NZUs poised for upside as auction looms

Friday 25 Oct 2024

Opinion Piece: Nigel Brunel, Managing Director, Marex New Zealand

Spot NZUs continue to grind along and whilst there are quite good volumes still going through the market – it has been effectively a sideways market for over a month, trading a NZ$2 range between NZ$61.50 and NZ$63.50.

It’s just over 5 weeks to the final auction of the year – where there is 11 million NZUs up for grabs at NZ$64. It’s likely we will see a partial clearance, given concerns are building that from 2025 we are starting to see a structural deficit in supply. Entities may also have concerns about being able to secure sufficient volumes in the years ahead. Some entities have demand that is greater or equal to the entire auction volume for 2025, and beyond. There is almost twice as much volume in this auction than all of 2025.

Let’s also not forget that next year the auction floor is NZ$68 – so this auction is good value in relative terms at NZ$64 and we expect this to be a driver.

NZU index March - Sept 2024, Carbon News


We would be surprised to see the entire auction clear but odds on we may get a third away. How will the price react? 

Our view is that there is NZ$5 to NZ$6 of upside on a partial clearance of around 3 million. All unsold auction volume is cancelled. There could be a short-term negative price reaction if it totally cleared (unlikely) because some may view that supply entering the market will dampen demand, but our view is that it would be short term and a buying opportunity.

Our rationale is reasonably simple:
  • If NZUs don’t get above NZ$68 next year – the 2025 auctions won’t clear
  • We see demand (surrender) from 2025 sticky at 35 million versus supply at 18 million and falling – in other words we expect the demand/supply shortfall to widen
  • Despite concerns about too much forestry coming in - we don’t see the evidence yet
  • If the demand/supply run rate (above) holds true – we see the stockpile surplus gone within 5 years
Source: Marex New Zealand
Chart credit: Carbon News



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