Tough weeks ahead for EU carbon prices-analysts

* Allocation of 2010 EUAs could prompt industrial selling

* Credit conditions better this year, 2009 lows unlikely

* EUA prices could still fall a further 12 pct to 11 euros

* Bulgaria, E.Europe early sellers but not Poland, Estonia

By Michael Szabo

LONDON, Feb 22 (Reuters) - European carbon prices could test 10-month lows and possibly fall as low as 11 euros a tonne in the next two weeks as European Union member states allocate their 2010 emissions permits to industry, analysts said.

Firms regulated under the EU's Emissions Trading Scheme will receive over 1.8 billion tonnes of 2010 permits, or EU Allowances (EUAs), by Feb. 28.

With industrial output still well below 2008 levels in the wake of the recession, traders and analysts are on close watch for a possible repeat of the drop at the start of 2009, when EUA prices fell by nearly 50 percent.

"There might be a bit of downside pressure, but it won't be anything like last year," said Trevor Sikorski, director of carbon research at Barclays Capital.

In early 2009, industrial firms like steel and cement manufacturers, which tend to receive more permits than needed to help them compete internationally, sold their EUAs on the spot market in a bid to raise badly needed cash and boost their balance sheets, a trend that pushed prices down to 8 euros from above 15 euros at the end of 2008.

Benchmark EUA futures CFI2Zc1 trading on the European Climate Exchange were up 1 percent on Monday after closing at 12.49 euros a tonne on Friday, a 6-week low. They last traded below 12 euros in April 2009.

"Even if selling is limited, I expect EUA prices could drop by another 1 to 1.5 euros in the next two weeks," said Emmanuel Fages of Societe Generale/orbeo.

BarCap's Sikorski was a bit more optimistic.

"The credit markets are a lot better for industrial companies now," Sikorski said, adding that he does not see EUA prices dropping below 12 euros.

"Recently when we've seen EUAs drop below 12.50 euros, utilities and financials come in and buy and industrials' desire to sell drops away because they're not as desperate for cash."

For a table on 2010 EUA allocations, click [ID:nLDE61I23P]

WHO'S SELLING?

In their busiest trading day of the year so far, spot EUAs closed at 12.40 euros a tonne on Friday, also a 6-week low, a day after the Czech Republic issued its 2010 quota of around 85 million EUAs to industry.

"That may have pushed prices down, but it could just have been sentiment selling by speculators," Fages said.

BlueNext, Europe's main exchange for spot EUA trading, traded 2.66 million spot EUAs BNXCO2-2 on Friday, the most volume seen on the exchange since late November.

"We could see some of the usual suspects in eastern Europe like Bulgaria, but Poland and Estonia are not allocating EUAs so companies from those countries won't have anything to sell right away," Fages said, referring to the countries likely to bring surplus 2010 EUAs to market over the next few weeks.

The EU's executive in December asked Poland and Estonia to resubmit their 2008-12 emissions plans after they won an appeal for more generous quotas in the EU's second-highest court.

The court ruled the EU Commission had exceeded its authority by slashing their proposed quotas. [ID:nGEE5BA10E]

Bulgaria's industrial sector is likely to be net sellers of EUAs once Brussels approves the government's 2008-12 plan.

The country will then receive some 113 million EUAs, equivalent to 3 years' worth of quotas.

With the country's industrial production down by at least 25 percent last year, analysts expect Bulgarian industrials to bring a significant portion to market. [ID:nLDE60P0M5]

For additional news and analysis on the EU carbon market, log on to here (Editing by Amanda Cooper)