Lookin at Quotas From Every Angle

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Talk given by Marie Luchet, SRI Analyst - CM CIC Securities - France.

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Lookin at Quotas From Every Angle

  1. 1. Looking at quotas from every angle A broker research on climate change risk and opportunity Grégory Schneider-Manoury - 33 1 45 96 79 23 - E-mail : [email_address] Agnès Blazy - 33 1 45 96 77 61 - E-mail : blazyag @cmcics.com Marie Luchet - 33 1 45 96 78 75 - E-mail : luchetma @cmcics.com TBLI : 9th November 2006
  2. 2. <ul><li>EU Allowances on the CO2 market </li></ul><ul><li>EU Allowances in companies balance sheet </li></ul>
  3. 3. EU CO2 Allowances trend from October 2005 to October 2006 € Source: Bloomberg Crash on the CO2 market April 06: drop of 50 % from € 31 to € 13,70 (April 05 level)
  4. 4. EU CO2 Allowances trend from October 2005 to October 2006 € Source: Bloomberg Crash on the CO2 market <ul><li>April 06: drop of 50 % </li></ul><ul><li>from € 31 to € 13,70 </li></ul><ul><li>(April 05 level) </li></ul><ul><li>Why ? </li></ul><ul><li>Publication by 6 Member States </li></ul><ul><li>of 2005 CO2 emissions </li></ul><ul><li>well below allowances </li></ul><ul><li>OVER ALLOCATION of EUAs </li></ul>
  5. 5. Long or short in EUAs ? <ul><li>ALLOCATION / 2005 VERIFIED EMISSIONS … BY COUNTRY </li></ul>- 5 % - 15 % Spain United Kingdom Not enough ? + 14 % + 26 % + 29 % + 16 % Etc. France Finland Denmark Rep. Tchèque Too many ! TOTAL : + 67 Mtonnes
  6. 6. Long or short in EUAs ? <ul><li>ALLOCATION / 2005 VERIFIED EMISSIONS … BY SECTOR IN FRANCE </li></ul>
  7. 7. CO2 price depending on EUA scarcity => Strong impact of political decisions and regulations on CO2 price => 2006/2007 EUA balance still unknown <ul><li>Extreme climatic conditions lead to high use of energy </li></ul><ul><li>Energy production mix </li></ul><ul><li>Price trends of fossil energies </li></ul><ul><li>Increasing CO2 emissions from companies </li></ul><ul><li>Economic growth: + 2 % per year of CO2 emissions </li></ul>DEMAND <ul><li>Amount of EUAs assigned by member states to their industries: </li></ul><ul><li>=> Will 2008-2012 NAPs be less generous than phase 1 NAPs ? </li></ul><ul><li>Technological improvements by companies leading to a reduction of CO2 emissions </li></ul><ul><li>Emissions credits resulting from Kyoto project mechanisms (Clean Development Mechanisms & Joint Implementation) </li></ul>SUPPLY
  8. 8. Carbon trading markets <ul><li>Spot or Future (80% of the market) contracts </li></ul><ul><li>Difference between spot & futures price = up to 4 € </li></ul>10.10.2006 EUA spot price = 12.45 € 1.8 Mtonnes traded on Powernext in sept.06 10.10.2006 EUA futures price for year 2008 = 16.00 € Source: Bloomberg
  9. 9. <ul><li>EU Allowances on the CO2 market </li></ul><ul><li>EU Allowances in companies balance sheet </li></ul>
  10. 10. CAC40 companies were generously allocated by the government: Main target of our work <ul><li>17 of them were granted by Allowances allocation (49% CAC’s Market cap) </li></ul><ul><ul><ul><li>10 groups met criteria : received allowances & answered the Carbone Disclosure Project 4 survey </li></ul></ul></ul><ul><ul><ul><li>23 did not benefit of allowances, of which 16 banks & services </li></ul></ul></ul><ul><ul><ul><li>7 benefit from allowances but were not transparent </li></ul></ul></ul>Our universe  9 stocks - STM & Vinci not retained - Rhodia added STM : 1 site EU-ETS (16 sites globally), for 0.013 M tonnes CO2 allocated for Crolles-France. Vinci : 2 site EU-ETS , for 0.164 M Tonnes, had over allocation in 2005.
  11. 11. <ul><li>French allowances more than generous </li></ul><ul><li>Allocations exceeded needs by 6% for these 9 stocks </li></ul><ul><ul><ul><li>PSA, Renault  more than 40% </li></ul></ul></ul><ul><ul><ul><li>Total, Suez  excess of 2 to 15% </li></ul></ul></ul><ul><ul><ul><li>Lafarge, EDF  company whose needs were not met </li></ul></ul></ul>CAC40 companies were generously allocated by the government: How big was their allocation?
  12. 12. Earth in the balance sheet Assumptions: Thin balance sheet Impact <ul><li>Balance sheet impact? If IASB recommends that allowances should be accounted at « fair value » </li></ul><ul><li>All groups account for the allowances … but at ZERO value! </li></ul><ul><li>In intangible assets and counterpart as subsidies </li></ul><ul><li>Provisions to be made in case of quota shortage at year’s end </li></ul>
  13. 13. Earth in the balance sheet Assumptions: big potential P&L Impact <ul><li>Impact on margins if Allowances were bought </li></ul><ul><li>Impact on Ebit margins if all allowances required were bought at 13€ or 30€ </li></ul><ul><li>Impact on Pre tax profit impact if companies have to buy all allowances at 13€ </li></ul>Pre tax Profit impact with &quot;cash out&quot; to purchase all allowances
  14. 14. Earth in the balance sheet Assumptions: Fair Value of the over allocation <ul><li>Allowances : do these free things have a price ? </li></ul>at 13€ Cash out
  15. 15. Conclusion <ul><li>1- The CO2 allowance has a financial worth for companies </li></ul><ul><li>2- The CO2 quota has and will have a clear financial value for investors </li></ul><ul><li> It is counterproductive that the biggest CO2 contributors get the highest amount of quotas. </li></ul><ul><ul><li> </li></ul></ul><ul><ul><li>THANK YOU FOR YOUR ATTENTION </li></ul></ul>
  16. 16. <ul><li>Identification of trends not yet integrated in the stock price </li></ul><ul><ul><li>The number before the number </li></ul></ul><ul><ul><li>The number against the number </li></ul></ul><ul><li>Identification and measurement of financial impact </li></ul><ul><ul><li>2 consequences : operational performance or long run performance </li></ul></ul><ul><ul><li>3 impacts: sales, margin, assets </li></ul></ul><ul><li>Dissociation of moral and economic issues </li></ul><ul><ul><li>Awareness of the moral grounds of decision </li></ul></ul><ul><ul><li>Focus on financial impact </li></ul></ul>What a broker looks for in SRI analysis
  17. 17. The ESN offer in SRI analysis <ul><li>An integrated methodology: </li></ul><ul><li>Financial framing of environmental and social issues </li></ul><ul><li>700 European companies covered </li></ul><ul><li>10 European brokers </li></ul><ul><li>8 Sustainable Investment analysts </li></ul>
  18. 18. The ESN offer in extra-financial analysis Banca Akros S.p.A. Viale Eginardo, 29 20149 Milano Italy Phone: +39 02 43 444 389 Fax: +39 02 43 444 302 Equinet Institutional Services Gräfstraße 97 60487 Frankfurt am Main Germany Tel: +49 69 58997 400 Fax:+49 69 58997 299 Bank Degroof Rue de I’Industrie 44 1040 Brussels Belgium Phone: +32 2 287 91 16 Fax: +32 2 233 99 97 Caja Madrid Bolsa S.V.B. Serrano, 39 28001 Madrid Spain Phone: +34 91 436 7813 Fax: +34 91 577 3770 Caixa Banco de Investimento Rua Barata Salgueiro, 33-5 1250-042 Lisboa Portugal Phone: +351 21 389 68 00 Fax: +351 21 389 68 98 Egnatia Finance S.A. 8 Dragatsaniou Str. 105 59 Athens Greece Phone: +302 10 32 79 200 Fax: +302 10 32 48 694 CM - CIC Securities Avenue de Provence 6 75441 Paris Cedex 09 France Phone: +33 1 4596 7700 Fax: +33 1 4596 7788 F. van Lanschot Bankiers N.V. Leonardo da Vinciplein 60 5223 DR ‘s-Hertogenbosch Netherlands Phone: +31 73 548 8724 Fax: +31 73 548 8577 NCB Stockbrokers Ltd. 3 George Dock, Dublin 1 Ireland Phone: +353 1 611 5611 Fax: +353 1 611 5781 Mandatum Stockbrokers Ltd. Unioninkatu 22, P.O. Box 66, 00131 Helsinki Finland Phone: +358 10 236 10 Fax: +358 10 236 4755
  19. 19. Questions / Answers <ul><li>Agnès Blazy </li></ul><ul><li>[email_address] </li></ul><ul><li>Marie Luchet </li></ul><ul><li>[email_address] </li></ul><ul><li>Gregory Schneider-Maunoury </li></ul><ul><li>[email_address] </li></ul>

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