2011 Annual Report - OTCIQ.com

Due to lower commodity prices and underutilized capacity,
the OECD expects the inflation rate to decline during the
forecast period.
The OECD emphasizes the upside and the downside risks of
its projections. The euro-zone debt crisis and U.S. fiscal policy
are the main sources of uncertainty.
Energy Markets
We expect power and fuel markets to be generally more
volatile in 2012 and 2013 due to their increasing sensitivity to
macroeconomic developments and policy decisions.
The oil market is currently displaying a classic backwardation
pattern, with prices for nearby months higher than prices for
forward months. This trend could continue, since at the moment
the market is increasingly driven by geopolitical events (Iran’s
nuclear program, EU sanctions, the Strait of Hormuz, unrest in
the Middle East and North Africa). The Brent contract for nextmonth
delivery started 2012 at about $112 per barrel, which is
significantly above the price at the start of 2011 ($95).
In 2011, abundant coal stocks and lower demand due to mild
winter weather were the fundamental factors on Europe’s
coal market as measured by the API#2 index. The price for hard
coal for next-year delivery began 2012 at $116 per metric ton,
the same level as at the start of 2011. Good availability and
favorable freight rates could send prices lower. The main source
of demand is the Asia-Pacific region, particularly China. Unlike
oil, however, coal displays a contango pattern, with outlying
periods priced higher than nearby periods. Consequently, the
price for delivery in 2014 is currently $121 per metric ton.
In 2011, wholesale gas prices at Europe’s hubs, both for spot
products and for forward products for delivery in 2012 and
2013, were significantly higher than in the prior year. This is
especially attributable to higher LNG demand in Asian markets,
which was driven by economic growth in non-OECD countries
and the replacement of nuclear capacity by gas-fired
capacity in Japan following Fukushima. Higher oil prices, resulting
in part from political developments in the Middle East
and North Africa, are pushing up the prices of oil-indexed gas
imports to Europe. The forward market shows rising gas prices
in Europe for the next two years. To a significant degree, these
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expectations continue to be driven by LNG demand in Asia
and have so far not been shaken by concerns about a collapse
of demand in Europe due to a renewed danger of recession.
U.S. gas prices are expected to remain at low levels due to
the cost-effective extraction of shale gas, despite the apparent
environmental risks of this practice.
Prices for carbon allowances under the EU Emissions Trading
Scheme (known as “EUAs”) fell to record lows in 2011, primarily
because the weak economy led to lower industrial production
and consequently to lower demand for power, resulting in an
ongoing oversupply of EUAs. In the years ahead, this trend
could be augmented by emission-reduction measures (such as
measures to increase energy efficiency), which would put
further downward pressure on EUA prices. Low EUA prices have
led EU policymakers to consider taking steps (such as a setaside
strategy) to reduce the number of EUAs on the market.
In view of Europe’s lackluster economic situation, however,
such a proposal would probably meet stiff resistance from a
number of member states. More negative news about the
euro zone and the absence of progress in policies to reduce
the number of EUAs could mean that carbon prices reach
new lows in the years ahead.
Near-term and medium-term power prices in Germany will
be determined largely by the price of hard coal, natural gas, and
EUAs and by forecasts on the ratio of supply to demand in
Germany and neighboring countries. However, new capacity,
particularly new renewables capacity, could put further downward
pressure on prices (at the start of 2012, Germany had
24.7 GW of installed solar capacity and 30 GW of installed
wind capacity). This pressure could be increased in the years
ahead by concerns about Europe’s economic outlook and
the concomitant lowering of growth expectations for power
consumption. Still, the market’s general expectation is for
forward power prices to remain at roughly the same level over
the next two years due to continued low carbon prices and
moderate coal and gas prices. At the start of 2012, the EEX baseload
contract was trading at about €52 per MWh for 2013
delivery and at €53 for 2014 delivery, similar to the level at the
start of last year.
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