
European nuclear output increased m/m, but French nuclear output decreased m/m. It faced some struggles in June as workers went on strike for a day and there were some forced shutdowns due to low power demand. Over the next month, we expect minimal change to nuclear output, so there should little differential impact on the carbon price in July. We believe there is no significant risk from high summer temperatures causing reactor shutdowns (due to rising water temperatures and the inability to cool reactors) as temperatures are expected to be average in July.
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 sales@crugroup.com, we’d be happy to discuss this with you.
About The Authors
Lottie Zayed, Sustainability Analyst
Lottie joined CRU Sustainability in 2023. She has 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.
One world, two trading blocs
The Balkanisation of global trade is under way
Geopolitical strife manifested in the United States-China trade tensions, aggravated by the wars in Ukraine and Israel, have been fundamental in shaping trade patterns. For instance, the share of US goods imported from China peaked at 22% in 2018 and has been declining consistently since then, with the European Union, Canada and Mexico slowly taking up China's share (Figure 1, left-hand side).
A trend is emerging that is reflected in trading patterns – the world is dividing into two blocs. In the past, formal trade agreements between countries or blocs played an important role in the gradual reduction of tariffs and other trade restrictions. Given the lack of progress in signing new trade agreements, both tariff and non-tariff (behind the border) measures for national security reasons (e.g. energy or technology) are now increasingly determining trade patterns.
The role of geopolitics in driving trade flows becomes clear when we analyze trade between countries based on their geopolitical closeness*. After remaining relatively stable between 2010–2020, the difference in trade between countries that are geopolitically close and those that are distant has almost doubled from 2020 to date (Figure 1, right-hand side). More than half of this rise is driven by trade in mineral products deemed strategic to national interests in the US, China and the EU, such as fossil fuels and (increasingly) renewable energy (Figure 2, left-hand side).
On one hand, EU imports of fossil fuels (oil, coal and gas) and other raw materials from Russia have plunged in favor of geopolitically aligned countries, particularly the US and Canada. Japan and South Korea (defined as being close to Europe and the US geopolitically) have also reduced their Russian oil exposure.
On the other hand, US imports of manufactured goods, steel, and aluminum from China have also declined. Recently increased levies by the US on Chinese products relevant to the battery and electric vehicles supply chain, or the EU’s tariffs on electric vehicles from China announced in June, underscore clean technologies for the energy transition as another source of trade tension between opposite blocs. For their part, trade in minerals, base metals, machinery and equipment has increased between China and Russia.
As the economic rents derived from natural resources have averaged almost 3% of global GDP for the past decade (Figure 2, right-hand side), pronounced trade shifts pose significant implications for national economies and commodity markets. How individual countries fare under this emerging geopolitical realignment will depend on several factors – from their relative endowment of natural resources and trade openness to technological capabilities – a topic we will explore in the second part of this note.
About The Author
Cristobal Arias, Senior Cost Analyst
Cristobal Arias has over 8 years experience in the macroeconomic research industry. He is a Senior Cost Analyst at CRU, leading its Cost Macro Service and incorporating climate-related themes on commodities traded in the freight markets.
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