Geithner’s Senate Hearing Delayed By Republicans

By Ryan J. Donmoyer

Jan. 15 (Bloomberg) -- Senate Republicans moved yesterday to delay Timothy Geithner’s confirmation as Treasury secretary, pushing President-elect Barack Obama to defend his nominee’s “embarrassing” mistake of underpaying his taxes.

Senate Finance Committee Chairman Max Baucus was forced to reschedule Geithner’s confirmation hearing for Jan. 21 after Arizona Senator Jon Kyl, the panel’s second-ranking Republican, objected to holding the session tomorrow.

While Kyl said he requested the delay because of a scheduling conflict, Republicans may be using Geithner’s tax troubles to gain political leverage, said Bill Frenzel, a former Republican congressman from Minnesota.

“Obviously, they’re after something else,” Frenzel said of the Senate Republicans -- “perhaps something unrelated,” such as pushing for larger tax cuts in the fiscal-stimulus bill than the Democrats who are crafting the measure support.

Baucus said yesterday he was trying to persuade Kyl to remove his objection so that Geithner’s hearing could be held tomorrow. If he is unsuccessful, Obama will take office on Jan. 20 without a Treasury secretary at a time when the economy struggles through a credit crisis that has transferred control of large swaths of the financial sector to the department.

Stuart Levey, the U.S. Treasury Department’s top official on terrorism financing, will run the agency as acting secretary starting on Jan. 20, when the outgoing administration leaves, pending Geithner’s confirmation, a person briefed on the matter said.

Political Risk

Frenzel, 80, a guest scholar on economic studies at the Brookings Institution in Washington, said the re-scheduling of the Geithner hearing could carry political risk for Republicans, who lost seats in the Senate and House in the November election to the Democrats, who control both chambers and will next week take back the presidency.

“If they’re doing this to flex their muscles, all they’re going to do is dig their hole a little deeper.”

At least two Republicans on the Finance Committee, Pat Roberts of Kansas and Orrin Hatch of Utah, said they would back Geithner.

Obama, in comments to reporters yesterday, said of the questions about Geithner’s taxes, “Look, is this an embarrassment? Yes. But it was an innocent mistake.” He also said that Geithner, 47, will be approved by the Senate.

‘Honest Mistake’

Baucus also expressed support for Geithner. “This is an honest mistake and it’s clear there was no intention not to pay it and he did pay immediately, as soon as his mistake was discovered,” Baucus, a Montana Democrat, said. “Add to that, the country needs him.”

Geithner, president of the Federal Reserve Bank of New York, told committee members on Jan. 13 that he had discovered he underpaid his taxes for several years earlier this decade. With the interest penalties, he paid the Internal Revenue Service $48,268, according to documents released by the Finance Committee. Obama told CBS News that his team knew of Geithner’s tax issue before his nomination for the post in November.

As Treasury secretary, Geithner would oversee the IRS, the largest agency in his department. Iowa Senator Charles Grassley, the top Republican on the panel, called the tax issue “disconcerting.”

‘Hardly a Precedent’

“There’s hardly a precedent for it,” Grassley said in an interview with Bloomberg Television. Senators must weigh their concern about Geithner’s tax situation with his qualifications to steer the economy out of its troubles, Grassley said. “For the next seven days or so, they’re going to be weighed.”

Kyl, in seeking the postponement of the hearing on Geithner tomorrow, said it was likely to conflict with a Senate Judiciary Committee hearing for Eric Holder, Obama’s nominee to be attorney general. Kyl serves on both panels.

“He’s reserving his right to attend both confirmation hearings,” said Ryan Patmintra, the senator’s spokesman. He said the Holder hearing, scheduled for today, may extend into tomorrow.

Kyl hasn’t decided how he’ll vote on Geithner’s nomination, Patmintra said.

Roberts, the Kansas senator, said he spoke with Geithner on the telephone and that he is a “good man” who “really knows his stuff.” Although Roberts said the timing of the disclosure about Geithner’s taxes is “troubling,” he said his “guesstimate is he’ll be approved with my vote.”

At issue is Geithner’s failure to pay self-employment taxes while working at the International Monetary Fund. In addition, questions were raised about a lapse of his housekeeper’s legal status.

‘Appropriately Paid’

Geithner said he was unaware that the woman’s immigration papers had expired three months before she stopped working for him, according to an official on Obama’s transition staff. The Finance Committee said taxes for the housekeeper were “appropriately paid.”

The IRS in 2006 and 2007 offered leniency to U.S.-based employees of international organizations and foreign embassies, saying there were rampant problems with tax-law compliance.

“The IRS estimates that as many as half of these employees subject to U.S. tax fail to report their wages, claim deductions they are not entitled to, incorrectly establish” retirement plans, “fail to pay self-employment tax or fail to file tax returns,” the agency said in a March 22, 2007, news release.

Self-Employment Taxes

Geithner, who prepared his own tax returns in 2000, 2001, 2002 and 2005 and used paid preparers in other years, acknowledged receiving a written guide on how to pay the self- employment taxes he owed, according to a summary of the case by the committee. He also late-filed Social Security taxes for household employees in the 1990s, the committee said.

The Treasury secretary-designate didn’t pay some of the back taxes until it was clear he would be nominated for the post, the panel said. He also made other errors such as claiming dependent-care deductions for sending a child to sleep-away camp; only the cost of day-camps is deductible.

Hatch, the Utah senator, in discussing his support for Geithner said, “If we expect perfection around here we’d never have anyone for any of these positions.” He also said, “The man is qualified, competent, one of the best choices” Obama has made.

Former IRS Commissioner Mortimer Caplin, who served from 1961-1964 and founded the law firm Caplin & Drysdale, agreed that Geithner’s tax errors are forgivable.

“It sounds like an honest mistake to me,” said Caplin, 92. “It’s very understandable.”

Don Alexander, another former IRS commissioner who served from 1973-1977, said Geithner would have a more difficult time winning confirmation if the economy weren’t in crisis.

“He is getting a pass,” Alexander, 87, said. “But not a free pass; this won’t help him at all in his later duties. It’s a problem that someone who’s running the Treasury Department should not have.”

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Nicholas Johnston in Washington at njohnston3@bloomberg.net

Read more...

Philadelphia Fed Factory Index Increased to -24.3

By Timothy R. Homan

Jan. 15 (Bloomberg) -- Manufacturing in the Philadelphia region shrank in January for the 13th time in the last 14 months as employment deteriorated at the fastest pace in more than three decades and orders kept dropping.

The Federal Reserve Bank of Philadelphia’s general economic index was minus 24.3 this month compared with minus 36.1 in December, the bank said today. Negative numbers signal contraction and the index averaged minus 21.3 last year.

Factories are curtailing production as consumer spending weakens and global demand falters amid a deepening recession. A report from the New York Fed showed manufacturing in that region contracted in January for a ninth straight month.

“The index remains deep in negative territory,” Anna Piretti, a senior economist at BNP Paribas in New York wrote in a note to clients. “Pent-up demand continues to shrink at a rapid pace.”

Economists forecast the index would fall to minus 35, according to the median of 53 projections in a Bloomberg News survey. Estimates ranged from minus 28 to minus 41.3.

The Fed Bank of New York today said its general economic index improved to minus 22.2 from a revised minus 27.9 in December. Still, a gauge of expectations six months from now was negative for the first time on record. Similar to the Philadelphia Fed’s index, readings below zero signal manufacturing activity is shrinking.

More Claims

Reports the Labor Department showed jobless claims jumped last week and wholesale prices dropped in December.

First-time applications for unemployment benefits rose 54,000 last week, more than forecast, to 524,000, signaling companies increased the pace of firings at the start of the year. The total number of people collecting benefits decreased from a 26-year high.

Producer prices fell 1.9 percent last month and were down 0.9 percent for all of last year. Last year’s drop was the largest since 2001.

The Philadelphia Fed’s employment index was minus 39, the lowest level since 1975, compared with minus 28.6 in December, the report showed.

The gauge of new orders was at minus 22.3 in January compared with minus 28.6 a month earlier, today’s report showed. The shipments index improved to minus 16.7 from minus 29.7.

Prices Falling

The prices paid index declined to minus 27 from minus 25.5 in December. An index of prices received improved to minus 26.2 from minus 32.8.

Expectations for the next six months turned positive for the first time since September. The index rose to 7.4 from minus 10.4 in December, today’s report showed.

The headline index is a separate question unrelated to the individual measures and some economists consider it a gauge of business sentiment.

Production is also slowing in other parts of the country, according to yesterday’s release of the Fed’s regional business survey known as the Beige Book. “Manufacturing activity decreased in most districts,” the report said.

A slowdown in global demand is also hurting American factories. U.S. exports dropped 15 percent from August through November, the biggest four-month decline since at least 1992, according to figures from the Commerce Department issued this week. Foreign purchases of American-made automobiles in November were the lowest in two years.

U.S. automakers fared no better domestically last month as General Motors Corp. and Chrysler LLC led a decline that capped the industry’s worst year since 1992. Chrysler sales in December dropped 48 percent from a year earlier, while GM was down 41 percent and Ford Motor Co. fell 33 percent.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

Read more...

U.S. Initial Jobless Claims Rose to 524,000 Last Week

By Bob Willis

Jan. 15 (Bloomberg) -- First-time claims for U.S. unemployment benefits last week rose more than forecast, signaling companies stepped up the pace of firings at the start of the year.

Initial jobless claims jumped by 54,000 to 524,000 in the week that ended Jan. 10, from a revised 470,000 the prior week, the Labor Department said today in Washington. The total number of people collecting benefits decreased from a 26-year high.

The worst holiday sales season in at least four decades and the lack of credit will probably prompt even more payroll reductions in coming weeks and months. President-elect Barack Obama, who takes office next week, has proposed a stimulus plan aimed at saving or creating up to 4 million jobs.

“We’ve had consistent numbers that are worse than expectations,” Dan North, chief U.S. economist at Euler Hermes ACI in Owings Mills, Maryland, said in an interview with Bloomberg Television. “That kind of tells you that the recession seems to be accelerating just a little bit and puts the forecast of a second-half recovery at risk.”

Another Labor report showed wholesale prices fell 1.9 percent in December and were down 0.9 percent for all of 2008. Last year’s drop was the largest since 2001.

New York Manufacturing

The Federal Reserve Bank of New York reported manufacturing in New York state contracted for a ninth straight month in January and a gauge of expectations for six months from now was negative for the first time on record.

The New York Fed’s general economic index rose to minus 22.2 from a revised minus 27.9 in December that was lower than previously reported, the bank said today. Readings below zero for the Empire State index signal manufacturing activity is shrinking.

Jobless claims were projected to rise to 503,000 from the 467,000 initially reported the previous week, according to the median projection of 42 economists in a Bloomberg News survey. Estimates ranged from 442,000 to 700,000.

The four-week moving average, a less volatile measure, fell to 518,500 compared with 526,500 the prior week.

The number of people staying on benefit rolls dropped to 4.497 million in the week ended Jan. 3 from 4.612 million, the highest level since 1982.

Jobless Rate

The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 3.4 percent. The unemployment rate and continuing claims are reported with a one- week lag.

Twenty-seven states and territories reported an increase in new claims for the week ended Jan. 3, while 25 had a decrease.

Jobless claims reflect weekly firings and tend to rise as job growth -- measured by the monthly payroll report -- slows.

The government last week reported employers cut 524,000 workers from payrolls in December, bringing the total number of job losses for 2008 to 2.6 million.

Economists surveyed by Bloomberg early this month forecast the jobless rate will rise to 8.4 percent by the end of 2009 from 7.2 percent reported for December 2008. Job losses this year may total 3 million, according to Nigel Gault, chief U.S. economist at IHS Global Insight Inc. in Lexington, Massachusetts.

The U.S. economy weakened further in the past month across almost all regions, hurt by a lack of credit and declines in retail sales, the Federal Reserve said yesterday in its regional business survey.

Broad Weakening

“Most districts noted reduced or low activity across a wide range of industries,” the Fed said in its Beige Book release. “Overall economic activity continued to weaken.”

General Motors Corp., Chrysler LLC and Ford Motor Co. have idled plants and slashed production to clear out inventories after sales last month fell 36 percent from a year earlier, capping the worst year for sales since 1992.

U.S. job cuts are also increasingly reflecting the spreading worldwide slowdown.

Seagate Technology, the biggest maker of hard-disk drives, said it will cut 800 U.S. jobs as part of a downsizing of about 6 percent of its global workforce as profit falls, according to a regulatory filing today.

ING Groep NV, the biggest Dutch financial services company, will eliminate 750 jobs in the U.S. across all lines of business, spokesman Dana Ripley said this week.

“Like most companies operating in the U.S., we need to take the appropriate steps in the short term to navigate through these challenges,” Ripley said.

To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net

Read more...

European Inflation Slows to Two-Year Low on Energy

By Jurjen van de Pol

Jan. 15 (Bloomberg) -- Europe’s inflation rate dropped to the lowest in more than two years in December as energy prices fell and consumers cut spending, giving the European Central Bank scope to lower interest rates to tackle the deepening recession.

The inflation rate in the euro area fell to 1.6 percent from 2.1 percent in November, the European Union statistics office in Luxembourg said today. The December rate was the lowest since October 2006 and matched the initial estimate published on Jan. 6.

As the euro-zone economy contracts and energy costs decline amid slackening demand, ECB policy makers meeting in Frankfurt today may lower the benchmark lending rate by half a percentage point, according to a Bloomberg survey of economists. Crude-oil prices have dropped 75 percent from a record $147.27 a barrel in July and energy costs fell 3.7 percent in December, the first annual decline since August 2007, today’s data showed.

Energy and food prices “will remain the main driver for the next few months and will exercise a significant drag on inflation,” said Luigi Speranza, an economist at BNP Paribas in London.

The ECB forecasts inflation will average 1.4 percent in 2009 and 1.8 percent next year, compared with 3.3 percent in 2008. The central bank also predicts the economy will contract about 0.5 percent this year, which would be the first full-year drop in gross domestic product since the euro’s launch a decade ago.

Key Rate

Slowing inflation may prompt the central bank’s governing council to lower the key rate to 2 percent today, according to the median forecast of 60 economists surveyed by Bloomberg. That would match the lowest rate since the ECB took charge of monetary policy in 1999.

The ECB “will have to go beyond this and I think it will go another 50 basis points in March,” Thomas Mayer, Deutsche Bank’s chief European economist, said in a Bloomberg television interview today. “We see the bottom closer to 0.75 percent than to 2 percent” for the key rate.

The ECB trails other central banks including the U.S. Federal Reserve and the Bank of England, which have reduced borrowing costs aggressively to combat the recession. The Frankfurt-based bank will announce its rate decision at 1:45 p.m. and ECB President Jean-Claude Trichet is scheduled to hold a press conference 45 minutes later.

In Germany, Europe’s largest economy, automaker Opel this month cut prices on some models by more than 8 percent and rolled out a cheap financing package to boost demand. German car sales fell 6.6 percent last month, capping the worst year since the nation’s reunification in 1990.

The German economy may have contracted as much as 2 percent in the fourth quarter, data showed yesterday. That would be the biggest slump in more than two decades.

The euro was little changed against the dollar after the inflation report, trading at $1.3183, down 0.1 percent, at 11:55 a.m. in London.

To contact the reporter on this story: Jurjen van de Pol in Amsterdam jvandepol@bloomberg.net

Read more...

Greece Buys Two LNG Cargoes to Replace Lost Russia, Caspian Gas

By Maher Chmaytelli

Jan. 15 (Bloomberg) -- Greece bought two liquefied natural gas cargoes from the spot market as Russia’s price dispute with Ukraine halted pipeline deliveries for a tenth day, according to three people familiar with the matter.

Greece is now completely relying on ships carrying LNG for its gas needs, said three people on condition of anonymity, citing company policy. Greece’s supply from Azerbaijan through a pipeline across Turkey stopped about a week ago as Turkey is also short of Russian gas, they said.

The public relations department of state-run Public Gas Corp., known as Depa, declined to immediately respond to questions by phone. Depa is 65 percent owned by the government with the balance held by Hellenic Petroleum SA, the country’s biggest refiner.

Greece may buy more shipments of LNG as Russian supply is not certain to resume within the next few days, the people said. They declined to say which country had supplied the two shipments already purchased.

LNG is gas cooled to a liquid to allow its transportation on ships to places too distant for pipeline connections. It is returned to its gaseous form on arrival at import terminals.

Greece imports its LNG through Depa’s regasification terminal on the islet of Revithoussa, west of Athens.

Greece typically buys LNG from Algeria. In 2007, it got 60 percent of its LNG from Algeria and the rest from Egypt, according to statistics compiled by BP Plc.

Domestic demand at this time of the year runs at about 13 million cubic meters a day, according to figures published last year by Desfa, the operator of the Greek gas grid. Supply from Russia usually meets about 8 million cubic meters a day of consumption, with the rest coming through Turkey and from LNG imports.

Russian gas supplies to Bulgaria, Turkey, Greece and Macedonia were cut at the Ukrainian-Romanian border, Bulgaria’s Energy and Economy Ministry said on Jan. 6, following a dispute between Russia and Ukraine over prices and transit fees.

To contact the reporter on this story: Maher Chmaytelli in Cyprus at mchmaytelli@bloomberg.net or ;

Read more...

Refinery Margin Gain on Cold, Run Cuts, May Not Last, OPEC Says

By Nidaa Bakhsh

Jan. 15 (Bloomberg) -- Higher refinery profit margins as a result of cold weather and reduced refinery activity, may prove temporary as a slowing world economy saps demand, the Organization of Petroleum Exporting Countries said.

Higher oil-product prices “may not last long as the recessionary outlook for the world economy may deteriorate product demand,” Vienna-based OPEC said in its Monthly Oil Market Report today. In recent weeks, “a combination of a cold snap across the Western hemisphere with unseasonable cuts by refiners and lower cost of crude provided support for product prices,” it said.

U.S. Gulf Coast refining margins rose to 65 cents a barrel in December, from a negative margin of $1.18 in November, OPEC said. In Rotterdam, the European oil-trading hub, margins fell to $2.79, from $4.35, and in Singapore they rose to $.73 from $2.61.

Cold weather and a natural gas supply disruption caused by a dispute between Russia and Ukraine has temporarily strengthened the “outlook” for fuel oil and middle distillates including diesel and gasoil, the European form of heating oil, as consumers switch from gas to oil-derived heating fuels, OPEC said.

BP Plc’s Global Indicator Margin, a measure of refining profitability using data from third parties, averaged $7.32 a barrel for the first eight days this year, compared with $5.20 last quarter and $4.57 in the first quarter of 2008.

Demand for oil-products will decline following the end of winter in the Northern Hemisphere and as slowing economies force consumers to cut spending on travel and goods. Safar Keramati is OPEC’s refining analyst.

Weak demand may also lead to more reductions in processing, or “refinery runs,” by various oil companies, leaving crude oil inventories high, OPEC said.

To contact the reporter on this story: Nidaa Bakhsh in London at nbakhsh@bloomberg.net

Read more...

South African Power Use Stagnates, Easing Pressure

By Ron Derby

Jan. 15 (Bloomberg) -- Eskom Holdings Ltd., which has restricted power supplies to South African mines because of a shortage, expects no growth in the country’s power demand for the next two years as the global economic crisis curbs appetite for commodity exports.

In January last year South Africa’s power network nearly collapsed, closing most mines and metal smelters for five days. That resulted in rationing and caused the deferral of some projects, including an aluminum smelter planned by Rio Tinto Group.

“For the next two years we expect no growth in energy requirements,” Brian Dames, the head of state-owned Eskom’s power generation unit, said in an interview today at the Medupi power plant, which is being built near South Africa’s border with Botswana. “None of us really know what is happening” with the economic downturn.

The economic slowdown may ease pressure on Eskom to raise funding for a five-year, 353 billion rand ($35 billion expansion to ease an electricity shortage that’s curbing economic growth in Africa’s biggest economy. South Africa’s power demand rose by 4.3 percent in 2007, according to government figures.

“It’s become significantly more difficult” to raise finance, Dames said. “We have just seen equity and bond markets essentially closed for all companies.”

Talks to find alternatives are being held with the National Treasury and the World Bank, he said.

Delayed Permission

Eskom ran out of power last year because the economy had grown at a faster-than-expected rate and the government had delayed giving it permission to expand for four years, hoping to attract private investment, which didn’t materialize.

Xstrata Plc and other companies have now shuttered ferrochrome smelters, some of Eskom’s biggest customers, because of reduced demand globally for the stainless steel raw material. That could further slow growth from a decade-low annualized rate of 0.2 percent in the third quarter of last year.

“It’s a relief for Eskom, its not a relief for the country,” Iraj Abedian, the chief executive officer, of Johannesburg-based Pan-African Capital Holdings Ltd., whose services include economic research. “If we don’t invest now we won’t have the energy capacity” to grow in the future.

Eskom is forecasting that demand growth will resume at a rate of 2 percent to 3 percent a year after the next two years, Dames said.

Third Power Plant

Eskom is building two coal-fired power plants and will make a decision on whether to erect another within 18 months, Jacob Maroga, the company’s chief executive officer, said in a separate interview at Medupi. The company is also in talks with the government over how to expand its nuclear energy program after it canceled a 120 billion rand plan to build a second nuclear plant in December, saying it was too costly.

“Nuclear energy must play a role,” he said, adding that Eskom will seek partners to develop its nuclear program. Eskom currently operates one 1,800 megawatt nuclear power plant near Cape Town.

The company will make an application to South Africa’s energy regulator within two months to raise its tariffs, Dames said. Higher tariffs are needed to help the company pay for its expansion, the company has said.

While an application had been due late last year Eskom had to make adjustments because of the falling price of coal, which is used to generate about 90 percent of its power, he said, adding that the company expects to get better prices for its “short-term” coal-contracts, which account for about 20 percent of its needs. Eskom burns about 125 million tons of coal a year.

Elections

Coal exported from the port of Richards Bay in South Africa, which is mostly of a higher grade than that burned by Eskom, has fallen 53 percent from a record in July.

In June last year, Eskom was allowed to raise its prices by 27.5 percent, less than half the level it requested. That request prompted criticism from political parties and Congress of South African Trade Unions, South Africa’s biggest federation of labor unions, threatened to call a national strike.

South Africa is due to hold elections before mid-July.

To contact the reporter on this story: Ron Derby in Johannesburg at rderby1@bloomberg.net

Read more...

Edison Stake to Be Put Up for Sale, CEO Quadrino Says

By Adam L. Freeman and Mahmoud Kassem

Jan. 15 (Bloomberg) -- Edison SpA Chief Executive Officer Umberto Quadrino said a stake in Italy’s second-largest electricity producer may be put up for sale soon.

“There is a 10 percent stake that could be for sale in the near future,” Quadrino told reporters in Cairo today, without identifying the potential buyer. Edison rose to a one-month high in Milan trading following his comments.

A2A SpA and Electricite de France SA, Edison’s majority shareholders, are in talks on buying a 10 percent interest in the Milan-based company from Carlo Tassara SpA, Quotidiano Energia reported yesterday, without saying where it got the information.

Tassara, financier Romain Zaleski’s holding company, said in December it signed an agreement with a group of Italian creditors including Intesa Sanpaolo SpA to “stabilize and reduce” its debt within a year.

Tassara, which owns stakes in some of Italy’s biggest companies, including Intesa and insurer Assicurazioni Generali SpA, needs to reorganize its debt after the global financial crisis eroded the value of its holdings. Italy’s Il Messaggero reported Nov. 16 that Tassara owed 5.5 billion euros ($7.2 billion) to lenders.

A2A Chairman Giuliano Zuccoli said today that his company and EDF aren’t in talks to buy the Tassara stake, adding that they would consider anything it puts up for sale, Italian news agency Ansa reported. Zuccoli is also chairman of Edison.

Francois Molho, a spokesman for EDF in Paris, declined to comment when contacted by Bloomberg News.

Edison shares rose as much as 4 percent to 98.5 euro cents, the highest intraday price since Dec. 8. The stock was at 97.8 cents as of 2:57 p.m. local time, giving the company a market value of 5.19 billion euros.

Italy’s largest power producer is Enel SpA.

To contact the reporters on this story: Adam L. Freeman in Rome at afreeman5@bloomberg.net; Mahmoud Kassem in Cairo at mkassem1@bloomberg.net.

Read more...

Total’s Refining Margins Rise After Crude Oil Drops

By Tara Patel

Jan. 15 (Bloomberg) -- Total SA, Europe’s largest oil refiner, said fourth-quarter profit from producing gasoline, diesel and other fuels rose as crude prices dropped.

Refining margins rose to $41.40 a ton from $30.10 a ton a year earlier, the Paris-based company said today in a statement on its Web site. The average price for liquid products fell to $49.40 a barrel from $84.50 a barrel a year earlier, while natural gas rose to $7.57 a million British thermal units from $6.08.

“The overall impact on our preliminary fourth-quarter estimates will be a gain of around 10 million euros,” Bertrand Hodee, an analyst at Kepler Capital Markets in Paris, wrote in a research note. He was expecting a 36 percent drop in fourth- quarter profit from the previous three months because of the drop in oil prices.

Refining margins in the fourth quarter were 8 percent lower than the $45 a ton reported in the third quarter, according to the statement.

Crude oil for next-month delivery averaged $59.08 a barrel in New York in the last three months of 2008, down from $118.22 in the third quarter, according to data compiled by Bloomberg. Futures averaged $90.50 in the fourth quarter of 2007.

Oil for February delivery traded at $37.50 on the New York Mercantile Exchange at 12:23 a.m. London time today, down 75 percent from the July 11 record of $147.27.

The French oil company, scheduled to release fourth-quarter earnings on Feb. 12, has said fourth-quarter maintenance would lead to partial shutdowns of the Feyzin and Provence refineries.

To contact the reporter on this story: Tara Patel in Paris at tpatel2@bloomberg.net

Read more...

Morgan Stanley Said to Seek Supertanker to Store Oil

By Alaric Nightingale and Todd Zeranski

Jan. 15 (Bloomberg) -- Morgan Stanley is seeking a supertanker to store crude oil, joining Citigroup Inc. and Royal Dutch Shell Plc in trying to profit from higher prices later in the year, four shipbrokers said.

The bank has yet to find a suitable vessel, said one of the brokers, all of whom asked not to be identified because the information is private. Carlos Melville, a spokesman for Morgan Stanley in London, declined to comment.

“There’s a lot of people looking for storage,” Denis Petropoulos, London-based head of tankers at Braemar Shipping Services Plc, the world’s second-largest publicly traded shipbroker, said by phone.

Banks and commodity traders are seeking new ways to make money after the Standard & Poor’s 500 Index fell by the most since 1937 last year and crude oil prices dropped more than $100 a barrel from their peak. Companies including Koch Industries Inc. and BP Plc are hoarding enough crude at sea to supply the world for almost a day.

Frontline Ltd., the world’s biggest owner of supertankers, yesterday said about 80 million barrels of crude oil are being stored in tankers, the most in 20 years. A purchaser could buy oil now, keep it for months at sea and fetch better prices by selling oil futures that are higher than the spot price.

The so-called contango pricing structure has been caused by excess oil supply as demand slows and speculation that output cuts by the Organization of Petroleum Exporting Countries will reduce the glut later this year.

Tanks Filling Up

Slumping U.S. oil demand means tanks are filling at Cushing, Oklahoma, the pricing point for the benchmark West Texas Intermediate grade. Futures contracts indicate WTI will gain an average of about $2.15 a barrel a month until December.

Supertanker storage deals are being done at about $75,000 a day, according to Petropoulos. Assuming the ship has a 2 million- barrel cargo, that works out at $1.12 a barrel over a 30-day period. Traders also need to pay financing and insurance costs.

Phibro LLC, Citigroup’s commodities trading unit, has the carrier Ice Transporter stationed off north Scotland, according to people familiar with the matter. Shell, Europe’s largest oil company, has booked the supertankers Leander and Eliza.

Oil traders hired two more ships to store North Sea crude off Scotland’s Orkney Islands. The 2 million-barrel supertanker Luxembourg is scheduled to arrive at Scapa Flow on Jan. 21 while the 600,000-barrel transporter Atlantic Galaxy is already there, said Captain William Sclater, operations manager at the port.

Oil Grades

The easiest types of oil to buy for the trade are likely to be either WTI or the North Sea grades Brent, Forties, Oseberg or Ekofisk. That’s because they are the ones used to settle the most-traded futures contracts.

Other oils, such as those from the Middle East and Africa, are usually bought and sold at prices related to the main European and U.S. grades. Because those prices fluctuate, it means traders assume an extra risk by hoarding them.

Morgan Stanley owns half of Heidmar Inc., which operates smaller oil tankers. Heidmar hasn’t had demand for its tankers to store oil, probably because they aren’t the largest supertankers that investors need for the contango trade, Tim Brennan, the company’s chief executive officer, said by phone Jan. 8.

To contact the reporter on this story: Alaric Nightingale in London at Anightingal1@bloomberg.netTodd Zeranski in New York at tzeranski@bloomberg.net

Read more...

Schroeder Will Join TNK-BP to End Owners’ Dispute

By Eduard Gismatullin

Jan. 15 (Bloomberg) -- Gerhard Schroeder, the former German chancellor, will join TNK-BP’s board as a non-executive director as BP Plc’s Russian oil venture installs new management and seeks to put a damaging power struggle behind it.

James Leng, chairman of Corus Group Plc, and Alexander Shokhin, president of the Russian Union of Industrialists, will also become non-executive directors, BP said today in a statement. Mikhail Fridman, a shareholder in TNK-BP, said the new directors will help the company become an “international major” to compete with the world’s largest oil producers.

BP Chief Executive Officer Tony Hayward and his billionaire partners in TNK-BP -- Fridman, German Khan, Viktor Vekselberg and Len Blavatnik -- agreed on Sept. 4 to end an eight-month dispute over the running of the venture by removing CEO Robert Dudley, who left the company on Dec. 1. The power struggle hurt output and discouraged investors.

“It’s going to be reasonably positive in the context of Russia and all those vagaries that it brings with it,” Jason Kenney, an analyst at ING in Edinburgh, said today by telephone. Schroeder “can hopefully progress assets for TNK-BP using the influence” he has with Prime Minister Vladimir Putin, he said.

Nord Stream

Schroeder has close personal ties with Putin and chairs OAO Gazprom’s Nord Stream pipeline venture, which plans to build a link under the Baltic Sea to supply Russian natural gas directly to Germany. President Dmitry Medvedev was Gazprom’s chairman before being elected to the presidency last year.

Russian investors have pushed for TNK-BP to expand internationally, proposing projects in Poland, Germany and northern Iraq. BP’s directors have previously shot down most of these suggestions, according to the billionaire shareholders, collectively known as AAR.

TNK-BP stockholders “have agreed to appoint the three directors to avoid the risk of deadlock between the 50:50 owners of the joint venture, which are represented on the 11-strong board by four directors from each side,” BP said.

TNK-BP Ltd. shareholders may soon announce the nomination of Denis Morozov, the former head of miner OAO GMK Norilsk Nickel, to the post of CEO, BP said Jan. 9. Morozov has a “high” chance of being appointed to the job, Vekselberg said Nov. 13.

Tim Summers will continue as acting CEO until the new nomination, BP said today in the e-mailed statement.

Board Expansion

Last week, BP and the Russian investors approved expansion of the board to 11 directors, four from each side and three independents. The earlier board had 10 members, split evenly between BP and AAR.

Stockholders also agreed, as part of the September accord, to study the sale of shares in a unit of TNK-BP Ltd. and ways to boost the company’s market value, BP said Jan. 9. TNK-BP, Russia’s third-largest oil company, accounts for almost a quarter of BP’s output.

The new directors, “along with a recently agreed new system of corporate governance, will strengthen our company and make it more competitive, efficient and valuable,” Vekselberg said today in an e-mailed statement.

Shokhin serves as a non-executive director on the boards of OAO Lukoil, Russia’s largest publicly traded oil company, and OAO Russian Railways, the national rail monopoly.

Leng, in addition to his post at Corus, is deputy chairman of Tata Steel Ltd., India’s biggest steelmaker, which bought Corus in January 2007. He also advises on investments at HSBC Holdings Plc, Europe’s largest bank.

Rio Tinto Group, the world’s third-largest mining company, yesterday said Leng will take over as chairman in April, replacing Paul Skinner, who will retire.

To contact the reporter on this story: Eduard Gismatullin in London at egismatullin@bloomberg.net

Read more...

Russia, Ukraine Agree Talks to Resolve Gas Dispute

By Kateryna Choursina and Nicholas Comfort

Jan. 15 (Bloomberg) -- Russian Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Timoshenko will meet in Moscow on Jan. 17 to resolve a natural-gas dispute that’s disrupted shipments to the European Union for nine days.

The meeting was called after the EU threatened to urge companies in the 27-nation bloc to seek legal redress if supplies aren’t resumed without further delay. The crisis has led to power shortages in the Balkans, with rationing introduced and factories shut down because of a lack of fuel.

Natural gas jumped and the ruble slid to a record as the continent endured a second week without transit gas supplies from Ukraine. Slovak Prime Minister Robert Fico said he sees no early resumption of flows, halted last week after Russia accused Ukraine of siphoning off gas intended for EU customers for its own use, a charge the country denies.

“Russia and Ukraine will be at loggerheads for the foreseeable future,” Frank Schallenberger, a commodities analyst at Landesbank Baden-Wuerttemberg in Stuttgart, said today in a Bloomberg Television interview. “The only way to solve this problem is to find other routes and build pipelines to get the gas to Europe.”

Russia stopped flows through Ukraine on Jan. 7 after negotiations over gas prices and transit fees broke down. OAO Gazprom, the Russian gas exporter that provides a quarter of the continent’s gas needs, estimates it has lost $1.1 billion in export revenue since the crisis unfolded.

Ukraine’s Guarantee

Timoshenko sent a telegram to Putin guaranteeing Russian transit gas flows to EU nations “apart from 8 percent of gas used to fuel gas pumping,” according to a statement on the government Web site today. An argument over “technical gas,” needed to ensure Ukraine’s pipeline system can operate, has been one of the sticking points.

German Chancellor Angela Merkel took aim at Russia a day before she’s due to host talks with Putin in Berlin, saying Moscow could lose its “reliability” as an energy partner if gas deliveries are interrupted for much longer.

Russian President Dmitry Medvedev yesterday invited Ukraine and the EU to an emergency summit in Moscow this weekend to reach a settlement and also prevent a repeat of the crisis.

Russia is prepared to compensate Ukraine should it agree to ship gas to Europe from underground storage reservoirs near its western border, Medvedev said.

Diversify Supplies

He made the proposal after meeting the prime ministers of Slovakia, Moldova and Bulgaria, nations hit hardest by the supply cutoff. The cutoff has already led to renewed calls for region to diversify its sources of energy away from Russia.

Ukraine’s President Viktor Yushchenko said he supported three-way talks, rejecting Russian’s offer to host the summit in Moscow because it’s a party in the dispute. He suggested Prague or Brussels as alternatives.

The EU said it’s ready to send representatives to a meeting to “assist” Russia and Ukraine in reaching a settlement. EU officials “urge once again Russia and Ukraine to resume gas supplies to the EU immediately,” spokesman Johannes Laitenberger told reporters in Brussels today.

Gas prices in the U.K., Europe’s largest market, climbed as much as 8.1 percent to 67 pence a therm, according to broker Spectron Group Ltd. That’s equal to $9.79 a million British thermal units. A therm is 100,000 Btus. The ruble fell as low as 32.4112 per dollar.

‘Technically Impossible’

Ukraine refused to pump Russian gas to European consumers for a third day, reneging on an EU-brokered deal, Gazprom said today. Its western neighbor declined shipments to the Balkans, Slovakia and Moldova, citing the lack of a technical agreement, the Moscow-based company said.

NAK Naftogaz Ukrainy, the state energy company, said the request had been “technically impossible” to meet without endangering domestic supplies.

“Gazprom requested the same route as yesterday,” Naftogaz spokesman Valentyn Zemlyanskyi said in a phone interview from Kiev. “Gas should be sent through all stations in sufficient amounts and with sufficient pressure.”

The transit route requested by Gazprom, via the Sudzha pumping station, would have cut off deliveries to four provinces, Yushchenko said yesterday.

“This is a lose-lose situation,” said Eugen Weinberg, a senior commodity analyst at Commerzbank AG, in a television interview. “I don’t see any solution yet as one side accused the other of theft, while Ukraine says Russian gas isn’t being delivered at the agreed levels.”

Present

Ukraine demanded 1.5 billion cubic meters of gas for free in the first three months of the year to resume transit to Europe, Gazprom Chief Executive Officer Alexei Miller said yesterday. That volume of gas would amount to giving Ukraine a $700 million present, Miller said.

Timoshenko said in the telegram that all natural gas used for technical needs will be paid for once price is set for Russian gas deliveries.

Slovakia is using imports and backup generators to avoid a blackout following the supply cut. It’s also asked Ukraine to ship 20 million cubic meters of gas from its reserves while Gazprom has agreed to supply that amount to storage in eastern Ukraine, Fico said. The Slovak side is awaiting a response from the Ukrainians.

Bulgaria has slashed daily consumption by more than half, using gas from reserves to meet demand, shut 72 factories and rationed gas for heating utilities and 150 other companies. Moldova has also imposed curbs on gas use.

“Within a week I think normality will return and gas flows will resume but the political scars will take longer to heal,” said Rob Laughlin, senior broker at MF Global Ltd. in London.

Gazprom’s overall deliveries to Europe fell by about 60 percent when it halted transit flows and supplies to Ukraine’s domestic market were suspended Jan. 1.

In 2006, Russia turned off gas exports to Ukraine for three days, causing volumes to fall in the EU, and also cut shipments by 50 percent last March during a debt spat.

To contact the reporters on this story: Kateryna Choursina in Kiev kchoursina@bloomberg.net

Read more...

BNP Says Euro May Weaken Unless ECB Cuts Rate to 1% This Year

By Bo Nielsen and Gavin Finch

Jan. 15 (Bloomberg) -- The euro may weaken unless the European Central Bank cuts its main interest rate to 1 percent this year, according to BNP Paribas SA.

“If the ECB is reluctant to continue this pace of easing, it would be negative for the euro,” said Ian Stannard, a currency strategist in London at BNP. “The ECB has got to go to 1 percent this year. There are still some big risks for the euro.”

The ECB cut the rate by 50 basis points to 2 percent today, as predicted by economists.

The euro fell 0.8 percent to $1.3085 as of 1:11 p.m. in London.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

Read more...

Nordic Currencies: Norway’s Krone Falls as Stocks Extend Drop

By Bo Nielsen

Jan. 15 (Bloomberg) -- Norway’s krone dropped for a third day against the euro as stock-market losses sapped investors’ appetite for smaller, less liquid currencies.

The krone slipped to the lowest level this week as the Dow Jones Stoxx 600 Index traded near the weakest in almost six weeks. The European Central Bank will probably cut its main interest rate by a half-point to 2 percent today, according to the median forecast of 60 economists surveyed by Bloomberg to try to revive the slump in Scandinavia’s biggest trade partner.

“Continued risk aversion on financial-sector woes point to krone and Swedish krona underperformance,” David Simmonds, head of foreign-exchange research in London at Royal Bank of Scotland Group Plc, wrote in a note today.

Norway’s krone depreciated 0.4 percent to 9.5062 per euro by 12:14 p.m. in Oslo. It weakened as much as 1.6 percent to 7.2969 against the dollar, the lowest level since Dec. 5.

Investors should sell both Scandinavian currencies against the Swiss franc today, Simmonds said. The franc appreciated 0.1 percent to 6.4610 per krone.

Sweden’s krona was at 11.0710 per euro, from 11.0787 yesterday, and fell 0.3 percent to 8.4078 versus the dollar.

The Swedish government’s budget deficit will reach 87 billion kronor ($10.3 billion) this year and 65 billion kronor in 2010, the Stockholm-based the National Debt Office said in a report on its Web site today. That compares with November’s estimate of a 23 billion-kronor deficit in 2009 and a 35 billion- kronor gap next year.

Government bonds in the region were mixed. The yield on Sweden’s 5.25 percent government note due March 2011 was little changed at 1.34 percent. The yield on Norway’s 6 percent bond due May 2011 slipped seven basis points to 2.34 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net

Read more...

Trichet Says Inflation Risks Are ‘Balanced’ on Slump

By Simone Meier

Jan. 15 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said inflation risks are “broadly balanced,” signaling that he’s reluctant to keep up the current pace of interest-rate cuts.

“It is not the intention of the Governing Council to find itself in a liquidity trap,” Trichet told reporters in Frankfurt after cutting the ECB’s benchmark by 50 basis points to 2 percent, matching a record low. Policy makers will probably wait until March before deciding to move rates again, he said.

Trichet is reluctant to follow the Federal Reserve and cut borrowing costs too close to zero. The economy of the 16 euro nations is nevertheless deteriorating more rapidly than the ECB anticipated last month as the global financial crisis hurts exports, damps spending and threatens credit ratings in the region.

The euro initially rose after Trichet’s comments, climbing as much as 1 percent to $1.3241. It traded at $1.3152 at 3:31 p.m. in Frankfurt. The ECB has reduced its benchmark by 225 basis points since early October.

“The euro area is experiencing a significant slowdown largely related to the effect of the intensification of financial turmoil,” said Trichet. “Medium-term inflation is broadly balanced and in line with our definition of price stability.”

Trichet, who said today’s decision was unanimous, indicated the ECB will wait for revised growth and inflation projections in March before taking its next decision.

March Meeting

“Our decision in February is only in three weeks,” Trichet said. “We consider it is not a relevant one to make monetary policy decision.”

The ECB “has been overwhelmed by a series of dismal data,” said Carsten Brzeski, an economist at ING Group in Brussels. “The recession in the eurozone seems to worsen by the day, while at the same time inflation is no longer a concern.”

The Fed last month lowered its key rate to a target range of zero to 0.25 percent. Japanese and Swiss rates are also close to zero. The Bank of England on Jan. 8 cut its main lending rate to 1.5 percent, the lowest since the bank was founded in 1694.

The ECB has reduced its benchmark by 225 basis points since early October. Trichet said last month that there’s a limit to how far the ECB can cut rates after lowering the benchmark by 75 basis points, its most aggressive step ever.

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net

Read more...

Russian Ruble Slides to Pre-1998 Crisis Low; Forint, Zloty Sink

By Emma O’Brien

Jan. 15 (Bloomberg) -- Russia’s ruble tumbled to a record low against the dollar after the central bank accelerated its devaluation of the currency in an effort to stem the drain on foreign-exchange reserves.

The currency dropped to as low as 32.4668 per dollar, the weakest since Russia redenominated the ruble at the start of 1998, before the government’s default in August that year. The trading band versus the dollar-euro basket was widened for the fourth time in five days, a Bank Rossii official said. The ruble has lost 27 percent against the dollar since August.

“Russian policy makers have realized they can’t fight this and that’s why we’re seeing this increase in the pace of devaluation,” said Peter Rosenstreich, chief market analyst at Geneva-based currency-trading firm ACM Advanced Currency Markets. “The staggered devaluation will continue as it’s the only way to relieve pressure on reserves depletion.”

Prime Minister Vladimir Putin pledged last month to avoid “sharp” swings in the ruble after slumps of as much as 27 percent in a day in 1998 fueled the financial crisis. The ruble led currency declines in Poland, Hungary and across eastern Europe as a ninth day of gas restrictions to industry exacerbated concern of a recession.

Russia’s energy-led economy is slowing after a 64 percent drop in the price of Urals crude, the country’s main export oil blend, since August to $43.47. Russia cut its average oil forecast for this year to $40 a barrel, from a previous $50, Vedomosti newspaper in Moscow reported, citing government officials. That’s below the $70 average the finance ministry says is needed to balance this year’s budget.

Gas Dispute

The central bank’s defense of the ruble drove foreign- currency reserves $11.7 billion lower to $426.5 billion in the 2 1/2 official trading days between Dec. 26 and Jan. 9, extending the depletion since August to 29 percent, according Bank Rossii data published today.

The dispute between Russia and Ukraine remained unresolved today as Putin and Ukrainian Prime Minister Yulia Timoshenko agreed yesterday to meet in Moscow to discuss the impasse on Jan. 17.

Emerging-market currencies in the region have fallen since the start of the year, led by a 6.1 percent slide in the Romanian leu against the euro and a 5 percent drop in the forint. Hungary’s currency was 0.8 percent lower today at 279.42 per euro. Poland’s zloty slid as much as 1.6 percent to 4.2440 against Europe’s common currency today, its lowest level since May 4, 2005.

Most Vulnerable

Hungary and Slovakia are the most vulnerable to OAO Gazprom’s stoppage of exports because they depend more on Russian gas for energy, according to UniCredit SpA. The stoppages have forced Romania to close two gas-import stations.

Industrial production dropped the most in 16 years in Hungary in November and the most in more than eight years in Romania as a recession in western Europe cut demand for exports.

Bank Rossii has devalued the ruble 16 times since Nov. 11, allowing it to weaken 21 percent against the basket, which is made up of about 55 percent dollars and 45 percent euros and is used to protect exporters from currency swings.

“The bottom line is that they need to get this over with and the faster the better,” said Rory MacFarquhar, Moscow economist for Goldman Sachs Group Inc., which forecasts a further 12 percent depreciation in the ruble versus the basket. “They’re still catching up with what happened in oil last year. They’re still getting it to a sustainable level.”

The ruble weakened 1.4 percent to 36.8044 versus the basket today. It closed at 36.2937 yesterday, when it was allowed to fall 1.4 percent. Devaluations in December averaged about 0.6 percent a day, according to data compiled by Goldman Sachs Group Inc. The currency fell by an average 1.5 percent in separate devaluations this week, according to data from Bloomberg and the Micex stock exchange.

‘One-Sided Bet’

Russia’s currency was 1.5 percent weaker at 32.2178 per dollar by 5 p.m. in Moscow. Russia took three zeros off the ruble on Jan. 1, 1998, replacing 1,000-ruble banknotes with 1-ruble notes. It fell 1.4 percent to 42.4555 per euro.

Investors see the ruble as a “one-sided bet” and are placing so-called short positions, or wagers it is going to fall further, said ACM’s Rosenstreich, who predicts a total ruble depreciation of 15 percent against the dollar and the basket in the first quarter. BNP Paribas SA, France’s largest bank, advises clients to short the ruble versus the basket.

The worst financial crisis to hit the country since it defaulted on $40 billion of debt in 1998 and investor concern about Russia’s invasion of neighboring Georgia in August spurred a record $129.9 billion to be withdrawn from the country last year, according to central bank figures released on Jan. 13. BNP Paribas estimates outflows between August and December at more than $200 billion.

The ruble is now able to fall about 20 percent below Bank Rossii’s target basket rate, from 3.6 percent on Nov. 11.

Budget Deficit

Russia may have a 4 trillion-ruble ($124 billion) budget deficit this year should Urals average $32 a barrel and the ruble fall to 34 per dollar, the Interfax newswire reported, citing unidentified people “close to the government.” It would also result in an inflation rate of 15 percent, the report said. Russian inflation was 13.3 percent in December.

Citigroup Inc. says it will fall another 8 percent against the basket this quarter, while Alexei Moiseev, head of fixed- income research at Moscow investment bank Renaissance Capital, forecasts another 13 percent depreciation in the dollar-ruble rate.

To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net

Read more...

U.S. Producer Prices Fall 1.9% as Fuel Costs Plunge

By Shobhana Chandra

Jan. 15 (Bloomberg) -- Prices paid to U.S. producers fell 1.9 percent in December, capping the first annual decrease in seven years, as demand for raw materials collapsed with the deepening recession.

The drop was in line with forecasts and followed a 2.2 percent decrease in November, Labor Department figures showed today in Washington. Excluding fuel and food, the so-called core rate rose 0.2 percent after a 0.1 percent increase.

The global slowdown has caused sales at companies such as Alcoa Inc. to slump, leading to cutbacks in output and hiring that are reverberating through the economy. Falling commodity costs and asset values are raising concern among some Federal Reserve officials about the danger of deep and extended price decreases that would worsen the economic downturn.

“The recession will continue through most of the year, and in this environment, producer prices can only move downward,” said Sal Guatieri, an economist at BMO Capital Markets in Toronto, who forecast a 2 percent drop in PPI.

Treasuries were little changed after the report, while stock-index futures remained lower. Yields on benchmark 10-year notes were at 2.21 percent at 8:35 a.m. in New York. Futures on the Standard & Poor’s 500 Stock Index lost 0.8 percent to 833.40.

Economists’ Forecasts

Prices paid to factories, farmers and other producers were forecast to decline 2 percent, according to the median estimate of 77 economists in a Bloomberg News survey. Estimates ranged from declines of 0.8 percent to 2.9 percent.

Core prices were projected to rise 0.1 percent for a second month, the survey median showed.

Wholesale prices fell 0.9 in 2008, the first drop since 2001. Excluding food and energy, wholesale costs rose 4.3 percent last year, the biggest gain since 1988.

Another Labor report showed first-time claims for unemployment benefits rose 54,000 last week, more than forecast, to 524,000, signaling companies stepped up the pace of firings at the start of the year.

President-elect Barack Obama is pressing for quick passage of a stimulus plan of about $775 billion that would cut taxes, boost infrastructure spending, and create jobs.

Fed officials projected that “the economic outlook would remain weak for a time,” and discussed setting an explicit target for inflation to discourage expectations that price increases will slow “below desired levels,” according to minutes of their December meeting issued last week.

‘Uncomfortably Low’

Some policy makers saw “significant risks that inflation could decline and persist for a time at uncomfortably low levels,” the minutes said. Price increases will likely “continue to abate because of the emergence of substantial slack in resource utilization and diminishing pricing power.”

In today’s report, the drop in wholesale prices last month was led by a 9.3 percent decline in fuel costs. Gasoline dropped a record 26 percent and heating oil expenses dropped 24 percent, the most since 2003.

Food prices decreased 1.5 percent, the biggest drop in almost three years.

Tumbling prices in earlier stages of production indicate costs for finished goods will keep dropping. Intermediate goods, such as chemicals, fertilizer and lumber, dropped 4.2 percent. Prices for raw materials, or so-called crude goods, fell 5.3 percent following a 12.5 percent drop.

Cars, Medicines

The gain in finished goods prices excluding food and fuel was paced by a 1.2 percent increase in passenger car costs and a 1.1 percent gain in medicines.

Crude oil futures have fallen about three-fourths from the July peak of $147.29 a barrel on the New York Mercantile Exchange. Aluminum prices are at five-year lows as automakers, builders and appliance manufacturers cut orders.

Alcoa, the largest U.S. aluminum producer, this month reported its first quarterly net loss in six years and said it will further cut output in 2009 if demand continues to weaken.

“The aluminum industry is caught up in a perfect storm of historic proportion,” Chief Executive Officer Klaus Kleinfeld said on a conference call with analysts on Jan. 13. “Inventories are building and prices are decreasing.”

Producer prices are one of three inflation gauges reported by the Labor Department. Prices of goods imported into the U.S. fell for a fifth consecutive month in December, figures showed yesterday.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Read more...