Carbon Impacts   What   Really   Matters   ?
Expert   in European Equities New York Zurich Milan Madrid Paris Amsterdam Frankfurt Stockholm London Research headcount C...
Front-ranking European Research TOP 5  in Continental Europe Number of staff and rankings by stocks’ country of origin  (N...
Carbon: an SRI issue ?    Responsibility Analysis towards Carbon Management Cheuvreux Carbon Research provides SRI Invest...
Exhaustive Research on Carbon <ul><li>   Carbon Research </li></ul><ul><ul><li>1 dedicated carbon analyst  </li></ul></ul...
Carbon Market – Recent Events <ul><li>Recent drop in carbon price raises up uncertainties </li></ul><ul><ul><li>Pilote pha...
NAP 1: Over-allocations ! <ul><li>First true-up revealed huge over-allocation </li></ul>
Capping with regards to Fundamentals <ul><li>2005: emissions around 30 Mt below the last 10 year average emissions </li></...
Lobbying Pressures <ul><li>A Common Concern: Impact on electricity prices </li></ul><ul><li>Lobbying game: electro-intensi...
Market Bias: Political Uncertainties <ul><li>Political announcements create strong uncertainties </li></ul><ul><ul><li>Ger...
NAP2: Nothing is Set <ul><li>Contrasted prospects </li></ul><ul><ul><li>French NAP seems far too lax </li></ul></ul><ul><u...
NAP 2 and Kyoto Targets
Link between Kyoto and the EU ETS ETS Covered Sectors ? TOP-DOWN APPROACH National Kyoto target Sector-level Households Tr...
The Kyoto Game: Market Actors Sellers Buyers
Kyoto: CDM markets <ul><li>Only 13.3m CER emitted… </li></ul><ul><li>…  but lots of projects in pipelines </li></ul><ul><u...
Risk vs. Responsibility Analysis <ul><li>Our responsibility analysis assesses internal efforts to control ghg emissions </...
Carbon Impact on Utilities <ul><li>   Carbon:  a new market variable for electricity producers </li></ul><ul><ul><li>Rede...
Electricity: Carbon Impact on Wholesale Prices <ul><li>Marginal cost of EUA is now included in electricity prices </li></u...
Correlated Carbon and Power Prices <ul><li>Strong correlation on deregulated markets </li></ul>
Utilities : Unequal Windfall Profits <ul><li>   Unequal carbon impact by player </li></ul><ul><ul><li>Depends on </li></u...
Electricity Producers: Positive Financial Impact Estimated windfall profits in 2005, as a % of EBITDA
Utilities: Responsibillty Analysis
Cement Sector: Outlook <ul><li>   Carbon constraint is theoretically a threat </li></ul><ul><ul><li>Highest carbon intens...
Cement players: Carbon Constraint   <ul><li>   Seven groups analysed through: </li></ul><ul><ul><li>Location of productio...
Cement Stocks under the Carbon Constraint
Cement & Climate Change: Responsible Players
Oil &Gas : Refining Industry <ul><li>   A Regulatory Paradox… </li></ul><ul><ul><li>Low sulphur specifications boost CO2 ...
Oil &Gas :  Company Focus <ul><li>   South: the place not to be </li></ul><ul><ul><li>Tightest cap constraints (Italy and...
Oil&Gas: Risk Analysis Company exposure to stringent emission caps
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Top-down and Bottom-up SRI approaches in Sell Side financial research

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Laurent Poinsot, Head Of Research - Calyon Cheuvreux - France

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Top-down and Bottom-up SRI approaches in Sell Side financial research

  1. 1. Carbon Impacts What Really Matters ?
  2. 2. Expert in European Equities New York Zurich Milan Madrid Paris Amsterdam Frankfurt Stockholm London Research headcount Cheuvreux CLSA Calyon Securities San Francisco Taipei Manila Jakarta Singapore Kuala Lumpur Mumbai Bangkok Hong Kong Beijing Shanghai Seoul Tokyo Shenzhen 100 110 11
  3. 3. Front-ranking European Research 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 N°1 France ** <ul><li>35 analysts </li></ul><ul><li>50 sales & sales traders </li></ul><ul><li>88% of market capitalisation </li></ul>N°1 Italy * <ul><li>7 analysts </li></ul><ul><li>12 sales & sales traders </li></ul><ul><li>94% of market capitalisation </li></ul>N°3 Netherlands * <ul><li>8 analysts </li></ul><ul><li>10 sales & sales traders </li></ul><ul><li>85% of market capitalisation </li></ul>N°3 Switzerland * <ul><li>7 analysts </li></ul><ul><li>8 sales & sales traders </li></ul><ul><li>95% of market capitalisation </li></ul>N°1 Spain * <ul><li>8 analysts </li></ul><ul><li>9 sales & sales traders </li></ul><ul><li>99% of market capitalisation </li></ul>N°3 Germany * <ul><li>14 analysts </li></ul><ul><li>15 sales & sales traders </li></ul><ul><li>82% of market capitalisation </li></ul>N°4 Nordic countries * * * <ul><li>12 analysts </li></ul><ul><li>12 sales & sales traders </li></ul><ul><li>75% of market capitalisation </li></ul>
  4. 4. Carbon: an SRI issue ?  Responsibility Analysis towards Carbon Management Cheuvreux 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 Constraints Our 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 Research Our 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.
  5. 5. Exhaustive Research on Carbon <ul><li> Carbon Research </li></ul><ul><ul><li>1 dedicated carbon analyst </li></ul></ul><ul><ul><li>10 Reports published in 2006 </li></ul></ul><ul><ul><li>Carbon Focus : understanding mechanisms and drivers </li></ul></ul><ul><ul><li>Carbon Impacts : a series of 7 reports: </li></ul></ul><ul><ul><ul><li>evaluating the impact of the carbon constraints </li></ul></ul></ul><ul><ul><ul><li>5 regulated sectors + Chemicals + Airlines </li></ul></ul></ul><ul><ul><li>Carbon Flash : </li></ul></ul><ul><ul><ul><li>Balanced analysis on carbon news flow </li></ul></ul></ul><ul><ul><ul><li>Monitoring major events (regulations…) </li></ul></ul></ul><ul><ul><ul><li>Companies updates </li></ul></ul></ul><ul><li> Carbon Expertise </li></ul><ul><ul><li>Monitoring emissions and NAPs </li></ul></ul><ul><ul><li>Evaluating CDMs credits </li></ul></ul><ul><ul><li>Political trends (lobbies, NGOs, Brussels…) </li></ul></ul>
  6. 6. Carbon Market – Recent Events <ul><li>Recent drop in carbon price raises up uncertainties </li></ul><ul><ul><li>Pilote phase (2005-07) is behind us… </li></ul></ul><ul><ul><li>Second phase prices wait a signal from the European Commission on NAPs submitted by Member States </li></ul></ul>Decorrelation of prices fwd 06-07 and fwd 2008 is expected Sept, 18 th : sharp drop in phase 1 carbon contracts
  7. 7. NAP 1: Over-allocations ! <ul><li>First true-up revealed huge over-allocation </li></ul>
  8. 8. Capping with regards to Fundamentals <ul><li>2005: emissions around 30 Mt below the last 10 year average emissions </li></ul><ul><ul><li>Standard deviation : 32 Mt </li></ul></ul><ul><li>2005 surplus will not be resorbed </li></ul><ul><li>Caps must take into account the impact of variation of fundamentals </li></ul>
  9. 9. Lobbying Pressures <ul><li>A Common Concern: Impact on electricity prices </li></ul><ul><li>Lobbying game: electro-intensive industries vs. electricity producers </li></ul><ul><li>Stakeholders’ equilibrium price: EUR 12-18/tCO2 </li></ul>
  10. 10. Market Bias: Political Uncertainties <ul><li>Political announcements create strong uncertainties </li></ul><ul><ul><li>German and Polish proposals to limit sales of surpluses: ex- post adjustements </li></ul></ul><ul><ul><li>About 50% of surpluses are in these two countries </li></ul></ul><ul><li>Any political decision could bring a new deal </li></ul><ul><li>A bias for carbon markets that causes wait-and-see policies of many actors </li></ul>
  11. 11. NAP2: Nothing is Set <ul><li>Contrasted prospects </li></ul><ul><ul><li>French NAP seems far too lax </li></ul></ul><ul><ul><li>… whereas U.K. holds emissions tight </li></ul></ul><ul><li>A lack of transparency </li></ul><ul><ul><li>Submission of Spanish and Italian NAP delayed: what shortage? </li></ul></ul><ul><ul><li>What about Central and Eastern Europe (hot air) ? </li></ul></ul><ul><ul><li>Modification of the scope (# installations), new entrants… </li></ul></ul><ul><li>European Commission: judgement on submitted NAP expected in November </li></ul>
  12. 12. NAP 2 and Kyoto Targets
  13. 13. 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 (tCO 2 /year) Non-covered Industries Government
  14. 14. The Kyoto Game: Market Actors Sellers Buyers
  15. 15. Kyoto: CDM markets <ul><li>Only 13.3m CER emitted… </li></ul><ul><li>… but lots of projects in pipelines </li></ul><ul><ul><li>1112 projects submitted: 1.287 b. CER </li></ul></ul><ul><li>CER price is based on EUA price (fwd 08) </li></ul>ETS sectors CO2 emissions JI/CDM around 45% Non-ETS sectors all other gases National Kyoto target Allowable emissions= Sector distribution Co 2 Allowable quotas
  16. 16. Risk vs. Responsibility Analysis <ul><li>Our responsibility analysis assesses internal efforts to control ghg emissions </li></ul><ul><ul><li>Evolution of groups’ carbon factor (tCO2/unit produced) </li></ul></ul><ul><li>But other external parameters make risk analysis results different </li></ul><ul><ul><li>Country risk (Spain, Italy, U.K.) prevails: cap stringency </li></ul></ul>
  17. 17. Carbon Impact on Utilities <ul><li> Carbon: a new market variable for electricity producers </li></ul><ul><ul><li>Redefines dispatching decisions: “Clean” dark/spark spreads </li></ul></ul><ul><li> Power markets now integrate the &quot;carbon cost&quot; in wholesale prices </li></ul><ul><ul><li>Average cost-pass-through in Europe: 0.55x EUA price </li></ul></ul><ul><li> Windfall profits largely compensate compliance costs </li></ul>
  18. 18. Electricity: Carbon Impact on Wholesale Prices <ul><li>Marginal cost of EUA is now included in electricity prices </li></ul><ul><li>With market specificities </li></ul><ul><ul><ul><li>Price regulation </li></ul></ul></ul><ul><ul><ul><li>Fuel at the margin </li></ul></ul></ul>
  19. 19. Correlated Carbon and Power Prices <ul><li>Strong correlation on deregulated markets </li></ul>
  20. 20. Utilities : Unequal Windfall Profits <ul><li> Unequal carbon impact by player </li></ul><ul><ul><li>Depends on </li></ul></ul><ul><ul><ul><li>the allocated emissions caps, </li></ul></ul></ul><ul><ul><ul><li>the average carbon intensity of group installations, </li></ul></ul></ul><ul><ul><ul><li>and the level of price regulation on the markets in which they operate </li></ul></ul></ul><ul><li> Carbon windfall represents 0.5-3.0% of sales for most of the players </li></ul><ul><ul><li>Top 3: Fortum, RWE, E.On </li></ul></ul><ul><ul><li>Bottom 3: Union Fenosa, Enel, EDP </li></ul></ul>
  21. 21. Electricity Producers: Positive Financial Impact Estimated windfall profits in 2005, as a % of EBITDA
  22. 22. Utilities: Responsibillty Analysis
  23. 23. Cement Sector: Outlook <ul><li> Carbon constraint is theoretically a threat </li></ul><ul><ul><li>Highest carbon intensity: 750kgCO2/ t cement </li></ul></ul><ul><ul><li>Generous over-allocation in Phase I: +7.2% </li></ul></ul><ul><ul><ul><li>Significant disparities by country </li></ul></ul></ul><ul><li> High exposure to hike in electricity prices </li></ul><ul><ul><li>Electricity represents 14% of costs </li></ul></ul><ul><ul><li>Estimated adverse effect: -0.9% of sales </li></ul></ul><ul><ul><li>Though, local markets allow cost pass-through </li></ul></ul><ul><li> Overall neutral effect on margins </li></ul><ul><ul><li>With surplus sold at EUR12.5 per tCO2 </li></ul></ul><ul><ul><li>And before rise in cement prices </li></ul></ul>
  24. 24. Cement players: Carbon Constraint <ul><li> Seven groups analysed through: </li></ul><ul><ul><li>Location of production sites </li></ul></ul><ul><ul><li>Control of electricity consumption </li></ul></ul><ul><ul><li>Exposure to regions covered by the EU ETS </li></ul></ul><ul><li> Top 3: Buzzi Unicem, Lafarge, Holcim </li></ul><ul><ul><li>Large over-allocations in Central Europe </li></ul></ul><ul><li> Bottom 3: Italcementi, Cementos Portland, Ciments Français </li></ul><ul><ul><li>High exposure to stringent caps </li></ul></ul>
  25. 25. Cement Stocks under the Carbon Constraint
  26. 26. Cement & Climate Change: Responsible Players
  27. 27. Oil &Gas : Refining Industry <ul><li> A Regulatory Paradox… </li></ul><ul><ul><li>Low sulphur specifications boost CO2 emissions </li></ul></ul><ul><li> … Justifies general over-allocation for phase I (except Spain) </li></ul><ul><li> Self-produced electricity: +/- 50% </li></ul><ul><ul><li>Hedge against cost pass-through of Utilities </li></ul></ul>
  28. 28. Oil &Gas : Company Focus <ul><li> South: the place not to be </li></ul><ul><ul><li>Tightest cap constraints (Italy and Spain) </li></ul></ul><ul><ul><li>More CO2 intensive processes to reach sulphur specifications </li></ul></ul><ul><li> Financial exposure: part of business in EU </li></ul><ul><ul><li>Neste Oil, Erg, Cepsa: 100% of refinery production in EU </li></ul></ul><ul><li>Top 3: Neste Oil, Total, Shell </li></ul><ul><li> Bottom 3: ERG, Cepsa, Repsol YPF </li></ul>
  29. 29. Oil&Gas: Risk Analysis Company exposure to stringent emission caps

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