Carbon Frenzy Gripping Investors Has Nordic Banks Cashing In
(Bloomberg) -- With the green transition in full swing and carbon prices on a tear, Nordic banks are gearing up for a surge in demand for trading.
Futures in Europe’s emissions market jumped by a third last year. They’ve already soared almost as much so far in 2021 as hedge funds and other financial investors speculate the gains will continue because of tightening climate policies from Brussels and national governments.
Clients trading emission permits at SEB AB tripled in the past four to five years, making the securities among its most widely used commodity products, said Maximilian Brodin, the Swedish bank’s head of commodities. DNB ASA in Oslo said it has seen a “significant increase” in focus on risk management among its clients as prices jumped.
Europe’s 16-year-old carbon market, the world’s biggest, differs from other commodities in that the supply of permits will drop over time and make it costlier to pollute. Among the more than 11,000 installations covered are smelters, paper mills, chemical plants and other energy-intensive users that keep the Nordic economies humming. Shipping, another major industry in the region, could be next.
“I wouldn’t be surprised if we’ll see increased presence by the banks, also considering the increasing importance of environmental markets and the suggested inclusion of the shipping sector,” said Sead Keric, managing director for the Nordic unit of STX Commodities, which trades both on its own account and for clients.
So far, only a few Nordic financial institutions are active. Nordea Bank Abp and Danske Bank A/S, said they’re not trading carbon. Despite Brexit, London is the market’s center where larger peers from Morgan Stanley to Goldman Sachs Group Inc. buy and sell the permits. It’s also the location for several of the hedge funds that are bullish on prices, including Andurand Capital Management.
The growing interest in green markets “will play an ever more important role for us going forward,” SEB’s Brodin said. “In the past few years, we’ve seen growth in mainly emissions, base metals and other metals linked to the energy transition.”
The bank has five traders across different commodities, where three have deeper expertise on energy and two on metals. They’re all active in carbon, said Brodin. SEB is offering its clients access to more than 150 different commodities, he said.
It also recently started publishing regular research and plans to hire a junior research analyst for its Oslo office.
BNP Paribas SA’s Nordic unit also said it’s offering carbon trading to customers in the region. “We have a long-standing trading relationship with a number of clients in the region including utilities, industrials and institutional clients,” the Paris-based bank said in an email.
The fast increase in carbon prices triggered a fresh debate on whether the European Union should analyze the impact of speculation. Danish Climate Minister Dan Jorgensen said earlier this month that policy makers should consider that when the carbon market is reformed later this year. Still, he stressed that high prices are beneficial for the green transition.
And analysts say prices have further to go.
Bjarne Schieldrop, SEB’s Oslo-based chief commodity analyst, predicts a price of 50 euros ($59.45) per metric ton of carbon emissions in the next few months. He started publishing regular research on the market this year. Permits reached another record of 43.77 euros on Thursday. They traded little changed at 41.98 euros on Monday.
The price is expected to rise as high as 110 euros by the fourth quarter because of a permit shortage, according to Lawson Steele, a utilities analyst at Berenberg. BloombergNEF said in December it anticipates 80 euros by 2024, depending on what policies emerge from Brussels.
The EU will unveil a plan in June to include at least intra-EU shipping in the market, with details to be hammered out in negotiations that may take about two years. One way of expanding the market would be to create separate allowances for shipping.
The inclusion of shipping, along with the reduction of free allowances, will only increase the interest among clients, said Andre Rorheim, a commodity dealer at DNB Markets who leads a carbon team with help from staff in Oslo and London.
“Going forward, we expect our carbon product offering to clients to expand,” he said.
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