CHINA: Cement firms in China's Hubei likely to pay millions to meet carbon obligations

Cement companies, including Huaxin, covered by the carbon market in China's Hubei province will likely be forced to spend millions of yuan on permits before Friday's compliance deadline after authorities rejected their pleas for leniency.

Last month, the firms asked regulators to let them borrow some permits from next year's quota, saying they could not afford to buy permits to cover their obligations for 2014. But their requests were rejected, easing market concerns that big emitters would be let off the hook.

Huaxin Cement, Hubei's biggest cement producer, has been under particular pressure to buy over the last few trading days as it has a shortfall of 1.15 million permits.

"Local officials have talked through the consequences of non-compliance with cement factories, so Huaxin approved a 40 million yuan ($6.44 million) budget to pay for permits," said a trader with direct knowledge of the matter, who did not want to be named as he was not authorised to speak to media.

Huaxin declined to comment.

Trading volumes on the Hubei carbon exchange have surged ahead of the deadline, in the absence of any indication the compliance date, initially set for May 31, may be pushed back for a second time.

The market closed on Thursday with prices at 24.39 yuan ($3.93), up from the launch price of 21 yuan. It has been hovering at around 25 yuan for the past week.

Daily trading volumes have averaged 385,000 this month, nearly 15 times more than in June.

However, as of Thursday, 44 companies, or 32 percent of the total 138 firms, did not have enough permits to cover their obligations, brokers said. Of these, 26 were cement producers.

A manager with Gezhouba Cement Group, Hubei's No.2 cement producer, said its permit allocation had been miscalculated.

Firms covered by the Hubei exchange are only obliged to buy a maximum of 200,000 permits, regardless of how much they overshot their cap. But Gezhouba has eight subsidiaries in the scheme, bringing its total permit demand to more than a million.

"The scheme is punishing big producers but not inefficient competitors," the manager said. "We pleaded with the government to re-issue permits and narrow the gap, but we have not got any reply. How can we spend tens of millions on carbon?"

The most active carbon market in China, the Hubei Emissions Exchange, has traded nearly 17 million permits since its launch in April 2014, representing 55 percent of the nationwide volume. But most was conducted by a small number of trading companies, with compliance buyers moving in only as the deadline loomed.

But shrinking industrial output has undermined the prospect of any larger price hike. "Many institutional investors bought at 21 or 26 yuan, hoping it would go above 30 yuan in anticipation of a bull run ahead the deadline," a broker said.