Post on 19-Jan-2016
Carbon Impacts – Octobre 2006
Carbon Impacts What Really Matters ?
Carbon Impacts – Octobre 2006
Expert in European Equities
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Cheuvreux is the European Brokerage and Research arm of the Crédit Agricole S.A. Group (AA rating)
A complementary geographical fit: - Cheuvreux for European stocks - CLSA for Asian stocks - Calyon Securities for US stocks
Carbon Impacts – Octobre 2006
TOP 5
in Continental Europe
Number of staff and rankings by stocks’ country of origin (No.1 in France = No. 1 in Europe for French equities)* Greenwich Associates, 2006 , European investors (UK + Continental Europe) - ** Institutional Investor, 2006 - *** Thomson Extel Survey, 2006 & Greenwich Associates, 2006 , European investors
Front-ranking European Research
N°1 France **
35 analysts 50 sales & sales traders 88% of market capitalisation
N°1 Italy *
7 analysts 12 sales & sales traders 94% of market capitalisation
N°3 Netherlands *
8 analysts 10 sales & sales traders 85% of market capitalisation
N°3 Switzerland *
7 analysts 8 sales & sales traders 95% of market capitalisation
N°1 Spain *
8 analysts 9 sales & sales traders 99% of market capitalisation
N°3 Germany *
14 analysts 15 sales & sales traders 82% of market capitalisation
N°4 Nordic countries * * *
12 analysts 12 sales & sales traders 75% of market capitalisation
Carbon Impacts – Octobre 2006
Carbon: an SRI issue ?
Responsibility Analysis towards Carbon ManagementCheuvreux Carbon Research provides SRI Investors with a specific Carbon related approach to discriminate the Responsibility of companies towards carbon emissions management and strategy.
Risk Analysis towards Carbon ConstraintsOur analysis aims at measuring the financial impact of the carbon constraints on European companies through the implementation of the Kyoto mechanisms such as the EU-ETS. .
Sustainability ResearchOur Carbon Research enhance our capacity to identify and value European companies, typically small & mid caps that are developing carbon related technologies or that benefit from carbon credits.
Carbon Impacts – Octobre 2006
Exhaustive Research on Carbon
Carbon Research
- 1 dedicated carbon analyst
- 10 Reports published in 2006
- Carbon Focus: understanding mechanisms and drivers
- Carbon Impacts: a series of 7 reports: evaluating the impact of the carbon constraints 5 regulated sectors + Chemicals + Airlines
- Carbon Flash : Balanced analysis on carbon news flow
Monitoring major events (regulations…)
Companies updates
Carbon Expertise- Monitoring emissions and NAPs
- Evaluating CDMs credits
- Political trends (lobbies, NGOs, Brussels…)
Carbon Impact On Utilities
Carbon Impact On Ciment Sector
Carbon Impact On Pulp & Paper
Carbon Impact On Steel sector
Carbon Impact on Oil & Gaz Sector
Carbon Impact on Chemicals
Carbon Focus
Carbon Impact On Utilities
Carbon Impact On Ciment Sector
Carbon Impact On Pulp & Paper
Carbon Impact On Steel sector
Carbon Impact on Oil & Gaz Sector
Carbon Impact on Chemicals
Carbon Focus
Carbon Impacts – Octobre 2006
Carbon Market – Recent Events
Recent drop in carbon price raises up
uncertainties
Pilote phase (2005-07) is behind us…
Second phase prices wait a signal from the European
Commission on NAPs submitted by Member States
Decorrelation of prices fwd 06-07and fwd 2008 is expected
0
5
10
15
20
25
30
02/05/2006 22/05/2006 14/06/2006 08/07/2006 29/07/2006 22/08/2006 16/09/2006
Forward 08 Forward 06
Sept, 18th: sharp drop in phase 1 carbon contracts
Carbon Impacts – Octobre 2006
NAP 1: Over-allocations !
First true-up revealed huge over-allocation
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
Pola
nd
Germ
any
Fra
nce
Cze
ch R
epublic
Fin
land
Denm
ark
Lithuania
Neth
erlands
Slo
vakia
Hungary
Esto
nia
Sw
eden
Belg
ium
Latv
ia
Port
ugal
Slo
venia
Italy
Luxem
bourg
Gre
ece
Cypru
s
Malta
Austr
ia
Irela
nd
Spain
UK
Tota
l
Position 2005
Carbon Impacts – Octobre 2006
Capping with regards to Fundamentals
2005: emissions around 30 Mt below the last 10 year average emissions
Standard deviation : 32 Mt
2005 surplus will not be resorbed
Caps must take into account the impact of variation of fundamentals
Carbon Impacts – Octobre 2006
Lobbying Pressures
A Common Concern: Impact on electricity prices
Lobbying game: electro-intensive industries vs. electricity producers
Stakeholders’ equilibrium price: EUR 12-18/tCO2
Carbon Impacts – Octobre 2006
Market Bias: Political Uncertainties
Political announcements create strong uncertainties German and Polish proposals to limit sales of surpluses: ex-
post adjustements About 50% of surpluses are in these two countries
Any political decision could bring a new deal
A bias for carbon markets that causes wait-and-see policies of many actors
Carbon Impacts – Octobre 2006
NAP2: Nothing is Set
Contrasted prospects French NAP seems far too lax
… whereas U.K. holds emissions tight
A lack of transparency Submission of Spanish and Italian NAP delayed: what
shortage?
What about Central and Eastern Europe (hot air) ?
Modification of the scope (# installations), new entrants…
European Commission: judgement on submitted NAP expected in November
Carbon Impacts – Octobre 2006
NAP 2 and Kyoto Targets
-144.14
0.86
1.63
3.07
4.56
7.71
9.10
10.78
10.98
12.25
13.16
18.80
22.94
93.01
97.86
16.69
-5.20
-31.79
-26.56
-5.38-12.62
-15.32
-18.71
-30.31
-200.00 -150.00 -100.00 -50.00 0.00 50.00 100.00 150.00
Poland
Hungary
Czech Republic
Lithuania
Estonia
Slovakia
Latvia
France
Sweden
Greece
Slovenia
UK
Luxembourg
Ireland
Portugal
Germany
Finland
Denmark
Belgium
Netherlands
Austria
Italy
Spain
Total
countries: off the Kyoto target
Countries already have met their Kyoto targets
Carbon Impacts – Octobre 2006
Link between Kyoto and the EU ETS
ETS Covered Sectors
? TOP-DOWN APPROACH
National Kyoto target
Sector-level
Households Transport Agriculture
Activity-level
Electric Power Oil & Gas Cement Paper & Pulp
Company-level
Company A Company B Company C
BOTTOM-UP APPROACH
Steel
Member State National Assigned Allowance (tCO2/year)
Non-covered Industries
Government
Carbon Impacts – Octobre 2006
The Kyoto Game: Market Actors
Sellers Buyers
-26.3
-32.7
-40.5-62.1
-93.7
-201.0
-209.9-318.8
-26.0
-25.3
-19.5-17.7
-16.1
-14.4
-13.8-12.6
-8.4
-7.8
-3.5
-0.1
-0.1-0.8
-0.9
-350 -300 -250 -200 -150 -100 -50 0
Monaco
Liechtenstein
Luxembourg
BulgariaSlovenia
Croatia
Greece
NorwayNew Zealand
Ireland
Portugal
AustriaFinland
Denmark
NetherlandsFrance
Belgium
Romania
ItalySpain
J apan
Canada
European Union 15
Carbon Impacts – Octobre 2006
Kyoto: CDM markets
Only 13.3m CER emitted…
… but lots of projects in pipelines 1112 projects submitted: 1.287 b. CER
CER price is based on EUA price (fwd 08)
ETS sectors
CO2 emissions
JI/CDM around 45%
Non-ETS sectors
all other gases
National Kyoto target Allowable emissions= Sector distribution Co2
Allowable quotas
Carbon Impacts – Octobre 2006
Risk vs. Responsibility Analysis
Our responsibility analysis assesses internal efforts to control ghg emissions Evolution of groups’ carbon factor (tCO2/unit
produced)
But other external parameters make risk analysis results different Country risk (Spain, Italy, U.K.) prevails: cap
stringency
Carbon Impacts – Octobre 2006
Carbon Impact on Utilities
Carbon: a new market variable for electricity producers
Redefines dispatching decisions: “Clean” dark/spark spreads
Power markets now integrate the "carbon cost" in wholesale prices
Average cost-pass-through in Europe: 0.55x EUA price
Windfall profits largely compensate compliance costs
Carbon Impacts – Octobre 2006
Electricity: Carbon Impact on Wholesale Prices
Marginal cost of EUA is now included in electricity prices
With market specificitieso Price regulation
o Fuel at the margin
Carbon Impacts – Octobre 2006
Correlated Carbon and Power Prices
Strong correlation on deregulated markets
U.K.y = 1.5184x + 23.962
R2 = 0.9036
30.00
35.00
40.00
45.00
50.00
55.00
60.00
65.00
70.00
75.00
10 15 20 25 30
EUA price EUR/tCO2
GB
P/M
Wh
Forw ard price baseload contract Linear (Forw ard price baseload contract)
Germanyy = 0.5498x + 29.851
R2 = 0.6958
303234363840
4244464850
10 15 20 25 30
EUA price EUR/tCO2 E
UR
/MW
h
Forw ard price baseload contract Linear (Forw ard price baseload contract)
Carbon Impacts – Octobre 2006
Utilities : Unequal Windfall Profits
Unequal carbon impact by player Depends on
the allocated emissions caps, the average carbon intensity of group installations, and the level of price regulation on the markets in
which they operate
Carbon windfall represents 0.5-3.0% of sales for most of the players Top 3: Fortum, RWE, E.On Bottom 3: Union Fenosa, Enel, EDP
Carbon Impacts – Octobre 2006
Electricity Producers: Positive Financial Impact
Estimated windfall profits in 2005, as a % of EBITDA
Carbon Impacts – Octobre 2006
Utilities: Responsibillty Analysis
Carbon Impacts – Octobre 2006
Cement Sector: Outlook Carbon constraint is theoretically a threat
Highest carbon intensity: 750kgCO2/ t cement Generous over-allocation in Phase I: +7.2%
o Significant disparities by country
High exposure to hike in electricity prices Electricity represents 14% of costs Estimated adverse effect: -0.9% of sales Though, local markets allow cost pass-through
Overall neutral effect on margins With surplus sold at EUR12.5 per tCO2 And before rise in cement prices
Carbon Impacts – Octobre 2006
Cement players: Carbon
Constraint Seven groups analysed through:
Location of production sites Control of electricity consumption Exposure to regions covered by the EU ETS
Top 3: Buzzi Unicem, Lafarge, Holcim Large over-allocations in Central Europe
Bottom 3: Italcementi, Cementos Portland, Ciments Français High exposure to stringent caps
Carbon Impacts – Octobre 2006
Cement Stocks under the Carbon Constraint
Carbon Impacts – Octobre 2006
Cement & Climate Change: Responsible Players
Carbon Impacts – Octobre 2006
Oil &Gas : Refining Industry A Regulatory Paradox…
Low sulphur specifications boost CO2 emissions
… Justifies general over-allocation for phase I (except Spain)
Self-produced electricity: +/- 50% Hedge against cost pass-through of Utilities
Carbon Impacts – Octobre 2006
Oil &Gas : Company Focus
South: the place not to be Tightest cap constraints (Italy and Spain) More CO2 intensive processes to reach sulphur specifications
Financial exposure: part of business in EU Neste Oil, Erg, Cepsa: 100% of refinery production in EU
Top 3: Neste Oil, Total, Shell
Bottom 3: ERG, Cepsa, Repsol YPF
Carbon Impacts – Octobre 2006
Oil&Gas: Risk Analysis
Company exposure to stringent emission caps