Commodities Outlook: a mixed bag amid broader market trends
11 MAR, 2025
The latest insights from Macquarie highlight a complex landscape for commodities in 2025. The Dec-25 EUA futures contract has seen a significant drop, falling from nearly €84/t in late January to €67.5/t in early March. This decline has been primarily driven by the strong positive correlation with TTF gas prices, alongside broader macroeconomic pressures such as falling crude oil prices and the threat of US tariffs on EU exports, which could impact industrial activity and power demand.
Despite the bearish sentiment, Macquarie's strategists see the recent price drop as a potential buying opportunity, albeit with caution regarding gas market and macroeconomic developments.
Supply Risks in the European Carbon Market: Potential Turbulence Ahead
Supply risks in the EU Emissions Trading System (EU ETS) are a key concern for 2025. Macquarie identifies three main risks:
- Front-loading of Auction Supply: To finance the new Industrial Decarbonisation Bank (IDB), part of the Clean Industrial Deal, there could be a shift in the supply of allowances. While the EU Commission is unlikely to repeat major front-loading events like RepowerEU, the Innovation Fund's flexibility remains a potential risk.
- Efficiency Benchmark Adjustments: Changes to free allocation efficiency benchmarks could impact the market, particularly if a pro-business EU Commission adopts more lenient benchmarks. This could increase free allocation volumes but may also lead to fewer allowances later in the decade.
- CBAM Policy Review: The Carbon Border Adjustment Mechanism (CBAM) review could lead to a slower phase-out of free allocation, with potential implications for industries heavily reliant on export rebates, such as steel and fertilizers.
The formal legislative proposals on CBAM and IDB are expected in Q4 2025 and Q2 2026, respectively. Until then, uncertainty will likely weigh on the market.
Massive US Sell-Off: Impact on EU Carbon Market and Commodities
The bearish macroeconomic trends are not limited to Europe. The threat of US tariffs on EU goods and the overall market correction have contributed to a massive sell-off in US markets, amplifying the negative sentiment in the commodities sector. The EU ETS market has not been immune, with concerns over industrial activity and power loadadding pressure to EUA prices.
Looking ahead, the 2026 and 2027 market deficits might still hold, with strategists advising caution but seeing buying opportunities at the right entry points. However, front-loading risks, particularly if the EU Commission decides to raise substantial funds for the IDB through the Innovation Fund, could significantly alter market balances.
Caution when navigating
For professional investors, Macquarie’s outlook suggests a mixed strategy. While the commodities market offers potential opportunities, particularly in EUA futures, the looming supply risks and broader macroeconomic headwindscall for strategic positioning. Close monitoring of EU policy developments and macroeconomic indicators, including gas market trends, will be essential to capitalize on market opportunities while managing risks.
