Clinton’s Slumming May Boost Asia’s $120 Billion: William Pesek

Commentary by William Pesek

Feb. 25 (Bloomberg) -- Eight long years of “you are either with us or against us” ended in a Jakarta slum.

It was an apt place to turn the page on a dark chapter of U.S. foreign policy. Secretary of State Hillary Clinton marked it last week by visiting Indonesians most at risk as a crisis that began in the U.S. spans the globe.

The chants of “Hillary! Hillary!” greeting arguably the most powerful woman in the world were sign enough that the bellicosity of the Bush years is over. Southeast Asia is anxious for better relations with the U.S., and vice versa.

Yet the most important moment of Clinton’s Asia tour received scant attention. It wasn’t Clinton talking about the Rolling Stones on a Jakarta talk show. Nor was it urging China to continue buying U.S. debt, calling on North Korean leader Kim Jong Il to chill out, or visiting Japan’s royal family in Tokyo. It involved the rather arcane issue of swap lines.

Indonesia proposed a currency-swap accord with the U.S. to help bolster the rupiah, the second-worst performer in Asia outside Japan. It would be akin to those the Federal Reserve has with Brazil, Mexico, Singapore and South Korea. It’s the right thing to do and Clinton should expedite her pledge to take the request to U.S. President Barack Obama.

Impressive Stability

Much has been said about Indonesia’s impressive stability. Even as the U.S. and Japan slide into deepening recessions, Indonesia’s $433 billion economy is expected to grow about 4 percent this year. Clinton was right to praise Indonesia as a model of how “Islam, democracy and modernity not only can coexist, but thrive together.”

Few nations are as geopolitically important. Indonesia is home to the world’s largest Muslim community and the fourth- largest population, spread out on the largest archipelagic state. Imagine overseeing 17,000 islands. Indonesia also is resource rich. The place even has oil.

Indonesia has found success in the bond market, too. On Feb. 23, the government sold triple the amount it targeted in its first sale of Islamic bonds to local individual investors this year. It raised 5.56 trillion rupiah ($466 million). Not bad considering the state of international credit markets.

Even so, with per-capita income of $2,271, persistent poverty and rampant corruption squandering output, 2009 won’t be kind to Indonesia. It may be in better shape than, say, politically unstable Thailand, yet global turmoil is closing in.

Just an ‘Appetizer’

Marc Faber, Hong Kong-based publisher of the Gloom, Boom & Doom Report, makes a good point when he says we have seen only the “appetizer” of a global slump. The worst is yet to come.

Finance ministers from Japan, China, Korea and 10 Southeast Asian nations agreed this week to form a $120 billion pool of foreign-exchange reserves that can be used to fend off speculators. It’s a good move for a region that has been unimpressive on the cooperation front during this crisis.

Not that it’s a cure-all. Investment strategist Simon Grose-Hodge of LGT Group in Singapore says the fund will “only act to control speed rather than direction and try to keep intra-Asia cross-rates roughly in line” amid increased market turmoil.

The trouble is, the money leaving economies such as Indonesia isn’t speculative in nature. It’s not hedge funds or banks with highly leveraged proprietary trading desks, but pension funds, insurance companies and mutual funds. They aren’t selling in panic, but analyzing market risks globally. Many are wondering anew about Indonesia.

Debt Load

The nation’s currency reserves slid to $50.9 billion at the end of January, from $60.6 billion in July, as the central bank intervened to slow the rupiah’s decline. A low credit rating complicates things. Moody’s Investors Service rates it Ba3, three levels below investment grade. This also is an election year, an added challenge for Indonesia in wooing foreign capital.

The swap arrangements announced by the Fed in October bestowed a “Good Housekeeping” seal on economies that are following responsible policies yet feeling the brunt of the credit crisis. Indonesia will fit that category more and more as 2009 unfolds. It would be a mistake for the U.S. not to reach out.

The risk is that Indonesia will struggle to raise dollars if things darken. Yet not standing by Indonesia “risks diminishing U.S. influence with an ally and the most populated Muslim country and exacerbating the country’s challenges with the risk of unintended consequences,” Marc Chandler, global head of currency strategy at Brown Brothers in New York, wrote in a note yesterday.

Asians are livid that their post-1997 recovery has been sidetracked by irresponsible U.S. policies and clumsy crisis management in Washington. While Asians should have done more to reduce their reliance on exports, governments were broadsided by the U.S. economy’s crash. If things worsen, $120 billion isn’t going to do it.

Clinton saw firsthand how the U.S.’s woes are hurting Asia. The U.S. should put money where its public-relations intentions are. Indonesia is as good a place to start as any.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

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Tokyo Electric Shuts Fukushima Reactor After Alarm

By Megumi Yamanaka and Taku Kato

Feb. 25 (Bloomberg) -- Tokyo Electric Power Co., Asia’s biggest generator, shut a nuclear reactor north of Tokyo after an alarm sounded. No radiation leaked.

The company manually shut the No. 1 reactor, with 460 megawatts of capacity, at the Fukushima Daiichi nuclear facility at 8:49 a.m. today, it said on its Web site. The alarm signaled high pressure levels inside the reactor, it said. A pipe connected to a pressure valve was later found to have uncoupled, according to the statement.

Regular maintenance at the reactor was completed on Feb. 21. The company didn’t say when the plant can be restarted.

To contact the reporter on this story: Megumi Yamanaka in Tokyo at myamanaka@bloomberg.net; Taku Kato in Tokyo at tkato6@bloomberg.net.

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China Exports Made It World’s Largest Greenhouse-Gas Factory

By Todd White and Jeremy van Loon

Feb. 25 (Bloomberg) -- China became the world’s biggest generator of greenhouse gases largely by making electronics, metals and chemicals for wealthier countries.

Export manufacturing comprised about half of China’s 45 percent increase in carbon-dioxide emissions from 2002 to 2005, the Center for International Climate and Environmental Research said on its Web site. Developed nations bought a majority of the goods, according to the Oslo-based group, which contributed to the study being published in Geophysical Research Letters.

The findings illustrate “carbon leakage” in which richer countries bound by international agreements to cut emissions increase imports from poorer nations that have no limits. Under the 1997 Kyoto treaty, 37 developed nations vowed to reduce emissions and to meet individual targets by 2012.

China, the second-biggest exporter after Germany, powers its factories largely by burning coal, the dirtiest fuel among the five major power sources. Every two weeks last year, a new coal- fired plant was built in the world’s most populous country.

The nation in 2006 released 6.02 billion metric tons of carbon dioxide, the main gas blamed for global warming, exceeding the 5.9 billion-ton output of the U.S., according to Bloomberg data. China is the second-largest energy user after the U.S.

The U.S., Canada and Japan in December rebuffed demands by developing countries for pledges to cut greenhouse-gas emissions at the UN climate talks in Poznan, Poland. Requests by China and South Africa for more industrialized nations to share clean- energy technologies received no support at the talks.

The next round of UN climate talks is in December in Copenhagen.

To contact the reporters on this story: Todd White in Madrid at twhite2@bloomberg.netJeremy van Loon in Berlin at jvanloon@bloomberg.net

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Oil May Rally $3 on Close Above 50-Day Mean: Technical Analysis

By Grant Smith

Feb. 25 (Bloomberg) -- Crude oil may rally more than $3 a barrel if it closes above its 50-day moving average of $40.25 in New York today, according to technical analysis by consultant PetroMatrix GmbH.

Crude may climb to toward its higher Bollinger band at $43.80 a barrel, PetroMatrix founder Oliver Jakob said in a report e-mailed from Zug, Switzerland today.

Bollinger bands, a technique developed by analyst John Bollinger in the 1980s, use historical volatility to set upper and lower targets either side of the moving average price of a commodity, currency or security.

The chart shows the 50-day moving average for crude on the New York Mercantile Exchange with oil’s upper and lower Bollinger bands. Front-month futures last settled above their 50-day average on Jan. 26.

Oil for April delivery gained as much as 90 cents, or 2.3 percent, to $40.86 a barrel, on the New York Mercantile Exchange. It traded at $40.35 at 12:15 p.m. London time.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

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Sibir Suspends CEO, Examines Tchigirinski Deals

By Stephen Bierman

Feb. 25 (Bloomberg) -- Sibir Energy Plc, a London-based oil company, suspended Chief Executive Officer Henry Cameron pending a probe into the real estate dealings of Russian shareholder Chalva Tchigirinski that will take “months” to complete.

Cameron will continue to help the company “recover all monies owed by any Tchigirinski interest,” Sibir said in a statement today. Cameron’s deputy, Stuard Detmer, was named acting CEO.

Sibir was suspended from London trading on Feb. 19 after the company said businesses related to Tchigirinski owed the Siberian oil producer $210 million more than indicated in previous statements. A week earlier, Sibir said that the former billionaire owed $307.4 million and agreed to sell an airplane and property in Russia, France and Britain to pay it by October.

“We don’t know yet how long the investigation is going to take,” Detmer said by mobile phone today. “We expect to get some pretty quick answers, in a matter of weeks, but the final report will probably take months.”

Tchigirinski, who once had a $2.5 billion fortune, was one of 52 Russians dropped from Finans magazine’s annual list of billionaires this year. The 59-year-old businessmen halted work last November on the Russia Tower, a planned skyscraper in Moscow’s new financial district designed by architect Norman Foster to be Europe’s tallest building when completed.

Moscow Government, Shell

“The board is satisfied” that the debt and related costs “will be recovered by Sibir in due course even if the properties are sold on a heavily discounted basis,” Sibir said Feb. 11.

Tchigirinski couldn’t be reached immediately for comment when Bloomberg called his mobile phone, and attempts to reach Cameron through Sibir’s London office were unsuccessful.

Tchigirinski and his partner Igor Kesaev control 47 percent of Sibir through a holding company called Bennfield, and Moscow’s city government owns about 18 percent. Institutions and individuals own the rest, according to Sibir’s Web site.

Kesaev supported the board’s decision to suspend Cameron and investigate the property transactions, said Robert May, spokesman for Kesaev’s Mercury Group holding company.

Sibir pumped 80,000 barrels of crude a day last month, mainly from its half of a joint venture with Royal Dutch Shell Group Plc.

The Financial Times reported in October that Shell was seeking a “large” stake in Sibir, citing unidentified Shell executives. Tchigirinski said then that he wanted to expand cooperation with Shell, though he ruled out selling any part of his stake.

The investigation won’t include the acquisition of stakes in two companies controlled by Tchigirinski and Kesaev, Avtocard and Korimos, that the board approved in December, Detmer said today.

Asked if the probe would affect Sibir’s discussions with potential partners, Detmer said: “This certainly won’t prevent people from talking.”

To contact the reporter on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net

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Iran Says Test of First Nuclear Power Plant Begins

By Ladane Nasseri

Feb. 25 (Bloomberg) -- Iranian scientists began a test run of the country’s first nuclear power plant, outside the southern port city of Bushehr, adding to tensions with Western powers that suspect the Persian Gulf nation of seeking an atomic bomb.

The trial at the plant, which was built with Russian help, involved the use of non-nuclear material instead of enriched uranium, said Mohammad Saeedi, deputy head of Iran’s Atomic Energy Organization.

The 1,000-megawatt reactor is at the center of the controversy over Iran’s nuclear program, which the U.S. and several of its major allies say is a cover for weapons development. Iran rejects the allegation, and says the project is intended to generate electricity for its growing population.

“This is one step further on the road that leads to nuclear weapons and shows the need for even more determined and coordinated international efforts to stop Iran from laying its hands on nuclear weapons,” Yigal Palmor, spokesman for the Israeli Foreign Ministry, said after the operation began today.

The plant’s test run is being carried out with “virtual fuel,” Saeedi said, according to the state-run Iranian Students News Agency. The material’s properties are similar to enriched uranium, except “that when feeding it into the reactor it does not create an atomic reaction,” he said without identifying the substance.

“The primary circuit, back-up and secondary circuits are all tested to avoid any flaws” before the plant is fueled and begins generating power, Saeedi said.

‘Supply Electricity’

“We hope that in a few months it will supply electricity” to Iran’s southern provinces, Gholam Reza Aghazadeh, head of the Atomic Energy Organization, said on state television. The trial began during a visit to the plant that he made with Sergei Kiriyenko, chief executive officer of Rosatom Corp., Russia’s state-owned nuclear holding company.

Testing of the plant is likely to last four to seven months, Aghazadeh said, though he added that it may be completed sooner.

During the first stage of the plant’s operation, it will provide southern provinces with 500 megawatts of electricity, state television said. The plant in Bushehr province is 15 kilometers (9 miles) from Bushehr port.

The dispute over Iran’s nuclear development concerns the enrichment of uranium, which it carries out at the Natanz nuclear facility in central Iran, in defiance of United Nations sanctions. Enriched uranium can be used to fuel a reactor and, at higher concentrations, can form the core of a bomb.

Enriched Uranium

The UN’s International Atomic Energy Agency said Feb. 19 that Iran’s stockpile of low-enriched uranium increased by about 60 percent since the IAEA’s last report, in November, giving the country around 1,010 kilograms (2,227 pounds) of the material.

London’s Verification Research Training and Information Center estimates that 630 kilograms of low-enriched uranium could yield 15 to 22 kilograms of weapons-grade uranium, enough for the production of a device under the supervision of an expert bomb- maker.

Both the Natanz and Bushehr sites are monitored by the IAEA, which oversees adherence to the global nuclear Non Proliferation Treaty, to which Iran is a signatory.

Today’s trial “is a marker in Iran’s ability to operationalize a nuclear power plant,” said Anoush Ehteshami, a professor of international relations at Durham University in northeastern England.

‘Transparent’

The Bushehr plant is under IAEA supervision and Russian engineers are at the site, Ehteshami said in a telephone interview from the U.K. “This is as transparent as it gets,” he said. The U.S. would have been informed of today’s step by the IAEA and Russia and “it will not come as a surprise,” he added.

A plant with a capacity to generate 1,000 megawatts is a “global average,” Jeremy Gordon, an analyst at the World Nuclear Association, said today in a phone interview from London. This additional power “would be significant in Iran’s power supply but it’s not going to revolutionize anything for the country,” he said.

Iran generates about 30,000 megawatts from several conventional power plants, he said. Iran is the second-largest producer in the Organization of Petroleum Exporting Countries.

“Each country can benefit from peaceful nuclear energy,” Kiriyenko said in comments broadcast from Bushehr. “This should be under the supervision of the IAEA to ensure that it is not diverted” for military purposes. “We believe that Bushehr is in line with this,” he added.

‘Suspend Activities’

France said the Bushehr plant is authorized under Security Council resolutions, and proves there is no need for Iran to enrich its own fuel, since the Russian-designed plant only functions with specially provided Russian fuel.

“The delivery of fuel for this plant by Russia provides a further reason that Iran suspend its sensitive nuclear activities,” French Foreign Ministry spokesman Frederic Desagneaux said in an e-mailed response. “Iran’s enrichment in no way can be justified by the continued functioning of the Bushehr nuclear center.”

France again called on Iran to suspend enrichment.

Last year’s scheduled opening of the plant was delayed by difficulties including a disagreement over payments to Russia, Iran’s government had said.

To contact the reporter on this story: Ladane Nasseri in Tehran at lnasseri@bloomberg.net.

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AGL to Approve A$1.1 Billion Gas, Wind Power Projects

By Angela Macdonald-Smith

Feb. 25 (Bloomberg) -- AGL Energy Ltd., Australia’s biggest power and gas retailer, expects to approve about A$1.1 billion ($716 million) of wind- and gas-fired generation this year for construction as it boosts investments in cleaner electricity.

The Sydney-based company is also still considering whether to exercise options worth more than A$1 billion to buy coal-seam gas and power assets from BG Group Plc, Managing Director Michael Fraser said today on a conference call about AGL’s first-half earnings. It will examine any energy assets sold by the New South Wales state, he said.

AGL made a gain of A$1.5 billion in the first half from the sale of assets, including Papua New Guinea petroleum interests, as it raises funds for investment in low-emissions generation and gas supply. The company reiterated a full-year forecast for profit before one-time items of between A$370 million and A$400 million.

“It’s been a very good and favorable story in the current market conditions,” said Parvathy Iyer, a credit analyst at Standard & Poor’s Ratings Services in Melbourne. “AGL is trying to retain its position of strength to bid” for the New South Wales power assets, she said.

AGL Energy dropped 16 cents, or 1.2 percent, to A$13.25 in Sydney trading, compared with a 1.4 percent slide in the Australian stock exchange’s benchmark utilities index.

Wind, Power

The Hallett 4 wind project may get the go-ahead “in the near future,” Fraser said. The Hallett 3 and Oaklands Hill wind ventures may be approved in the second half of the year, while the 360-megawatt Leafs Gully gas-fired generator in New South Wales should be sanctioned late this year or early 2010, he said.

The wind power projects, in South Australia and Victoria states, would cost about A$750 million, while the Leafs Gully project may cost between A$350 million and A$400 million, Fraser said in an interview. AGL’s options over the BG gas and power assets in Queensland expire on April 14.

AGL won’t delay planned investments waiting to see whether New South Wales goes ahead with a delayed privatization of power assets, Fraser said.

“If it was up for sale then we would be looking at how would we fund it versus these other projects,” he said. “It’s not up for sale today. It’s been a very long and drawn-out process and we’re not going to stop making sensible decisions.”

AGL surged to a profit of A$1.65 billion in the six months ended Dec. 31, from a year-earlier loss of A$22.9 million when it reported a slide in the value of hedging contracts. ‘Underlying” profit rose 5.3 percent to A$192.5 million, compared with a median estimate of A$200 million of four analysts surveyed by Bloomberg News.

‘Plenty of Options’

The results are “pretty much in line overall,” said Jason Mabee, a utilities analyst at ABN Amro Australia Pty in Sydney. “There were some higher costs in the retail business which were a little bit of a surprise, but nothing too big of a deal.”

Earnings before interest and tax in the retailing unit rose 8.1 percent in the half on higher winter gas sales and tariff increases, offset partly by rising operating costs as AGL switches to a new billing system. Profit at the energy trading business jumped 35 percent, while earnings at the gas and power unit fell 58 percent, mostly because of a drop in the contribution from Papua New Guinea, AGL said in a statement.

AGL has “plenty of options” for refinancing A$1.1 billion of debt that matures in October, said Chief Financial Officer Stephen Mikkelsen. It expects to arrange the refinancing by June for debt due both this year and next, he said in an interview.

The company in December paid A$370 million for a coal-seam gas exploration venture in New South Wales and bid A$171 million for Sydney Gas Ltd. The acquisitions make AGL “reasonably confident” it can meet its medium-term target of 2,000 petajoules of gas reserves without exercising the BG option, Fraser said.

AGL confirmed a forecast for full-year earnings before interest, tax, depreciation and amortization of between A$775 million and A$820 million. First-half sales advanced 5.1 percent to A$2.98 billion. AGL declared a first-half dividend of 26 cents, unchanged from a year earlier.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net

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Cepsa Plunges as Santander Offers $3.9 Billion Stake

By Todd White and Charles Penty

Feb. 25 (Bloomberg) -- Compania Espanola de Petroleos SA, Spain’s second-largest oil company, fell as much as 41 percent in Madrid trading after Banco Santander SA said it may sell its holding for as much as 3 billion euros ($3.9 billion).

Santander, Spain’s biggest bank, is in talks to sell its 31.6 percent stake in Cepsa for between 30 and 35 euros a share, it said today in a statement. The midpoint of the range is less than half of Cepsa’s closing price of 66.75 euros on Feb. 23.

While Santander didn’t identify possible buyers, Expansion reported yesterday that Abu Dhabi-based International Petroleum Investment Co. is in talks to raise its 9.5 percent stake in Cepsa. Santander, Cepsa’s second-biggest shareholder after 49 percent owner Total SA, may need additional capital as its markets in Spain, the U.K. and Brazil suffer from a deepening recession, according to analysts at Nomura Securities.

“The strategy is to shore up capital,” said Daragh Quinn, an analyst at Nomura Securities in Madrid. “The U.K. economy looks bad and Brazil is slowing fast, so it all adds up.”

The Santander, Spain-based lender raised 7.2 billion euros in a rights offering in November to boost reserves. Its core capital, a measure of solvency, reached 7.23 percent in December, up from 6.31 percent in September, it said Feb. 5.

Cepsa, scheduled to post fourth-quarter earnings tomorrow, is about 94 percent owned by its four largest shareholders, Paris-based Total, Santander, IPIC and Madrid-based Union Fenosa SA, according to data compiled by Bloomberg.

Sell Order

Fenosa, with a 5 percent stake in Cepsa, asked Santander to sell it months ago, a spokesman said yesterday IPIC is also in talks to buy out Fenosa’s stake stake in Cepsa, Spanish newspaper Expansion reported yesterday.

Officials at Santander, Fenosa and IPIC declined to comment on the Expansion report. Khadem Al Qubaisi, IPIC managing director, said last month the company was considering raising its 9.5 percent stake in Cepsa.

IPIC, owned by the Abu Dhabi government, agreed Feb. 23 to buy Nova Chemicals Corp., Canada’s largest chemical maker, for $499 million. IPIC has invested more than $2 billion in the past 18 months, including stakes in EDP-Energias de Portugal SA, Portugal’s biggest electricity company, and MAN AG’s Ferrostaal, a German oil-services company.

“This is the time for them to pick up some of the companies they think are good values,” said Hanzada Nessim, a Dubai-based analyst at EFG-Hermes Holding SAE. “Abu Dhabi does have the money. You’ll see them doing more investment.”

Exploration, Production

Cepsa, run by Chief Executive Officer Dominique de Riberolles, said Oct. 30 that nine-month profit was almost unchanged at 563 million euros as higher income from exploration and production offset a drop in refining and distribution.

Cepsa’s largest refinery is at Gibraltar-San Roque, with an oil-processing capacity of 223,000 barrels a day. Its Huelva plant can handle 98,000 barrels a day, according to data compiled by Bloomberg.

Cepsa shares plunged as much as 21.10 euros and traded down 28 percent at 37.71 euros, the lowest since February 2005, as of 2:15 p.m. in Madrid after a suspension was lifted. Today’s decline extended yesterday’s drop of 22 percent, valuing the company at 10 billion euros.

Santander rose 3.4 percent to 4.86 euros in Madrid, valuing the bank at 39.7 billion euros. The shares are down 28 percent this year, in line with the 26 percent drop for the Bloomberg Europe Banks and Financial Services Index.

To contact the reporters responsible for this story: Todd White at twhite2@bloomberg.net Charles Penty in Madrid at cpenty@bloomberg.net

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Centrica Seeks Up to 450 Million-Pound Loan for U.K. Wind Farms

By Caroline Hyde and Paul Dobson

Feb. 25 (Bloomberg) -- Centrica Plc, the U.K’s biggest energy supplier, is seeking up to 450 million pounds ($650 million) in debt to finance three of its U.K. wind farms, according to two people with knowledge of the deal.

Bank of Tokyo-Mitsubishi UFJ is advising Centrica in arranging the loan with a 15-year maturity, according to the people, who declined to be named as the talks are private. The debt will be raised against two offshore wind farms that are already constructed and now undergoing commissioning work and one operational onshore wind park, the people said.

European Union governments are promoting wind turbines to help meet a target to get 20 percent of energy supplies from renewable sources by 2020, designed to combat climate change. Some lenders have stopped providing financing for turbines installed at sea because of increased costs, Thiess Harder-Heun, a director at Deutsche Kreditbank AG, said Feb. 11.

Windsor, England-based Centrica is looking to raise finance against Lynn and Inner Dowsing, two wind farms off England’s Lincolnshire coast with a combined capacity of 194 megawatts, and the smaller Glens of Foudland wind farm in Scotland, one of the people said.

Centrica spokesman Andrew Turpin declined to comment when contacted by phone, and a London-based spokesman for Bank of Tokyo Mitsubishi declined to comment on the financing.

Centrica has government approval to build the 250-megawatt Lincs wind farm adjacent to Lynn and Inner Dowsing. Phil Bentley, the managing director of Centrica’s British Gas retail unit, said Feb. 11 “the economics don’t quite work” at present for new offshore wind farms. Additional state subsidies may help to make them viable, he said.

To contact the reporter on this story: Caroline Hyde in London chyde3@bloomberg.net. Paul Dobson in London at pdobson2@bloomberg.net

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UBS Targets U.S. Dollar at $1.25 Against Euro in Three Months

By Daniel Tilles

Feb. 25 (Bloomberg) -- The dollar may strengthen to $1.25 against the euro in three months, according to UBS AG, the world’s second-biggest foreign-exchange trader.

“The lack of alternatives to the dollar in the current environment is becoming increasingly conspicuous and we continue to target the greenback at $1.25 in three months against the euro,” Ashley Davies, a currency strategist in Singapore, wrote in a report today. UBS repeated it would hedge its “view of either a risk rally or a debasing of the U.S. dollar with a six-month call option on the Australian dollar.”

The dollar was little changed at $1.2851 against the euro as of 7:19 a.m. in London.

To contact the reporter on this story: Daniel Tilles in London at dtilles@bloomberg.net

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RBS May Not Avoid Full Nationalization With Insurance

By Jon Menon

Feb. 25 (Bloomberg) -- Royal Bank of Scotland Group Plc’s effort to put about 200 billion pounds ($288 billion) of toxic assets into a government insurance program may not prevent it from being fully nationalized as the U.K. economy deteriorates.

RBS, the first U.K. lender to take part in the asset protection plan, aims to disclose the terms of its participation when it reports results at 7 a.m. tomorrow in London. Lloyds Banking Group Plc and Barclays Plc may also join the program.

“This is prolonging the inevitable and the inevitable is nationalization,” said Tom Kirchmaier, a corporate governance lecturer at the London School of Economics. “It will instill some trust, but I doubt it will solve all the problems with the banks. We still haven’t seen the worst of the real economy.”

Prime Minister Gordon Brown’s government aims to stimulate lending and jumpstart the economy, which contracted 1.5 percent in the fourth quarter, by insuring banks against losses on assets such as collateralized debt obligations. The government owns 58 percent of RBS and 43 percent of Lloyds after injecting 37 billion pounds into the banks last year.

The insurance plan is designed to reduce the risky assets held by banks and thereby help increase their capital strength, Jonathan Pierce, an analyst at Credit Suisse Group AG in London, said in a Feb. 23 note to investors.

‘Rebuild for Future’

Under a proposal released by Chancellor of the Exchequer Alistair Darling last month, the government will charge a fee to guarantee about 90 percent of a bank’s potential losses on assets such as mortgage-backed securities and consumer loans. Pierce estimates Edinburgh-based RBS will pay as much as 3 percent of the value of the insured assets in the form of non-voting preference shares, with payments spread over three to five years.

“The task for banks is to clean up their balance sheets and rebuild for the future,” Darling wrote in a column in today’s Financial Times. “We need to create the certainty that will enable the banks to lend to creditworthy people and businesses, which is essential of we are to see an economic recovery.”

RBS and Lloyds will pledge to increase lending to homeowners and small businesses by more than 40 billion pounds in return for the insurance, the London-based Telegraph reported, without saying where it got the information.

Deteriorating Economy

RBS may put 200 billion pounds of toxic and non-toxic assets into the insurance program, though the figure is still under negotiation, said a person familiar with the plan who asked not to be identified because the talks are confidential. That could leave the bank liable for another 20 billion pounds of losses. A spokesman for the bank declined to comment.

“There’s a very real risk that equity shareholders end up with nothing,” said Colin Morton, who helps oversee $3 billion at Rensburg Fund Management in Leeds, England. “The economy seems to be deteriorating even faster than we all thought and there are going to be a lot more impairment charges to come.”

Morton said he sold his shares in RBS, Lloyds and Barclays because they were too risky.

Not all investors agree. The insurance plan is probably a “good use of government money” that will lift confidence in the banking system, said Jane Coffey, who helps oversee $63 billion as head of equities at Royal London Asset Management. With RBS responsible for the first 10 percent of losses, the plan may cost taxpayers nothing, she said.

“It will be much easier to generate the recovery going forward,” said Coffey, who owns shares of RBS, Lloyds and Barclays. “We won’t end up having a huge nationalized banking sector.”

Northern Rock

The U.K. nationalized Newcastle-based Northern Rock Plc a year ago, following the country’s first run on a bank in more than a century. In September, it seized Bradford & Bingley Plc after the credit crisis shut off funding.

The government has said it doesn’t intend to nationalize more banks.

“We’ve made it very clear that in our view the commercial sector and private ownership is the right place for banks,” Stephen Timms, chief secretary to the Treasury, told the British Broadcasting Corp. on Feb. 16.

RBS last month forecast a loss of as much as 28 billion pounds, including 20 billion pounds of writedowns on the value of acquisitions such as ABN Amro Holding NV. RBS said it expects to post 8 billion pounds of credit market writedowns for the full year, boosted by losses on U.S. collateralized debt obligations.

Banks worldwide have written down $1.1 trillion and raised $1 trillion in new capital since the credit crisis began, according to data compiled by Bloomberg.

Valuing Assets

The government may not have enough information about the assets it is insuring to know whether the risk has been properly priced, said the LSE’s Kirchmaier.

“The amount of knowledge you need is overwhelming,” he said. “The taxpayer will be the loser in that the pricing will be wrong. I don’t think anyone can value it properly.”

Last month, Lloyds acquired HBOS Plc in a government- brokered deal to head off the collapse of the U.K. mortgage lender. On Feb. 13, Lloyds said HBOS may post a pretax loss of 10 billion pounds. Chief Executive Officer Eric Daniels said he would have taken more time to study HBOS before the takeover if time had permitted.

The government may increase its stake to 70 percent if other shareholders don’t purchase new stock priced at 31.75 pence a share. RBS rose 4.3 percent to 22.1 pence yesterday in London trading.

RBS and Lloyds are already classified as public companies and will add as much as 1.5 trillion pounds to the U.K.’s net debt, an amount equal to gross domestic product, the Office for National Statistics said Feb. 19.

“RBS and Lloyds are tumbling toward full nationalization,” said Simon Willis, an analyst at NCB Stockbrokers Ltd. in London.

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net

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EU Officials Concerned About Risks of Pound Drop

By Meera Louis

Feb. 25 (Bloomberg) -- European Union officials are concerned that the pound’s slide to a record low against the euro could destabilize the British economy, according to a document prepared last month by European Commission and EU finance ministry officials.

The pound’s “very rapid” drop “raises questions about the financial stability of the British economy,” said the document, which was prepared ahead of the Feb. 14 Group of Seven meeting in Rome and obtained by Bloomberg News. The currency’s weakness “is a source of concern for the euro area.”

The report contradicts Prime Minister Gordon Brown’s argument on Feb. 13 that a weaker currency helps rather than hinders the economy. With the pound down 18 percent against the euro in the past year, it also underscores investors’ concern about Britain’s fiscal health as the government racks up debt to fund bank bailouts.

The one-page document, titled “Recent exchange rate developments - G7 preparation,” was circulated at a meeting of EU officials before the G-7 gathering in Rome. The document also outlined the EU’s position on the U.S. dollar, the yuan and the yen before discussing the pound.

The Obama administration’s expressed support for a “strong dollar” is “reassuring,” the document says. It also calls for a “continued real effective appreciation” of the yuan against the euro. Japanese authorities “should not intervene to reverse the past appreciation of the yen,” it says.

Pound’s Slump

The document signals concern among euro-area policy makers that the pound’s slump could push their 16-nation economy deeper into a recession by undermining exports to its biggest trading partner.

Gross domestic product in Britain contracted 1.5 percent in the fourth quarter, the most since 1980, as companies and consumers reduced spending, the Office for National Statistics said today. The economy shrank 1.9 percent on the year.

A U.K. Treasury official who declined to be named said the government doesn’t comment on movements in currency markets.

Policy makers “should be alive to the possibility that weakness in the pound will just scare off foreign investors,” Neil Mackinnon, chief economist at ECU Plc in London and a former U.K. Treasury official, said in an interview on Bloomberg Television today. “The U.K. economy is certainly in a recession if not a mini depression.”

The U.K. currency fell 23 percent against the euro last year as confidence in Britain’s fiscal health weakened, export demand dried up and Bank of England cut interest rates to records. The pound reached a record low of 98 pence per euro in late December. It traded at 88.87 pence per euro at 12:12 p.m. in London.

‘More Competitive’

“As the pound has gone down, we’re more competitive,” Brown said Feb. 13. “We’re not trying to target the exchange rate like people used to do.”

At the same time, his government has taken on liabilities that may amount to 1.5 trillion pounds ($2.2 trillion) as it tries to prop up the financial system and rescue banks such as Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc.

Nigel Lawson, the longest serving chancellor of the exchequer under Margaret Thatcher, said yesterday the U.K. government may have to introduce “a short period of nationalization” for some banks.

Europe’s officials are concerned that global currency volatility could roil markets and destabilize their economies.

“Exceptionally high volatility and unprecedented sharp moves in the foreign-exchange market have adverse implications for economic and financial stability and are especially unwelcome in the current economic environment,” the draft document said. “In a context of low inflation in all major economies, any large moves will translate into big real exchange rate swings that could lead to competitive distortions.”

French and Irish finance ministers have already openly questioned the U.K.’s management of its currency.

France’s Christine Lagarde said Jan. 21 that the Bank of England’s monetary policy “isn’t very efficient in providing more support” for the pound. Ireland’s Brian Lenihan said that Britain is engaging in “competitive devaluation.”

To contact the reporter on this story: Meera Louis in Brussels at mlouis1@bloomberg.net

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Real, Won, Australian Dollar to Rebound From April, Nomura Says

By Kim Kyoungwha

Feb. 25 (Bloomberg) -- The South Korean won and Brazilian real will lead a rebound in emerging-market currencies from April in anticipation of an improvement in global economies, according to Nomura Holdings Inc.

“April is a possible turnaround,” Simon Flint, head of global foreign exchange research in Singapore, said at an investors’ forum in Beijing today. “From April going on, you should start to be more aggressive in taking risks.”

Brazilian real will strengthen 11 percent to 2.15 against the U.S. dollar by the end of 2009, the Korean won will rise 26 percent to 1,200 and the Australian dollar will gain 15 percent to 75 U.S. cents versus the greenback, forecasts provided by Nomura show.

All but two of 26 most-traded emerging-market currencies tracked by Bloomberg data have fallen against the dollar in the past year, led by a 41 percent tumble in the Iceland krona and a 37 percent decline in the won, as fallout from the global credit rout slowed economies and prompted investors to sell riskier assets. Policy makers have lowered borrowing costs and increased fiscal spending to shore up confidence in their economies.

Investors should pay more attention to “risky currencies” that may rally early as global economies may bottom between the second and third quarters, Flint said, citing Nomura’s leading indicators that suggest a trough in economic activity in April.

“For risky Asia like Korea and Indonesia, their currencies will start to recover when global risk environment improves which we would expect to be pronounced from April,” Flint said. A recovery in the Taiwan dollar and the Singapore dollar may follow in the third quarter as their economies are “most exposed” to global trade cycle, he added.

China’s yuan will remain stable against the U.S. currency in the next six months before resuming its appreciation against the dollar, Flint forecast.

“Beyond six months, we think it will appreciate,” he said. “China is re-orientating itself from an export-led economy to a domestic consumption-led economy. One important aspect of this will be to have a stronger currency.”

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net.

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Mexico Peso Falls Near Record Low Amid U.S. Recession Concerns

By Andrea Jaramillo

Feb. 25 (Bloomberg) -- Mexico’s peso declined amid concern a deepening U.S. recession will further erode demand for Mexican exports.

The peso dropped 0.3 percent to 14.8720 per U.S. dollar at 9:08 a.m. New York time, from 14.8275 yesterday. The currency, which touched a record low of 14.9855 per dollar on Feb. 20, is down 32 percent in the past six months, the biggest decline among major currencies. Banco de Mexico has spent more than $18 billion of foreign reserves since October to stem the decline.

The yield on the government’s benchmark 10 percent bonds due in 2024 rose one basis point, or 0.01 percentage point, to 8.91 percent. The price on the securities fell 0.1 centavo to 109.17 centavos per peso, according to Banco Santander SA.

Yields on the country’s bonds surged to a two-month high on Feb. 23 after the central bank cut the benchmark rate by a quarter-point to 7.5 percent, less than the median half-point reduction forecast by economists in a Bloomberg survey.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

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Canada’s Dollar Falls as Risk Aversion Spurs Haven Buying

By Chris Fournier

Feb. 25 (Bloomberg) -- Canada’s currency weakened, snapping the longest winning streak in nine months, as weakness in U.S. stock futures drove investors to the relative safety of the greenback on concern equities will not hold yesterday’s gains.

“I think we need to see a sustained rally in equities to get some confidence back in the risk trades,” said Steven Butler, director of foreign-exchange trading in Toronto at Scotia Capital, a unit of Canada’s third-largest bank. “Fat chance and thin chance.”

The Canadian dollar declined 0.4 percent to C$1.2458 per U.S. dollar at 8:11 a.m. in Toronto, from C$1.2423 yesterday. One Canadian dollar buys 80.27 U.S. cents. The loonie, as the currency is known, rose five straight days ending yesterday, the longest stretch of gains since May.

Standard & Poor’s 500 Index futures slipped 0.2 percent and futures on the Dow Jones Industrial Average futures fell 0.1 percent on deepening concern the recession will wipe out earnings. The S&P 500 yesterday surged 4 percent and the Dow jumped 3.3 percent.

Canada’s currency will depreciate to C$1.26 against the U.S. dollar by the end of the first quarter before rebounding to C$1.22 by the end of 2009, according to the median forecast in a Bloomberg News survey of 44 economists.

The yield on the two-year government bond held steady at 1.20 percent. The price of the 2.75 percent security due in December 2010 fell 1 cent to C$102.71.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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Yen Off to Worst Start Since 2000 as Economy Shrinks

By Matthew Brown and Kim-Mai Cutler

Feb. 25 (Bloomberg) -- The yen is off to its worst start in nine years against the dollar as Japan’s tumbling exports and the fastest economic contraction since 1974 end a rally sparked by investors seeking a refuge from the financial crisis.

The currency slumped 6.4 percent against the dollar this year as global stock markets extended 2008’s losses. Last year, it rose the most of 171 currencies tracked by Bloomberg, climbing 23 percent versus the dollar and 29 percent against the euro, as equity markets around the world collapsed.

The biggest currency traders are calling an end to the yen’s gains as Japan’s economy, the world’s second-largest, sputters. Gross domestic product shrank at an annual 12.7 percent pace in the last quarter, the government said last week. The trade deficit widened in January to the most in more than two decades as exports plunged 46 percent, the Finance Ministry said today.

“With Japan’s trade data deteriorating sharply now, the Japanese yen is finally following suit,” Mansoor Mohi-Uddin, chief currency strategist at UBS AG, the world’s second-largest foreign-exchange trader, wrote in a note to clients today. “Japan’s currency potentially has a lot further to slide if investors stop perceiving the yen as a safe haven and trade the currency instead on Japan’s worsening export numbers.”

‘Lost Luster’

Bob Parker, who helps oversee $600 billion as chairman of Credit Suisse Asset Management in London, and bought the dollar when it traded between 88 and 90 yen, said there’s a “reasonable probability of a breakout” that will drive the yen down 3 percent to 100 per dollar. Win Thin, a senior currency strategist in New York at Brown Brothers Harriman & Co., Firas Askari, head currency trader in Toronto at BMO Nesbitt Burns, a unit of Bank of Montreal, and Kathy Lien, director of currency research at GFT, an online currency trading firm, are also betting the yen will weaken to 100 per dollar.

“The yen has lost its role as a safe haven currency,” said David Bloom, global head of currency strategy in London at HSBC Holdings Plc, Europe’s largest bank. “Ever since the GDP numbers came out, it lost its luster.” HSBC economists cut Japan’s growth forecast and expect a 6.6 percent contraction this year, Bloom said.

The currency traded at 96.96 per dollar as of 2:22 p.m. in London, after dropping 2.1 percent yesterday. It fell to 97.33, the weakest level since Nov. 25. The yen was also at 124.04 per euro, after losing 3.4 percent yesterday.

‘No Turning Point’

Japan’s economy shrank by 4.6 percent year-on-year in the last quarter, the government said last week. It may contract 2.6 percent in the first quarter, according to the median forecast of 17 economists in a Bloomberg survey.

On a trade-weighted basis, the yen is still 13 percent cheaper than its all-time high set in 1995, according to the Bank of England effective exchange rate on the yen. When the Standard & Poor’s 500 Index fell to a 12-year low of 741 on Nov. 21, the yen traded at 95.96. The S&P index rose to 773 yesterday in New York.

“We’re not at a turning point for the yen, medium-term,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, who predicted the yen will rise to 85 per dollar by year-end. “We’re moving into a world of yen strength, reflecting Japan’s strong external position and current-account surplus, and a very large net foreign-asset position.”

Japanese mutual funds held 20.71 trillion yen ($214 billion) in foreign assets at the end of January, according to Japan’s Investment Trust Association.

Export Pain

The yen’s gains hurt companies such as Nissan Motor Co. Ltd. and Toyota Motor Corp., the world’s largest automaker, amid Japan’s increased reliance on exports for growth. The country shipped 21 percent of its goods abroad in 2008, up from 16 percent in 1998, according to the Bank of Japan.

Nissan said this month it will fire 20,000 workers and post its first loss in nine years as demand plunges. Toyota, which forecast its first operating loss in seven decades, will cut production by 50 percent in the current quarter from last year.

The yen is also being hurt by political deadlock and falling approval ratings for Prime Minister Taro Aso, which are reducing the ability of the government to tackle the economic crisis.

A split between the two houses of government, with the opposition in control of the upper house, “is really going to be problematic down the road,” said Andrew Busch, a global currency strategist in Chicago at BMO Capital Markets, a unit of Canada’s fourth-largest bank.

Stocks Correlation

Aso’s approval rating fell 6.8 percentage points from last month to 11.4 percent, while his disapproval rating rose 8.8 points to 80.2 percent, a Sankei newspaper survey conducted with Fuji News Network showed yesterday. The governing Liberal Democratic Party has the support of 21.9 percent, compared with 25.9 percent for the opposition Democratic Party of Japan.

The yen’s decline signal the currency’s inverse relationship with stocks may be breaking down. The correlation between the dollar-yen and the Nikkei-225 Stock Average was minus 0.89 since Feb. 16, when the government’s GDP report was published. The relationship was positive 0.86 in the 12 months to Feb. 16. A reading of 1 would mean the two moved in lockstep.

The relationship between stocks and the yen has been in place since the beginning of 2005, when the so-called carry trade was established, according to Derek Halpenny, European head of global currency research at Bank of Tokyo Mitsubishi Ltd in London, which said at the end of January that the yen would start to weaken.

In the carry trade, investors buy higher-yielding currencies with lower-yielding ones, such as the yen. The yen gained 30 percent against the dollar from June 22, 2007, to Dec. 17, 2008, as the trade all but evaporated.

“It’s still a debate whether the breakdown is temporary or permanent, but we’re making new lows,” said Thin at Brown Brothers. “The pessimism remains strong in the market.”

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net

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Thompson Creek Seeks Acquisitions, Expects More Pain for Miners

By Stewart Bailey

Feb. 25 (Bloomberg) -- Thompson Creek Metals Co., the operator of molybdenum mines in North America, said it would like to make an all-stock acquisition to boost output and the company is in no rush because asset prices may continue falling.

“We’d like to go out there and do an acquisition, but we don’t feel an immediate sense of urgency because there may be some more pain to be felt in the marketplace,” Chief Executive Officer Kevin Loughrey said yesterday in an interview in Hollywood, Florida. “That will be felt most acutely by undercapitalized companies that have debt.”

Thompson Creek will buy mines or deposits that contain molybdenum and copper and may consider other metals, Loughrey said. High debt levels in target companies would deter deals in the current market, he said. Loughrey declined to name acquisition targets.

Loughrey, along with larger rival Freeport-McMoRan Copper & Gold Inc., has postponed projects and slashed production in response to a slump in the price of molybdenum, used to toughen steel for pipelines, refineries and drilling equipment. The drop in metal prices and a freeze in credit markets caused share prices of metal explorers and mine developers to crater.

Thompson Creek rose 2 cents to C$3.75 yesterday in Toronto Stock Exchange trading. The stock has dropped 77 percent in the six months before today, paring the company’s market value to C$458.5 million ($368.1 million).

Shareholders are “coming to grips with the fact that assets are worth a small fraction of what they were before,” Loughrey said.

Preserve Capital

Thompson Creek has $270 million in cash, a $35 million untapped credit line and $15 million in debt, Loughrey said. He said he plans to preserve capital until market conditions improve and may change production targets if there is a significant gain or decline in prices.

Molybdenum prices have dropped 70 percent in the past six months and now trade at $9.75 a pound, according to Metal Bulletin.

The company said on Feb. 18 annual production would be 20 million pounds to 24 million pounds, down from an earlier estimate of 31.5 million to 34 million.

Molybdenum prices will recover as government economic- stimulus packages take effect, emerging-market economies build new energy infrastructure and developed countries replaced worn pipelines and aging oil refineries, he said.

“Long term, we still feel very comfortable where moly is headed,” Loughrey said.

To contact the reporter on this story: Stewart Bailey in New York at sbailey7@bloomberg.net.

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Gold Rises to $963.35 in London Trade, Erasing Earlier Decline

By Nicholas Larkin

Feb. 25 (Bloomberg) -- Gold rebounded in London trading, erasing earlier declines.

Gold for immediate delivery added 68 cents, or 0.1 percent, to $963.35 an ounce at 1:28 p.m. local time. The metal earlier fell as much as 1.2 percent.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

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Dollar Rises as Eastern European Slump Spurs Demand for Haven

By Ye Xie

Feb. 25 (Bloomberg) -- The dollar gained against the euro, pound and Swedish krona on bets the slump in eastern Europe may deepen the recession in the 16 nations using the single currency, spurring demand for the greenback as a haven.

The yen slid to a three-month low against the dollar after a report showed Japan’s trade deficit increased to the widest since 1980, making the currency less attractive as a refuge from the financial crisis. The Polish zloty weakened against the euro after the central bank cut its main interest rate as the economy headed for its worst recession in almost a decade.

“People have positioned for further weakness in eastern Europe,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “The ripple effect is likely to continue to weigh on the euro and the Swedish krona.”

The dollar gained 0.2 percent to $1.2826 per euro at 9:10 a.m. in New York, from $1.2846 yesterday. The yen declined 0.3 percent to 96.93 per dollar from 96.64, after earlier reaching 97.33, the weakest level since Nov. 25. The euro traded at 124.24 yen, compared with 124.14.

Poland’s zloty lost 0.4 percent to 4.6539 per euro after policy makers lowered the main interest rate by a quarter- percentage point to 4.25 percent. The currency lost 11 percent this year for the worst performance among 25 emerging-market currencies after the Hungarian forint.

The dollar appreciated 0.7 percent to $1.4379 against the pound and 0.6 percent to 8.8625 Swedish kronor as Ukraine’s credit rating was cut by two levels by Standard & Poor’s a day after Latvia’s debt was downgraded to junk. Banks from Austria, Italy, France, Belgium, Germany and Sweden account for 84 percent of bank loans in central and eastern Europe.

Dollar Index

The ICE’s Dollar Index, which tracks the U.S. currency versus the euro, yen, pound, Canadian dollar, krona and Swiss franc, increased 0.3 percent to 87.150. It touched 88.254 on Feb. 18, the highest level since Nov. 21, when it reached a 2 1/2-year high.

Japan’s currency depreciated beyond 97 per dollar earlier today for the first time since November as the Finance Ministry said the trade deficit increased in January to 952.6 billion yen ($9.9 billion), the widest since 1980, the earliest year for which there’s comparable data.

“Japan’s currency potentially has a lot further to slide if investors stop perceiving the yen as a safe haven and trade the currency instead on Japan’s worsening export numbers,” Mansoor Mohi-Uddin, chief currency strategist in Zurich at UBS AG, the world’s second-largest foreign-exchange trader, wrote in a note to clients today.

The yen weakened 5 percent against the dollar since Feb. 16, when Japan said its gross domestic product shrank at an annual 12.7 percent pace in the last quarter, the most since the 1974 oil shock.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net

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World Sugar Production to Drop Most on Record, Czarnikow Says

By Rudy Ruitenberg

Feb. 25 (Bloomberg) -- World sugar production will fall the most on record this year as output declines in India and China, resulting in a greater supply deficit than expected, Czarnikow Group Ltd. said.

The global sugar deficit is expected to total 10.4 million metric tons in the 2008-09 season, compared with a November forecast that production would fall 5.8 million tons short of consumption, Czarnikow analysts led by Toby Cohen said in a report published today.

Lower crops in India, Pakistan and China, along with reforms to the European Union sugar industry, will contribute to a 15.2 million-ton decline in production, according to Czarnikow. Demand is expected to rise 1.5 percent, the report said.

“Though the end of the global 2008-09 crop cycle is still several months away it is already very clear that this has been a bad year for sugar production,” the analysts wrote. “It is difficult to see a quick rebound from this season’s fall in production.”

While production in Brazil is expected to rise by 170,000 tons to 33.69 million tons, the outlook for the Indian crop has been deteriorating since the season began in October 2008, Czarnikow said.

Brazil is the world’s largest producer of sugar followed by India.

To contact the reporter on this story: Rudy Ruitenberg in Paris at rruitenberg@bloomberg.net.

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Zinc Rises Most in 2 Weeks in London as China Builds Stockpiles

By Claudia Carpenter

Feb. 25 (Bloomberg) -- Zinc climbed the most in two weeks on the London Metal Exchange after China’s stockpiling agency bought metal from domestic smelters, reducing supply.

The State Reserve Bureau bought 100,000 metric tons, taking purchases this year to 159,000 tons, said four people familiar with the transactions who declined to be identified. Purchases will total 300,000 tons, one said. Zinc has dropped 55 percent in the past year. Supply exceeded demand by 195,000 tons in 2008, according to the International Lead and Zinc Study Group.

“The government is using relatively low prices to purchase metal they will need during the next few years,” said Michael Widmer, an analyst at BNP Paribas SA in London. “They’re trying to help some of the smelters to survive.”

Zinc for three-month delivery jumped as much as $31.75, or 2.9 percent, to $1,142.75 a ton on the LME, the biggest intraday gain since Feb. 9. The contract was at $1,128 a ton at 2:45 p.m. local time.

The purchasing “should benefit the market overall” because it will “mop up excess supplies,” said Jan Altink, spokesman in London for Nyrstar NV, the largest zinc producer. Mining and smelter cutbacks have probably put the supply of zinc concentrate, used to make the metal, “roughly” in balance with demand this year after a surplus in 2008, he said.

China plans to remove 800,000 tons of aluminum capacity, 300,000 tons of copper capacity and 400,000 tons of zinc capacity as part of a stimulus package, the China Securities Journal said, citing people it didn’t identify. The government may also start to buy nickel to increase state reserves, the report said. The bureau also has bought aluminum and copper this year, according to Macquarie Group Ltd.

Canceled Warrants

Copper advanced $90, or 2.7 percent, to $3,375 a ton. The amount of the metal scheduled to be taken out of LME-monitored warehouses, known as canceled warrants, jumped to 30,375 tons, or 5.5 percent of inventories, from 3.3 percent yesterday. This suggests “some pickup in physical interest,” said William Adams, an analyst at BaseMetals.com in London.

“Sentiment” in metals was helped by gains for equities in Europe and Asia, Widmer said. The U.K. benchmark FTSE 100 Index jumped as much as 1.8 percent, and Japan’s Nikkei 225 Stock Average closed 2.7 percent higher in Tokyo.

Aluminum rose $4 to $1,333 a ton, and tin jumped $275 to $10,800 a ton. Nickel climbed $125 to $9,925 a ton, while lead gained $25 to $1,020 a ton.

To contact the reporters on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net

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Corn, Soybeans Climb as Oil, Equity Rally Lifts Demand Outlook

By Jae Hur

Feb. 25 (Bloomberg) -- Corn and soybeans advanced for a third day on speculation that a rally in equity markets, the dollar’s decline and a rise in crude oil may boost demand prospects for food, animal feed and alternative fuel.

Asian stocks gained from a five-year low. U.S. stocks jumped the most in a month yesterday after Federal Reserve Chairman Ben S. Bernanke’s statement that banks need not be nationalized helped lift equities from their lowest valuations in two decades. The dollar fell 1.2 percent against the euro and oil gained 4 percent yesterday.

“Overall external factors, including stocks, the dollar and oil prices, lent support for the grains and oilseed complex,” Takaki Shigemoto, an analyst at Tokyo-based commodity broker Okachi & Co., said today by phone.

Corn for March delivery rose 0.5 percent to $3.56 a bushel at 3:19 p.m. Singapore time in electronic trading after gaining 0.7 percent yesterday. The grain for May delivery also added 0.5 percent to $3.6475. Futures reached a record $7.9925 on June 27.

Soybeans for May delivery rose as much as 1.1 percent to $8.935 a bushel and last traded at $8.8725. The most-active contract still has declined 46 percent from a record $16.3675 on July 3.

The U.S. Department of Agriculture will release planting forecasts on Feb. 27, with estimates to be revised on March 31 after the government surveys farmers early next month.

Planting Forecasts

About 78.659 million acres will be planted with soybeans this year, up 3.9 percent from 75.718 million in 2008 and 6.3 percent more than the 74 million forecast on Feb. 12, according to the average estimate of 14 analysts surveyed by Bloomberg News. Corn acreage may fall 1 percent to 85.141 million from 85.982 planted last year and 88 million estimated on Feb. 12.

U.S. winter wheat was planted on 42.1 million acres from September to December, down 9.1 percent from 46.3 million acres a year earlier, the highest in a decade, the USDA said Jan. 12.

Wheat for May delivery was 0.6 percent higher at $5.295 a bushel at 3:14 p.m. Singapore time after gaining 0.9 percent yesterday. The price has dropped 61 percent from a record $13.495 in February 2008.

The MSCI Asia Pacific Index rose as much as 1.7 percent to 75.60 before trading at 75.56 at 3:23 p.m. Singapore time. The Standard & Poor’s 500 Index added 4 percent yesterday, the biggest rally since Jan. 21.

Crude oil was down 0.3 percent at $39.83 a barrel after closing at $39.96 yesterday. The dollar traded at $1.2859 per euro from $1.2846 late yesterday.

To contact the reporter on this story: Jae Hur in Singapore at jhur1@bloomberg.net

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