Commerzbank Commodities Radar January 2022

Commodities radar at a glance

Source: Bloomberg data

EU emissions trading: 2022 – new records again and again?

2021 once again saw new record prices in EU emissions trading. In mid-December, the allowance to emit one tonne of carbon reached 90 euros – almost three times the level at the beginning of the year. Prices have now been rising since 2017, driven by the EU’s ambitious climate policy, which resulted in the ‘Fit for 55’ climate package announced in the middle of the year. On top of this, last year the trend was further reinforced by tailwinds provided by the recovery of the EU economy. With an increase of 20 percent in the first three quarters, the steel industry achieved the strongest production increase amongst the sectors covered by the EU Emission Trading System (EU ETS). On top of this, soaring gas prices further boosted the cost of emission allowances, giving coal – as an emissions-intensive energy source – a modest renaissance. For how long can this trend continue?

It is clear that the EU Commission intends to continue pursuing its ambitious climate policy. Within the next two years, the ‘Fit for 55’ climate package must be translated into concrete legislative proposals. Both the European Council – the representation of the member states – and the European Parliament will have to be involved in this process. In this context, setting a reduction of the emissions cap by 61 percent until 2030 compared to 2005 (previously: 43 percent) seems to be a somewhat simpler task; the inclusion of new sectors and implementation of the Carbon Border Adjustment Mechanism (CBAM) present more demanding challenges.

CO2 price in EUR per tonne

Hence, there is a lot of work to be done on the policy side, whilst the upwind from the cyclical side should abate EU emissions trading. The development of gas prices could even provide headwinds, should they drop this year. Due to the recent sharp increase in carbon prices, coal would then rapidly lose attractiveness as an energy source in power generation. Moreover, the total number of allowances in circulation (TNACs) will have fallen at the end of the year 2021 in view of the scarcity of emission allowances (high demand, while allowances auctioned remain low). As a consequence, fewer allowances will have to be transferred to the Market Stability Reserve (MSR) from September 2022, so that auction volumes might even increase again.

Investor behaviour will also be interesting to observe. Considering their net long positions, investment funds are positioned on the optimistic side. Critical voices had already been raised in autumn, given the price increase. However, for the time being, the European Securities and Market Supervision (ESMA) did not find any indications of market manipulation. In spring, another report – which is highly anticipated in view of the recent price rally – is scheduled to follow.

Considering the (short-term) burdens, we believe that price level is excessive, even though supply is set to be limited over a medium-term horizon. For 2022, we therefore expect a correction and a subsequent breather in EU emissions trading: in the second half of the year, the price should stabilise at 75 euros per tonne, before rising again over the medium term.

Source: Commerzbank Research, as of: 06.01.2022

The year’s price highs and lows at a glance

in EUR per unit in EUR per unit
Precious metals Agricultural products
Gold per troy ounce High
Low
1,649.86
1,415.30
Cocoa per mt High
Low
2,205.52
1,852.86
Palladium per troy ounce High
Low
2,483.71
1,422.35
Coffee per pound High
Low
2.22
0.98
Platinum per troy ounce High
Low
1,076.02
780.06
Cotton per pound High
Low
1.03
0.64
Silver per troy ounce High
Low
24.07
18.56
Maize per mt High
Low
320.00
200.00
Sugar per pound High
Low
0.18
0.12
Wheat per mt High
Low
311.50
197.25
Industrial metals Energy
Aluminium per mt High
Low
2,715.74
1,617.69
Brent Crude Oil per barrel
High
Low
74.57
41.70
Copper per mt
High
Low
9,722.51
6,401.70
Coal per mt
High
Low
236.54
52.24
Iron Ore per mt High
Low
188.41
75.85
Diesel per mt High
Low
642.75
338.77
Lead per mt High
Low
2,131.81
1,588.01
Electricity per MWh
High
Low
269.64
42.35
Nickel per mt High
Low
18,788.85
13,291.15
EUA per tonne High
Low
89.41
31.84
Tin per mt High
Low
36,725.62
17,177.61
Gasoil per mt High
Low
644.03
342.57
Zinc per mt High
Low
3,317.38
2,107.24
Jet Fuel per mt High
Low
671.01
351.43

Source: Bloomberg data, period: 01/01/2021 - 12/31/2021

From the perspective of German companies, the listed commodities are generally priced in a foreign currency. For this reason, currency risks need to be considered in addition to commodity price risks.

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