Etienne's column: CER future contract and fuel commodity prices are strongly related

By Etienne Boisnier,

 

Anyone can instinctively understand that the demand for CERs is not independent from the state of the global economy: a slowing activity leads to fewer industrial emissions and consequently to a reduced need for CERs. Ultimately, this lower demand is reflected in the price of the different CER future contracts. A variety of indicators are available to monitor the health of the global economic activity. Amongst them, the price of commodities appears especially relevant.

In its Global Economic Prospects 2009, the World Bank underlines once again the traditional link that exists between the growth rate of the world economy and the global demand for commodities. As illustrated by the sharp reversal in crude oil in the last months, a slowing activity leads to reduce the demand for commodities and, as a result, to drag their price down. Are the prices of communities and CER future contract related? Such a question is not futile, as it may help us understand more precisely, and maybe predict, CER price fluctuations.

A simple linear regression analysis was conducted to measure the strength of the relationship between the IMF Commodity Price Index and the monthly settlement price of the CER Future Contract (continuous contract). Results highlight a strong and significant linear relation (correlation coefficient r = 0.79; p = 0.006): the higher commodity prices are, the higher the CER prices tend to be.

As this index includes both fuel and non-fuel commodities, a closer look is required to check whether the CER prices are equally related to both types. Such a closer analysis underlines a weaker link between CER prices and the IMF Non-Fuel Commodity Price Index (r = 0.67; p = 0.03) than between CER prices and the IMF Fuel Commodity Price Index (r = 0.813; p = 0.004). Hence, focusing exclusively on the IMF Fuel Commodity Price Index enables to obtain the strongest and most significant relation (Figure 1).

Figure 1. CER Future Contract against the three different IMF indices (March 14^th 2008 to December 31^st 2008).

 

The following conclusions can then be drawn: first, CER prices and IMF Commodity Price Index are significantly related. Second, the strength and the significance of the relation vary according to the type of commodity considered. An optimum result is obtained with fuel commodities. Hence, the higher fuel commodity prices are, the higher CER prices tend to be.

From a broader perspective, these results suggest that the current CER price downtrend will not find a bottom until crude oil, coal and natural gas prices do not stabilize. This stabilization may take time to occur, as recently reminded by Antoine Halff, analyst at NewEdge USA, in the Wall Street Journal: "the outlook is very bearish"[1].