Analysis: Layoffs, lost business for London's carbon brokers

LONDON (Reuters) - London's once high-flying carbon emissions permit brokers have been grounded by the recession and dwindling client volumes, with layoffs and business lost to exchanges clouding the horizon of a once sunny future.

The London-based desk at CantorCO2e, one of the many players in the now over-crowded European emissions trading space, was the latest casualty as the firm laid off its last three carbon brokers in the UK earlier this month, sources told Reuters.

The company, a subsidiary of U.S.-based Cantor Fitzgerald, would not comment on the move, but calls placed by Reuters to its London emissions desk were re-routed to offices in New York and Houston.

This follows cutbacks and closures at other emissions brokers including industry veterans Carbon Capital Markets, which shut its trading desk in April.

"It's not good to see another broker go, but there are too many of them and not enough demand for carbon credits," said an emissions broker at a rival firm who requested anonymity.

Energy brokers that stampeded into the $144 billion global carbon trade in the past few years are losing business to emissions exchanges like London's European Climate Exchange (ECX), while fighting a cut-throat battle among themselves for the shrinking client volumes that remain.

The European Union recession slashed emissions under the bloc's trading scheme by over 11 percent, meaning many of the firms that had previously used brokers to help them cover emissions permit shortfalls suddenly reaped a surplus in 2009.

Analysts predict these industrial firms will not have to buy permits, called EU Allowances, again until 2013 at the earliest.

EUA prices have been rangebound between 12 and 16 euros ($15-$20) in the last year, trading well below all-time highs of near 30 euros hit in July 2008.

As EUAs are bankable through the EU scheme's third phase (2013-2020), when emissions, and therefore EUA demand, is expected to rise while the permit supply is tightened annually, firms have been in no rush to offload their excess.

Analysts said this price stability has given more confidence to smaller compliance players, which do not have large trading desks like the big European utilities, to execute basic trades themselves without the help of brokers.

"Brokers need to provide real color in a market like this," the broker said. "It's become harder to trade, so I suspect we'll see some more casualties in the long run."

MARKET SHARE

"Brokers are still a very important part of the market, but the deals that go through them now tend to be complex, multi-legged trades or very large volumes, so they need to add more value and find new ways to attract customers," ECX CEO Patrick Birley told Reuters.

Several brokers have hired carbon analysts in the past year and now produce regular research commenting on EUA price trends.

"This is our core business and we remain focused on it, but we need to evolve with it so we're always looking to develop new products or add more value for clients," said Evan Ard, a managing director at brokers Evolution Markets, adding there are no plans to cut head count at any of its global offices.

The share of exchange-cleared trades, typically over the counter (OTC) deals between brokers, as a proportion of all EUA futures traded on the ECX has fallen to 34 percent in the first six months of this year, from around 55 percent in 2008 and 2009 and above 60 percent in 2006 and 2007, ECX data showed.

Similar trends can also be seen on other European emissions exchanges including Germany's EEX, Dutch exchange Climex and Nordic exchange Nord Pool, now owned by NASDAQ OMX.

Screen trades, where the exchange matches up buyers and sellers, now make up the majority of the ECX's EUA futures volumes with the average trade size increasing by 60 percent in the past year to around 8,000 tonnes of carbon dioxide.

CantorCO2e also closed offices in India, Brazil, Chile and Mexico in the past 12 months, and sources said the New York and Houston offices would now handle calls from European clients, meaning those brokers need to start work as early as 1:00 am local time.

"This is a relationship-driven business, and guys in the U.S. may find it more difficult to talk to European clients about the market," said a carbon trader familiar with CantorCO2e's services who also requested to stay anonymous.

(Reporting by Michael Szabo; Editing by William Hardy)