Australian Employers Unexpectedly Add 32,200 Workers

By Jacob Greber

Aug. 6 (Bloomberg) -- Australian employers unexpectedly added workers in July, driving up the nation’s currency on speculation the central bank will raise borrowing costs by the end of the year.

The number of people employed rose 32,200 from June, the statistics bureau said in Sydney today. The median estimate of 18 economists surveyed by Bloomberg was for a decline of 18,000. The jobless rate held at 5.8 percent.

Central bank Governor Glenn Stevens kept the benchmark interest rate at a half-century low of 3 percent this week for a fourth month and signaled his next move may be an increase, saying the economy is “stronger than expected a few months ago.” Woolworths Ltd., the nation’s largest retailer, is among companies hiring to meet demand amid rising consumer confidence.

“It’s another sign of resilience and employers holding on to labor, so it provides some confidence in the future,” said David de Garis, a senior economist at National Australia Bank Ltd. in Sydney. The next move for interest rates “will be up.”

The Australian dollar rose to 84.43 U.S. cents at 12:17 p.m. in Sydney, close to its highest in more than 10 months, from 84.26 cents just before the report was released. The two-year government bond yield jumped 5 basis points to 4.45 percent. A basis point is 0.01 percentage point.

Interest-rate contracts on the Sydney Futures Exchange show about an 80 percent chance the Reserve Bank of Australia will increase borrowing costs in November by a quarter percentage point.

Part-time Jobs

Part-time employment increased 48,200 and the number of full-time jobs dropped 16,000 in July, today’s report showed.

The bureau of statistics also released figures today for the first time measuring aggregate monthly hours worked, which fell 0.43 percent in July to 1.52 billion hours. Hours worked peaked in June 2008 at 1.55 billion hours, the report said.

“It’s clear that Australia’s economists need to spend more time on the road listening to businesses than crunching numbers in their ivory towers,” said Craig James, a senior economist at Commonwealth Bank of Australia. “Businesses have been consistently saying that they are not shedding staff, but rather cutting hours” and moving people to part-time jobs.

While steady in Australia, unemployment is rising around the world amid the deepest global recession since the Great Depression. Japan’s jobless rate reached a six-year high of 5.4 percent in June and the U.S. rate climbed to 9.5 percent, the worst since 1983. A report today showed New Zealand’s rate jumped in the second quarter to a nine-year high of 6 percent.

Economic Growth

Australia’s economy has so far outperformed most other developed nations, expanding 0.4 percent in the first quarter, as A$12 billion ($10.1 billion) in government handouts to households boosted consumer spending, which accounts for about 60 percent of gross domestic product. The central bank also cut its benchmark interest rate by a record 4.25 percentage points between September and April.

Rising consumer and business confidence “suggests the risk of a severe contraction in the Australian economy has abated,” Governor Stevens said on Aug. 4.

A Westpac Banking Corp. index of consumer confidence jumped in July to the highest level in 19 months.

Woolworths said last month that sales in the three months ended June 28 rose 5.4 percent on demand at supermarkets.

Still, there are signs that interest-rate cuts and government spending are having less impact. Retail sales unexpectedly tumbled 1.4 percent in June, the first drop since February, when Prime Minister Kevin Rudd announced a plan to distribute individual cash payments of as much as A$900 to low and medium income earners.

Services Industry

A separate report published yesterday showed Australia’s services industry contracted in July, after expanding in June for the first time in 15 months, as households cut spending at hotels, cafes and restaurants.

Today’s figures show the “economic stimulus is working to support jobs,” Deputy Prime Minister Julia Gillard told reporters in Melbourne. Still, it’s “far too soon to contemplate pulling the rug out from the Australian economy” by cutting government spending.

Mark McInnes, chief executive officer of David Jones Ltd., the nation’s second-biggest department-store chain, said yesterday while there was a positive turnaround in trading during the June quarter, “there is still some uncertainty in relation to the future outlook.”

Retailers such as David Jones employ more than one in ten Australian workers, according to government figures.

The participation rate, which measures the labor force as a percentage of the population aged over 15, held at 65.3 percent, today’s report showed.

Labor-market resilience “may reflect greater flexibility compared with the last downturn in 2001 and the recession of the early 1990s,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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Italian Production Unexpectedly Falls, Delays Rebound

By Steve Scherer

Aug. 6 (Bloomberg) -- Italian industrial production unexpectedly fell in June as the country struggles to climb out of its worst recession since World War II.

Production declined 1.2 percent from May, when it was unchanged, the national statistics office in Rome said today. Economists had predicted manufacturing would gain 0.5 percent, according to the median of 22 forecasts in a Bloomberg survey. From a year earlier, adjusted production fell 21.9 percent.

“The drop in manufacturing is slowing, but it’s too early to say the recession is over,” said Lucia Lorenzoni, an economist with Banca Monte dei Paschi di Siena SpA in Siena, Italy. “What today’s figure shows is that the recovery is going to be very slow.”

Lorenzoni and two other economists predicted Italy’s economy, Europe’s fourth biggest, contracted more in the second quarter than was forecast before the release of the manufacturing figure. While Italian business confidence rose to an eight-month high in July, and consumer confidence was at its highest in almost two years, demand for industrial goods is still falling, Lorenzoni said.

Indesit SpA, the nation’s biggest maker of household appliances, posted a loss in the second quarter, and it doesn’t see sales picking up soon.

‘Demand Weak’

“Demand is still very weak,” Indesit Chief Executive Officer Marco Milani said when the company released results on July 30.

The report showed that sales of durable goods, such as cars and home appliances, fell 26 percent from a year earlier. Production of vehicles, including cars, buses and trucks, declined 35 percent from a year earlier, Istat said.

Italy’s economy will shrink 5.2 percent this year, twice as much as 2008, according to the government. The euro-region economy “bottomed out” in the first quarter, according to an index produced by the Bank of Italy last month. Some Italian manufacturers are showing signs of recovery.

Carmaker Fiat SpA’s domestic sales of its namesake brand rose 12 percent in July, as overall Italian car registrations rose for a second month, the Transportation Industry said earlier this week. Government incentives to trade in older cars helped boost demand. Fiat is Italy’s biggest manufacturer.

Other countries are showing signs of improvement, which could boost demand for Italian exports. Business confidence in Germany, Europe’s largest economy, rose for a fourth month in July, the Ifo institute said last month. The decline in European manufacturing slowed for a fifth month in July, Markit Economics’ purchasing managers index said on Aug. 3.

ECB

European Central Bank council member Athanasios Orphanides said on July 24 that recent positive signs in the global economy point to a gradual recovery next year.

Italy’s economy likely shrank 0.7 percent in the second quarter from the previous one, according to the median forecast of 22 economists surveyed before the release of today’s data. Three economists changed their forecasts to a 0.8 percent decline after the release. Istat releases that report tomorrow at 10 a.m.

Italian production declined 3.9 percent in the second quarter compared with the previous three months, indicating that economic growth likely slowed for a fifth quarter.

For Related News and Information: Stories on Italy’s economy: TNI ITALY ECO Top Italian news: TOP IT

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Czech Central Bank Cuts Key Rate to Record-Low 1.25%

By Radoslav Tomek

Aug. 6 (Bloomberg) -- The Czech central bank cut its key interest rate a quarter-point to a record low to prop up the economy during the global financial crisis.

Policy makers trimmed the two-week repurchase rate to 1.25 percent from 1.5 percent at their meeting today in Prague, the central bank said in a statement today. The decision was predicted by eight of 17 economists surveyed by Bloomberg. The rest expected no change amid signs the recession in western Europe, the main Czech export market, is easing.

The strengthening koruna allowed for one more rate cut to bolster the economy, which is heading for its worst contraction in more than a decade, economists said. The move brings the combined reduction of borrowing costs since June last year to 2.5 percentage points.

“A weaker first quarter, a favorable inflation outlook, a new gloomier prognosis, an imperfectly functioning inter-bank market and a stronger koruna: these are the reasons why we marginally lean toward a cut,” Martin Lobotka, an economist at Ceska Sporitelna AS in Prague, said before the announcement.

The central bank joined its counterparts in Hungary and Romania, which also reduced borrowing costs in the past two weeks.

Koruna Steady

The koruna was trading at 25.966 against the euro at 1:01 p.m. in Prague, little changed from yesterday. The currency has lost about 2 percent since reaching an eight-month high of 25.464 against the euro on July 27 on speculation the central bank may cut rates today.

The central bank didn’t elaborate on the decision. It will hold a press conference at 3:30 p.m. in Prague where it is scheduled to unveil its new outlook for the economy, which will probably show the economy will shrink more this year than the 2.4 percent estimate of three months ago.

The last forecast also projected an inflation rate at 1.1 percent in the second quarter of next year and at 1.7 percent in the third quarter of 2010.

The rate fell to 1.2 percent in June, the lowest in more than five years, from 1.3 percent in the previous month as the economy’s decline damped price pressures. The rate remains below the central bank’s target of 3 percent, plus-minus 1 percentage point.

To contact the reporter on this story: Radoslav Tomek in Bratislava at rtomek@bloomberg.net.

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Dutch Prices Drop for First Time Since at Least 1997

By Jurjen van de Pol

Aug. 6 (Bloomberg) -- Consumer prices in the Netherlands fell from a year earlier for the first time since at least 1997 in July after utilities cut natural-gas prices by 20 percent.

Dutch prices, using a harmonized European Union method, declined 0.1 percent last month after rising 1.4 percent in June, the national statistics bureau in The Hague said on its Web site today. That was the first annual drop since the data series began in January 1997. From the previous month, July consumer prices dropped 1.6 percent.

Utilities including Essent NV, the nation’s biggest, reduced charges by one-fifth in July, which lowered overall inflation by 1 percentage point, according to the statistics bureau. While lower prices boost household purchasing power, increased job insecurity is damping consumer spending across the euro region. The Dutch unemployment rate rose to the highest in more than two years in June.

“The difference between Dutch and European inflation has become smaller, but we don’t expect a deflation scenario with enduring lower prices,” said Marten van Garderen, an economist at ING Groep NV in Amsterdam, who forecasts full-year inflation at 0.9 percent in the Netherlands.

European consumer prices fell by the most in at least 13 years in July after energy costs declined. Crude oil has dropped 40 percent in the past 12 months after reaching an all-time high in July 2008.

Consumer-Goods Market

Unilever, the maker of Lipton tea and Magnum ice cream, anticipates the volume of the consumer-goods market in Western Europe “may even be negative” as unemployment rises and consumer confidence remains low, Chief Executive Officer Paul Polman told a conference call for analysts today.

While European retail sales fell more than economists forecast in June, there are signs the recession is easing after the European Central Bank cut its key interest rate to a record low of 1 percent and governments spent billions of euros on stimulus measures.

The Dutch economy’s second-quarter contraction will be smaller than that in the previous three months, Finance Minister Wouter Bos said last month. The economy shrank by a record in the first quarter as exports dropped and rising unemployment curbed consumer spending. The report on second-quarter gross domestic product is scheduled for release on Aug. 13.

Based on a national calculation of inflation, consumer prices in the Netherlands increased 0.2 percent in July from a year earlier, below the 0.7 percent median estimate of four economists in a Bloomberg News survey. That was the lowest reading since December 1987, according to data from the statistics bureau.

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

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Issing Says Officials May Have to Ignore Political ‘Screams’

By Matthew Brown and Frances Robinson

Aug. 6 (Bloomberg) -- Otmar Issing, former chief economist of the European Central Bank, said inflation will pick up as soon as the financial crisis has passed unless governments and central banks remove economic stimulus measures promptly.

“Politicians and industry might scream” when the measures are withdrawn, “but this should not be an argument for central banks and fiscal policies,” Issing said in a telephone interview from Frankfurt yesterday. The exit “has to happen at a time when unemployment is still high or even still rising, because of the lagged effect of the crisis on labor markets.”

Policy makers worldwide have pumped money into their economies in a bid to counter the worst recession since the Great Depression. While some officials have warned about the inflation risks associated with increased money supply, others say removing the stimulus too soon may stymie a nascent economic recovery as rising unemployment damps consumer spending.

“As we have seen the strongest expansionary policies, fiscal as well as monetary, in the history of the world, I think it is rather straightforward that as soon as the crisis is behind us, inflationary pressures will emerge unless policies change course in a timely manner,” Issing said.

The ECB has cut its benchmark interest rate to a record low of 1 percent, offered to lend banks as much money as they need and started buying 60 billion euros ($86 billion) of covered bonds in a bid to get credit flowing again. The Federal Reserve and Bank of England have gone further, reducing their key rates to close to zero and buying government and corporate bonds.

Rate Decision

Issing said that, “given the size of expansionary packages and the impact of monetary policy,” most economies will recover from recession at about the same time.

“The question is whether there will be a strong or weak recovery,” he said. “There are arguments that the recovery will be rather moderate. But even a moderate recovery is better than staying in this stagnation.”

ECB policy makers convene in Frankfurt today to discuss monetary policy. Issing, 73, retired from the bank in May 2006 after serving an eight-year term.

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Frances Robinson in Frankfurt at frobinson6@bloomberg.net

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BOJ Said to See Deflation Stretching Through 2011

By Mayumi Otsuma and Masahiro Hidaka

Aug. 6 (Bloomberg) -- The Bank of Japan will probably forecast that declines in consumer prices will extend into 2011 even as the economy recovers, according to two people familiar with the matter.

The estimate would be included in policy makers’ first economic projections for the financial year ending March 2012, scheduled for release in October, said the people, who declined to be identified ahead of the report. Central bankers have already predicted prices will fall 1.3 percent in the current year and 1 percent in fiscal 2010.

Prospects for a third year of deflation make it likely Bank of Japan Governor Masaaki Shirakawa and his colleagues will keep interest rates near zero through next year, analysts said. It would also erode profits at companies such as Aeon Co., Japan’s second-largest retailer, which has been forced to offer discounts to attract consumers whose wages are tumbling.

“The Bank of Japan will hold the key rate at 0.1 percent at least through March 2011 to stop deflation from becoming deeply entrenched,” said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo. “The central bank will probably consider further policy-easing action” should the risk of spiraling deflation mount, he also said.

Worst Recession

Japan is beginning to emerge from its worst postwar recession as exports improve and manufacturers boost production to replenish inventories. The revival has yet to spread to consumers, who are facing record declines in paychecks and an unemployment rate that economists say will reach an unprecedented 5.8 percent early next year.

Deflation may escalate as households, whose spending accounts for more than half of the nation’s gross domestic product, delay purchases on the expectation that goods will get cheaper, restraining a recovery in the world’s second-largest economy.

The central bank cut the key overnight rate to 0.1 percent in December, and has since begun buying corporate debt from lenders and offering them unlimited loans backed by collateral to channel funds to companies. The policy board last month extended the credit steps by three months to Dec. 31; some analysts said they’ll need to extend them again.

“With little room left to trim the key rate, the Bank of Japan will have no choice but to keep the current extraordinary policy measures, including the credit-easing programs, for a long time,” said Akio Makabe, an economics professor at Shinshu University in Matsumoto, central Japan.

Bond Yields

Subdued consumer prices have helped keep Japan’s debt yields from climbing even as the government enacted fiscal- stimulus measures. Benchmark 10-year bonds yielded 1.435 percent at 10:16 a.m. in Tokyo, down from the year’s high of 1.57 percent in June and an average of 1.47 percent the past decade.

Japan endured years of deflation earlier this decade, only defeating it in 2005. A central bank forecast signaling a return of the trend would come weeks after a new government takes office. The opposition Democratic Party of Japan leads the ruling Liberal Democratic Party in polls ahead of the Aug. 30 general election.

The central bank is bound by law to maintain price stability, and policy makers have indicated that inflation is steady within a range of zero to 2 percent. The prospect that prices will stay below that scope will force the central bank to keep the key rate unchanged at least through 2010, according to 10 of 13 economists surveyed by Bloomberg News.

Record Decline

Prices excluding fresh food, the central bank’s preferred gauge, slid a record 1.7 percent in June, in part because oil traded at about half of last year’s levels.

Central bank Deputy Governor Hirohide Yamaguchi said last month that it will take “some time” before consumer prices return to the policy board’s range. He added that there is no need for the bank to implement additional policy-easing measures for now, with the risk of a deflationary spiral being low.

Retailers are discounting products in an effort to maintain sales amid the recession. Chiba-based Aeon in July started selling house-brand beer that’s 20 percent cheaper than the equivalent products of major breweries. The company, which last month reported its fourth net loss in five quarters, cut prices on more than 6,000 items in March as rivals including Seven & I Holdings Co. and Seiyu Ltd., a Wal-Mart Stores Inc. unit, also discounted products.

Retailers Cut Prices

“Retailers are slashing prices to appeal to households, which are tightening their purse strings in response to job losses and wage cuts,” said Ryutaro Kono, chief economist at BNP Paribas in Tokyo.

Kono anticipates the Bank of Japan will in October forecast prices will fall about 1 percent in fiscal 2011 because a growing number of consumers and companies are expecting price declines.

A measure of the gap between supply and demand in Japan’s economy widened to a record in the three months ended March 31, according to the Cabinet Office.

“It’s inevitable that the Bank of Japan will forecast price declines for a third year,” given that slack in the economy has widened and growth will be subdued, said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo. “The central bank will continue to focus on the economy’s downside risks.”

To contact the reporters on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Masahiro Hidaka in Tokyo at at mhidaka@bloomberg.net

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U.K. House Prices Will Increase in 2009, RICS Says

By Brian Swint

Aug. 6 (Bloomberg) -- U.K. house prices will rise in 2009, the Royal Institution of Chartered Surveyors said, reversing an earlier prediction for a drop of as much as 15 percent.

The average price of a home will be “slightly higher” in the fourth quarter of 2009 than it was in the same period last year, RICS said in a statement in London today. Lower interest rates and the decline in house prices from their peak in 2007 have lured buyers back to the market, the group said.

Signs are mounting that Britain’s economy is recovering, with reports yesterday showing house prices jumped almost twice as much as economists forecast in July and consumer confidence rising to the highest in more than a year. The Bank of England will today decide whether to buy more assets with newly created money to combat the recession.

“There has been a clear change in the housing market over the past few months,” said Brigid O’Leary, a senior economist at RICS. “However, the outlook for 2010 is fairly uncertain, and there is a real risk that prices may slip back again.”

The pound traded near a nine-month high today at $1.6979 as of 10 a.m. in London.

RICS predicted in December that U.K. house prices would drop between 10 percent and 15 percent this year. After tripling in a decade, property values are now about 20 percent lower than their peak in 2007, according to data from Lloyds Banking Group Plc’s Halifax division.

Services, Manufacturing

U.K. services expanded the most in 1 1/2 years in July and manufacturing unexpectedly rose in June, reports showed yesterday. Home values climbed 1.1 percent to an average of 159,623 pounds ($269,850) last month, Halifax said.

Nationwide Building Society’s index of consumer sentiment rose to 60, the highest since May 2008. Homeowners expect the value of their properties to rise 0.5 percent in the next six months, the most since December 2007, Nationwide said.

Rising unemployment and increases in mortgage rates will limit the recovery in house prices, RICS said.

“This does not indicate a quick return to boom time, as activity remains very weak by historical standards,” RICS said in the report. “A return to a more orderly market is still some way off.”

Signals that the recession is past its worst may nevertheless sway the Bank of England to pause its money- printing program, which was started in March to pump more cash into the slumping economy. So far it has bought 125 billion pounds in securities. The decision is due at noon in London.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.

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German Factory Orders Surge the Most in Two Years

By Christian Vits

Aug. 6 (Bloomberg) -- German factory orders posted their biggest increase in two years in June, the latest sign that Europe’s largest economy is emerging from recession.

Orders, adjusted for seasonal swings and inflation, jumped 4.5 percent from May, the Economy Ministry in Berlin said today. That’s the most since June 2007 and the fourth successive monthly gain. Economists expected an increase of 0.6 percent, the median of 37 estimates in a Bloomberg News survey showed. Orders were still 25.3 percent lower than a year earlier.

Today’s report adds to evidence that Germany is shaking off its worst economic slump since World War II as a global recovery fuels demand for exports. While the government has forecast the economy will contract by 6 percent this year, some economists predict a return to growth as soon as this quarter. Business confidence rose for a fourth month in July.

“The factory figures are impressive, the outlook is brightening,” said Arnd Schaefer, an economist at WestLB in Dusseldorf. “We expect mildly positive growth rates in the second half of this year.”

The increase in June was driven by an 8.3 percent surge in export orders, today’s report showed. Orders from other euro- area countries spiked 13.2 percent while those from outside the region advanced 4.8 percent, the ministry said. Domestic orders rose 0.2 percent.

Emerging Markets

Volkswagen AG, Europe’s largest carmaker, said today its luxury Audi division boosted sales by 2.1 percent in July, a second consecutive increase, as it attracted a record number of buyers in China. Audi said on July 31 it’s likely to post a “significant” operating profit this year as emerging markets begin to revive.

Governments worldwide have announced about $2 trillion in economic stimulus programs to help rekindle economic growth. German Chancellor Angela Merkel’s government, which faces a national election in September, is spending about 85 billion euros ($122 billion) to fight the recession, including tax breaks and a 2,500-euro payment for consumers who scrap their old car and buy a new one.

At the same time, the European Central Bank has slashed interest rates, flooded financial markets with cash and started buying 60 billion euros of covered bonds to free up credit and encourage banks to lend to companies and households.

Munich-based Allianz, Europe’s biggest insurer, on July 22 predicted the German economy will expand 2.3 percent in both the third and fourth quarters.

“Germany will profit from the global recovery,” said Sebastian Wanke, an economist at Dekabank in Frankfurt. Still, “there’s a risk that we’ll face an economic backlash with negative growth when the car-scrapping premium ends.”

To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net

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BOE Extends Bond Purchases After Recession Deepened

By Jennifer Ryan

Aug. 6 (Bloomberg) -- The Bank of England increased its bond purchase program by 50 billion pounds ($84 billion), saying the U.K.’s economic recession is deeper than policy makers expected.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, kept the key interest rate at 0.5 percent and said it will increase its purchase program to 175 billion pounds. Twenty-three of 44 economists in a Bloomberg News survey predicted an expansion of the plan, and the rest saw no further purchases.

“In the United Kingdom, the recession appears to have been deeper than previously thought,” the central bank said in a statement in London today. “While some recovery in output growth is in prospect, the margin of spare capacity in the economy is likely to continue to grow for some while yet, bearing down on inflation in the medium term.”

The bank’s move suggests policy makers, who based the decision on quarterly forecasts prepared this month, assessed that their stimulus plan and record low interest rates weren’t enough to quell the threat of deflation. While services grew at the fastest pace in 1 1/2 years in July, unemployment is rising and banks have kept restricting access to credit.

“There’s evidence that the economy has turned the corner, but it’s early days yet and it’s still fragile,” said James Shugg, an economist at Westpac Banking Corp. in London. “The bank doesn’t want to take away the support that’s helped the recovery get under way.”

Market Reaction

Bond yields plunged and the pound dropped after the Bank of England’s statement. The yield on the benchmark 10-year gilt fell 17 basis points to 3.65 percent and the pound declined as much as 0.9 percent to $1.6832.

Chancellor of the Exchequer Alistair Darling authorized the purchases, reflecting Prime Minister Gordon Brown’s concern that the economy remains fragile.

Brown said on July 22 that the bank’s so-called quantitative easing policy and interest-rate cuts have “made a difference.” He faces elections by June 2010, and his Labour Party trailed the Conservative opposition by 14 percentage points in a YouGov Plc opinion poll that ended July 30.

“I agree that an increase in the ceiling would provide the MPC with scope to vary the stance of monetary policy to meet the inflation target,” Darling wrote in a letter to the central bank.

Bank’s Forecasts

Further clues on the central bank’s next move and its assessment of the economy may follow on Aug. 12, when King presents the new forecasts prepared by his staff.

All 60 economists in a Bloomberg News survey predicted the interest rate would stay at a record low today. The European Central Bank may keep its rate at 1 percent at 1:45 p.m. in Frankfurt today, all 52 economists in a separate survey said. The Federal Reserve has left its key rate at a range of zero to 0.25 percent since December.

Former policy maker Charles Goodhart told Bloomberg Television yesterday that he favored an expansion of the bank’s purchase program.

“The economy is still fragile, monetary figures are still very low, bank lending hasn’t increased yet and quantitative easing has the great advantage that it can be reversed very quickly,” Goodhart said yesterday. “We don’t lose anything if we continue, and we might gain.”

Money and Lending

A measure of money supply watched by the bank to assess quantitative easing, known as M4 excluding intermediate financial companies, grew at an annualized rate of 3.7 percent in the second quarter, compared with 6.4 percent for the same period in 2008. Mortgage approvals reached a 14-month high in June of 47,584. They remain a third lower than at the start of 2008.

Unemployment, which reached the highest since 1995 in the quarter through May, may rise further as the economic slump prompts companies to cut staff. GKN Plc, the U.K. maker of car parts for Bayerische Motoren Werke AG, and aircraft components for Airbus SAS, said Aug. 4 that it will cut 1,100 more jobs in the next 12 months.

“It’s not enough, I think they need to do more,” said John Greenwood, chief international economist at Invesco Asset Management. “In the shadow monetary policy committee I’ve been voting for a further 150 billion and to stretch that out to year end,” he said.

Strength in Services

An index of services rose this month to the highest since February 2008, and a gauge of manufacturing showed the first expansion this year, Markit Group Ltd. said this week. A report by Lloyds’s Halifax division showed house prices jumped almost twice as much as economists forecast last month.

Lloyds Banking Group Plc, which is 43 percent owned by the government, said yesterday it lost 3.1 billion pounds in the first half and won’t renew about 200 billion pounds of higher- risk loans as they come due over the next five years.

Barclays Plc, the U.K.’s second-biggest lender, said on Aug. 3 that first-half earnings rose 10 percent as profit from investment banking almost doubled. Aviva Plc, Britain’s second- largest insurer by market value, said today that it swung to a first-half profit as margins on the sale of life insurance policies increased.

If policy makers choose in future to expand the purchase program further, the central bank would expect Darling to allow them to do so by “a reasonable amount,” Deputy Governor Charles Bean told the BBC in an interview last month.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

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ECB May Keep Rates at Record Low as Outlook Grows ‘Less Gloomy’

By Simone Meier

Aug. 6 (Bloomberg) -- The European Central Bank will leave interest rates at a record low as it tries to get credit flowing again to strengthen an economy that may return to growth this quarter, economists said.

ECB officials meeting in Frankfurt today will keep the benchmark rate at 1 percent, according to all 52 economists in a Bloomberg News survey. The central bank, led by President Jean- Claude Trichet, will refrain from any further policy stimulus while it assesses the impact of its asset-purchase program and 12-month loans to banks, said Nick Kounis, chief euro-region economist at Fortis Bank in Amsterdam.

“The economy seems to be finding its feet sooner than the ECB expected, but a recovery is going to be gradual,” he said. “We’re moving from gloomy to less gloomy. They’re definitely not going to sound anywhere near euphoric.”

The economy of the 16 euro nations will expand 0.3 percent in the third quarter from the second, economists at Barclays Capital forecast, bringing an end to Europe’s worst recession since World War II. With unemployment rising and consumer prices falling at the fastest pace on record, the road to recovery may not be smooth. The euro area will be the worst performing major economy next year, according to the International Monetary Fund.

The ECB announces its rate decision at 1:45 p.m. and Trichet holds a press conference 45 minutes later. Separately, the Bank of England will probably keep its key interest rate at 0.5 percent today, a Bloomberg survey shows.

Credit Squeeze

The Bank of England, U.S. Federal Reserve and Bank of Japan have lowered borrowing costs to close to zero and started buying government and corporate bonds to rekindle growth. By contrast, the ECB has focused on getting credit flowing through the banking system again, arguing that two thirds of its economy is financed by banks.

The ECB in June lent banks a record 442 billion euros ($636 billion) for 12 months and will hold two more 12-month tenders this year. Last month it started a program to buy 60 billion euros of covered bonds, securities backed by mortgages and public-sector loans.

In the second quarter, a net 21 percent of banks reported a tightening in credit standards for enterprises, down from 43 percent in the previous three months, according to the ECB’s bank lending survey published on July 29. Still, loans to households and companies grew at the weakest pace on record in June.

‘Continued Pressure’

Deutsche Bank AG Chief Executive Officer Josef Ackermann said on July 28 he remains “cautious” about the economic outlook and expects to see “continued pressure on the credit environment.”

If banks remain reluctant to lend, the ECB may be forced to step up its response as the economic slump swells unemployment and prices decline. The jobless rate rose to 9.4 percent in June, the highest since 1999, and consumer prices posted a 0.6 percent annual decline in July, the biggest since data were first compiled in 1996.

Trichet last month refused to rule out further rate cuts, saying while the current level was “appropriate,” policy makers hadn’t decided they had reached their lower limit.

“The current stance is to monitor the impact of policy decisions that have been taken over the past months,” said Jacques Cailloux, chief euro-region economist at Royal Bank of Scotland Group Plc in London. “The latest information isn’t providing any sign that they would have to launch additional measures.”

‘The Worst Is Over’

European economic confidence rose to an eight-month high in July and the contraction in the region’s manufacturing and service industries slowed.

Adidas AG, the world’s second-largest sporting-goods maker, yesterday reported a smaller decline in second-quarter earnings than analysts had forecast, and CEO Herbert Hainer said “the worst is over.”

The ECB predicts the euro-region economy will contract about 4.6 percent this year and 0.3 percent in 2010. Inflation will average about 0.3 percent this year and 1 percent in 2010, it forecast in June. The bank aims to keep inflation just below 2 percent.

Holger Schmieding, chief European economist at Bank of America-Merrill Lynch in London, said the ECB is unlikely to “change the script” before September, when it publishes the next round of forecasts.

“I expect nothing, nothing, nothing” from today’s meeting, he said. “Interest rates are appropriate, and on the non-conventional front there won’t be anything new either. Council members could probably have saved the trip to Frankfurt.”

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

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Chinese Miners Meet 65% of Thermal-Coal Sales Quota

By Bloomberg News

Aug. 6 (Bloomberg) -- Chinese coal miners, led by China Shenhua Energy Co., have sold more than half of a government quota for the fuel as of the end of May at higher prices after demand improved, said an industry official.

Mining companies agreed to supply more than 400 million metric tons to power plants this year, equivalent to 65 percent of a state-set quota based on transport capacity, Liu Caiying, chairwoman of the China Coal Transportation and Distribution Association, said today. Shenhua sold the fuel at 540 yuan ($79) a ton, she said. That’s a 17 percent gain from last year.

Power plants had earlier sought a price cut of as much as 10 percent as electricity demand had fallen because of the world recession, while miners wanted to charge 10 percent more compared with 2008, Xie Juchen, a fuel purchasing director at China Electricity Council, said in December.

“Based on our research, local producers charged utilities an average 540 yuan a ton for the fuel under this year’s term contracts, an estimated 10 percent increase from 2008,” Shi Yan, a power analyst at UOB-Kay Hian Ltd., said by phone in Shanghai.

The higher contract prices rose in line with the improving economy, as well as spot prices at China’s Qinhuangdao port, a benchmark in the world’s biggest producer of the fuel.

The Chinese economy grew 7.9 percent in the second quarter as the government’s 4 trillion-yuan stimulus spending boosted industrial output. Electricity production posted the first increase in four months in June.

Prices of coal for immediate delivery at Qinhuangdao gained 1 percent to 570 yuan a ton by Aug. 3 from a week earlier. The fuel fell to this year’s low of 558 yuan a ton in March, after reaching a record 995 yuan last July.

Shandong Producers

Hong Kong-listed Yanzhou Coal Mining Corp. and miners in eastern Shandong province raised prices by 4 percent, Liu said by telephone from Beijing today. Zhang Baocai, board secretary of the miner, didn’t answer calls to his office.

The country’s major power producers have signed contracts for coal to be supplied to plants in Shandong at prices 4 percent higher than the 460 yuan a ton last year, Zhang Gelin, head of securities trading at Huadian Power International Corp., said on June 5.

Huadian Power, the listed unit of China Huadian, closed unchanged at HK$3.01 in Hong Kong trading today, while Yanzhou advanced 1 percent to HK$12.44. Shares of Beijing-based Shenhua Energy were flat at HK$32.80.

Shandong and neighboring Shanxi are China’s largest coal- producing provinces. The nation’s biggest power generators include China Huaneng Group Corp., China Datang Corp., China Huadian Corp., China Guodian Corp. and China Power Investment Corp.

Xie at the China Electricity Council, which represents domestic power producers, didn’t answer calls made to his mobile phone and office.

For Related News and Information: Top Energy Stories: ETOP Top Power Stories: PTOP

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Chubu Electric in Talks for Stake in Chevron Venture

By Megumi Yamanaka and Yuji Okada

Aug. 6 (Bloomberg) -- Chubu Electric Power Co., Japan’s third-largest generator, is in talks to buy stakes in liquefied natural gas projects planned by Chevron Corp. and Inpex Corp. in Australia as it seeks to diversify supplies.

The utility may buy less than 1 percent of the A$50 billion ($42 billion) Gorgon liquefied natural gas project, and aims to complete discussions with Chevron within the year, Yuji Kakimi, general manager at its fuel department, said in an interview in Tokyo yesterday. Nicole Hodgson, a Perth-based spokeswoman for Chevron, said talks with Chubu for a potential stake in the Gorgon project are ongoing.

Chubu Electric joins Tokyo Electric Power Co. and Tokyo Gas Co. in looking for new LNG suppliers, mainly in Australia, after Indonesia slashed exports to Japanese companies. Chubu is in early talks to buy supplies and a stake from Inpex’s $20 billion Ichthys venture in Darwin, Kakimi said. Inpex spokesman Kazuya Honda declined to comment when reached by phone in Tokyo.

“We’ve informed Inpex that we have a high expectation for the project,” Kakimi said. “Australia will be a good supplier for us as it needs to export LNG, unlike Indonesia where the fuel is diverted for domestic use to meet growing demand.”

Chubu’s talks with Inpex about Ichthys are at an early stage and haven’t addressed details such as the price, size of stake and the volume of supplies Chubu may buy, Kakimi said. He also declined to say how much Chubu may invest in Gorgon. The buyer of a 1 percent stake would have to bear about 30 billion yen ($316 million) in project costs, according to three analysts surveyed by Bloomberg.

Biggest Supplier

Australia will become the utility’s biggest LNG supplier after Qatar, from which Chubu Electric buys 40 percent of its LNG, or 4 million metric tons a year. The company signed a 25- year agreement in 2005 to buy 1.5 million tons annually from the Gorgon venture. It currently purchases about 1.1 million tons a year from Woodside Petroleum Ltd.’s North West Shelf venture.

Chevron and partners, Exxon Mobil Corp. and Royal Dutch Shell Plc, will make a final investment decision on Gorgon “in the coming months,” Chevron Australia Managing Director Roy Krzywosinski said in June. The venture plans to make first deliveries in 2014.

The Gorgon fields, some 200 kilometers (120 miles) off Western Australia, contain 40 trillion cubic feet of gas deposits and have an expected life of 60 years. Last week, Tokyo Gas Co., Japan’s largest gas retailer, said it will acquire a 1 percent stake in the venture.

Ichthys Project

Inpex, Japan’s biggest explorer, has been wooing Japanese LNG buyers to join the Ichthys project, one of about 10 proposed ventures in Australia. Tokyo Electric Power Co., Asia’s biggest utility, last month said it may buy around 1 percent in the venture. Inpex owns 76 percent of the project, with the remaining held by Paris-based partner Total SA.

Indonesia slashed volumes in February when it renewed contracts to sell LNG to six Japanese buyers. Supplies to Chubu, which gets about 30 percent of its LNG from Indonesia, will drop 75 percent to 950,000 tons a year in the five years to 2015, according to the company. The volume will fall again, to 630,000 tons, in the period from 2016 to 2020.

To fill the gap, Chubu will start buying fuel from Russia’s Sakhalin island project and from Malaysia starting in 2011, according to the company.

Shares Decline

Among Japan’s 10 regional utilities, Chubu generally relies most heavily on LNG thermal generation, which accounted about 45 percent of the company’s total power production in the year ended March 2009. It bought 10 million tons of the fuel in fiscal 2008, and will continue importing at that rate about 10 years, Kakimi said.

Chubu shares have declined 5.2 percent in the last six months compared with the 9.8 percent fall in the 17-member Topix utilities subindex. They dipped 1.3 percent to close at 2,275 yen in Tokyo trading.

Western Australian Premier Colin Barnett has estimated the value of the Gorgon project at A$50 billion, while Chevron hasn’t confirmed or denied the figure.

LNG is natural gas that’s chilled to liquid form for transportation by ship to destinations not connected by pipeline.

To contact the reporters on this story: Megumi Yamanaka in Tokyo at myamanaka@bloomberg.net; Yuji Okada in Tokyo at yokada6@bloomberg.net.

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Mont Saint Michel Turbines Spark Village Wars in Energy Fight

By Tara Patel

Aug. 6 (Bloomberg) -- Residents of rural France are seeking a moratorium on wind-farm construction, jeopardizing government plans to expand wind energy sevenfold over the next decade and hampering projects by EDF Energies Nouvelles SA and GDF Suez SA.

Organizers of a national petition that started this week demanded a debate on the economic justification for wind energy and the “visual blight” it creates in villages and at tourist sites such as Mont Saint Michel off the Normandy coast.

“Wind turbines have the potential to spark war in our villages,” said Yves Verilhac, the former director of a regional nature reserve who is spearheading the petition. “This is a complicated and highly politicized issue that needs further debate.”

France is seeking to boost wind power to as much as 25,000 megawatts of installed capacity by 2020, equal to seven nuclear reactors, from 3,400 megawatts at the start of this year. The government has said it wants to surpass a European Union target to get a fifth of energy from renewable sources by 2020. It’s promoting wind parks as the biggest contributor to the alternative-energy boom, anticipating investment of 15 billion euros ($21.6 billion) over the period.

“Reaching targets will be challenging for France,” Yohann Terry, a Paris-based analyst at Exane BNP Paribas, said yesterday by telephone, citing local opposition to projects and reluctance by municipal authorities to approve them.

Wind-Park Eyesores

The government’s plans face opposition from dozens of associations such as Vent de Colere that have sprung up in recent years to protest new wind projects. Wind farms on an industrial scale are an eyesore, Verilhac said by telephone on Aug. 3. They don’t create local jobs, they kill birds and aren’t an economical means to produce energy, he said.

Verilhac, whose fight has been documented by Vent de Colere and other groups, is focusing his campaign on planned wind parks visible from Mont Gerbier de Jonc, a mountain in the Massif Central region of rural Ardeche, where developers intend to increase turbines more than fourfold within five years.

Local resistance has made it increasingly difficult for EDF Energies, GDF Suez and Poweo SA to obtain planning approval for wind parks. Paris-based GDF Suez, which says it’s the biggest player on the French wind market with a 10 percent share, intends to add 400 megawatts of capacity at home to raise output about sevenfold in 2013. EDF Energies has had to curtail its ambitions in France as opposition hinders new developments.

Obstacles to Approval

“We aren’t expecting a huge increase in projects in France because there are so many obstacles to getting building permits,” EDF Energies Chairman Paris Mouratoglou said July 29 at a press conference. “It’s becoming harder and harder to get them.”

France lags behind European wind-power market leader Germany, which has 23,903 megawatts of installed capacity, and also Spain and Italy, according to statistics on the Web site of the Brussels-based European Wind Energy Association.

As French opposition stalls expansion, EDF Energies continues to grow abroad. It bought 180 turbines from SkyPower Corp. of Canada in the first half and reached an agreement with Greentech Energy System A/S for a stake in an Italian wind farm, Chief Executive Officer David Corchia said July 29. The company got “good prices” on both deals as the financial crisis reduced vendors’ bargaining power, he said.

The Paris-based company has 287 megawatts of installed wind capacity in France out of a total of 2,301 megawatts in Europe and North America, of which 863 megawatts are in the U.S. The company is targeting 4,000 megawatts of wind capacity by the end of 2012, including an unspecified number of new projects at home.

Grenelle Environnement

GDF Suez’s wind-energy plans are “on track,” an official at the utility said yesterday.

France’s environment plan, the Grenelle Environnement, calls for construction of wind farms nationwide, including offshore. Project development, currently mostly in the northeast, has stabilized at a pace of about 1,000 megawatts a year, according to a document published by Electricite de France SA’s grid operator Reseau de Transport d’Electricite last month.

“The energy revolution in France will be through energy savings and the development of renewable energies,” Energy Minister Jean-Louis Borloo said in June, citing wind power as one of the technologies to be promoted.

Reseau de Transport d’Electricite, or RTE, expects France to have 5,000 megawatts of wind turbines installed by the end of 2010, less than half a target set in 2006 for capacity of 13,500 megawatts. If the nation continues to add 1,000 megawatts a year, it won’t meet its 2020 goal.

Capped Subsidies

“A number of factors could in the short or long term put the brakes on project deployment,” RTE said. These include increased local resistance, limits on subsidies that enable power suppliers to pay higher prices for wind energy, and bottlenecks in regional planning for designated wind-park zones, according to the grid operator.

“There’s a contradiction between the government’s targets and the reality on the ground,” said Patrick Massoni, head of investor relations at Paris-based Poweo. “If France wants to reach its goal, the process has to be simplified.”

An estimated 27 different permits are needed for a wind- power installation in France, he said.

The Federation Environnement Durable and Vent de Colere associations, which are against industrial-sized wind farms, publicize local protests against developments across France. A demonstration is planned next month against at least nine projects around Mont Saint Michel, the island tourist attraction that’s classified as a Unesco World Heritage Site.

Courts Delay Plans

“Each project is a battleground,” said Jean-Louis Butre, head of the Federation Environnement Durable, adding that court cases have delayed projects throughout France, including around Mont Saint Michel. “What is equally bad is that if these projects are withdrawn, they will be put somewhere else where other people will have to live with them.”

The anti-wind park lobby is pitted against environmental pressure groups such as France Nature Environnement, which back turbines.

“Under the guise of defending the environment, wind-power opponents should pay more attention to the serious environmental impact of other forms of energy such as nuclear,” France Nature Environnement said on its Web site. “The Eiffel Tower, now a veritable logo for France, wasn’t well liked by Parisians when it was built.”

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

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Neste Oil Shuts Down Diesel Line at Finnish Refinery After Fire

By Kati Pohjanpalo

Aug. 6 (Bloomberg) -- Neste Oil Oyj, Finland’s only refiner, shut a diesel production line at its refinery in Finland today after a fire.

Repairs on the residue hydrocracker line at the Porvoo refinery near Helsinki will take “a few weeks,” based on initial estimates, the company said today in a statement.

The shutdown won’t affect fuel deliveries, said Miika Eerola, chief of the refinery, in a telephone interview today. The fire at the heavy crude oil heat exchanger lasted about an hour and caused no injuries to personnel. The company has yet to assess the extent of the damage and repairs, Eerola said.

In June, the line came out of a two-month maintenance to improve efficiency after suffering from technical faults since it started operating in 2007. The line has a capacity of 1 million metric tons a year.

The diesel line was expected to operate normally through the rest of 2009, Chief Executive Officer Matti Lievonen said on July 30. The Porvoo refinery, which has the capacity to process 196,000 barrels of oil a day, is scheduled to have a full maintenance stop in April.

Neste Oil said yesterday it plans to cut more than a tenth of its 4,000-strong staff in Finland to achieve half of a targeted 60 million euros ($86.4 million) in cost savings.

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

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Veolia Drops as Waste Business Saps First Half-Profit

By Tara Patel

Aug. 6 (Bloomberg) -- Veolia Environnement SA, the world’s biggest water company, fell the most in almost three months in Paris trading after posting a larger-than-estimated profit decline because of a slowdown in its waste treatment business.

Veolia shares fell as much as 1.58 euros, or 6.5 percent, to 23.77 euros, the biggest intraday drop since May 13, and traded at 22.98 euros as of 10:29 a.m. local time. Net income slid to 220.3 million euros ($317 million) from 500.5 million euros a year earlier, the company said today, missing the 384 million-euro average estimate in a Bloomberg survey.

“First-half results fell clearly short of expectations,” Matthias Heck, an analyst at Oppenheim Research GmbH in Frankfurt, said in a note. “We expect an initial negative share price reaction on the results, while comments on the progress of asset disposals, Veolia Transport and Veolia Cargo, as well as on cost reductions, could be seen as positive.”

The drop was due to a writedown of assets for the Italian waste treatment business and on the value of assets to be sold of about 100 million euros. Veolia and smaller competitor Suez Environnement SA have seen demand for waste collection and treatment fall as carmakers and steel producers close factories to survive the economic slowdown.

‘No Problem’

Veolia has “no problem” with its level of debt or liquidity and doesn’t need a capital increase, Thomas Piquemal, executive vice president in charge of finance, said on a conference call with reporters.

Chief Executive Officer Henri Proglio plans to sell 3 billion euros of assets through 2011 and has said he’ll cut investment by 44 percent this year and costs by 180 million euros. The company cut costs by 146 million euros in the first half, it said today.

Operating profit dropped 22 percent to 1 billion euros from 1.29 billion euros a year earlier. Sales fell 0.7 percent to 17.4 billion euros, dragged down by a 10 percent decline in waste management revenue. Net debt was stable at 16.8 billion euros from the end of March.

Veolia kept plans to generate positive free cash flow this year after paying a dividend and operating expenses. This takes into account a 10 percent drop in the waste management division, as was seen in the first six months of the year, Piquemal said.

Asset Sales

The company is aiming for 1 billion euros of assets sales this year and sold about 545 million euros in the first-half, Piquemal said. These will appear in second-half results once the deals are completed, he said.

Veolia spent about 4 billion euros in 2007 and 2008 on acquisitions including German trash-handler Sulo Group and TMT, the waste-management unit of Italy’s Termomeccanica Ecologia.

It has started talks with Caisse des Depots et Consignations, a French state-owned bank, to merge its transport unit Veolia Transport with Transdev, the fourth-largest private operator of public transport in Europe. Veolia and Transdev would each own half of a new company they would seek to list.

The company said July 31 it’s in exclusive talks with Societe Nationale des Chemins de Fer Francais and Groupe Eurotunnel SA to sell its cargo unit, a move that would reduce its debt by 95 million euros.

Veolia supplies water to about 110 million people worldwide and collects and manages trash for about 50 million. It provides public transportation in 27 countries and supplies energy in Europe and the U.S.

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

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China Balks at Greenhouse-Gas Capture Costs in Climate Battle

By Alex Morales and Jeremy van Loon

Aug. 6 (Bloomberg) -- China, the world’s biggest carbon- dioxide polluter, is balking at the cost and effectiveness of extracting greenhouse gases from hundreds of coal plants and storing them underground.

China can achieve larger emissions cuts instead by spending money improving the energy efficiency of buildings and vehicles and investing in alternative power sources such as wind and solar, said Su Wei, director-general of the climate-change unit at China’s National Development and Reform Commission.

“Carbon capture and storage, particularly for China is not one of the priorities -- the cost is an issue,” Su said in an Aug. 4 telephone interview from Beijing. “If we spent the same money for CCS on energy efficiency and the development of renewables, it would generate larger climate-change benefits.”

In 2008, coal burning in China added 366 million tons more to the world’s CO2 emissions than the previous year -- almost two-thirds of the global increase in output of the gas from burning dirty fossil fuels, Bloomberg calculations from BP Plc data show. The U.S. and European nations tout CCS as vital to fight climate change while allowing coal to remain a part of their energy mix.

China and the U.S. on July 28 signed a “memorandum of understanding” in which the two nations pledged to work together to fight climate change, sharing research on technologies including carbon capture and storage. U.S. companies working to develop the technique include American Electric Power Co. and Duke Energy Corp.

Coal makes up 70 percent of China’s total primary energy consumption and its use of coal last year represented 40 percent of the world’s total, according to the U.S. Energy Information Administration.

Biggest Coal Producer

China is the world’s largest producer of coal and has the third-biggest reserves after the U.S. and Russia. The country consumes about 3 billion tons of coal annually.

The scale of China’s coal reserves means it will need to deploy carbon capture if it’s to reduce greenhouse-gas emissions, according to Michael Donnermeyer, who heads IZ Klima, a Berlin-based association of energy companies including E.ON AG and RWE AG that promote the use of carbon capture and storage.

“It’s enormously important that China employ CCS because it’s not going to be able to manage and reduce its emissions without this technology,” Donnermeyer said in an interview. “China has large coal reserves and it’s using them and will continue to do so. Obviously efficiency is important but it’s not going to be enough.”

Costs Fall With Commercialization

E.ON and RWE are both working to develop carbon capture and storage. At the demonstration stage, the technology costs as much as 90 euros ($130) to keep a ton of emissions from the atmosphere, the consultants McKinsey and Co. estimate. Once commercialized, that can be cut to as little as 30 euros by 2030, according to the New York-based firm.

“CCS is not a magic solution: It is not a mature technology,” said Li Yan, a Greenpeace climate and energy campaigner in Beijing. “The Chinese government is taking a pragmatic approach.” Greenpeace has said carbon capture is a “scam” because it’s an unproven technology that aims to extend the use of fossil fuels blamed for worsening global warming.

Even though carbon capture isn’t proven, is expensive and CO2 reductions can be better achieved with other measures, it’s still a technology that China needs to look into “very carefully,” Su said. “It’s rather early to talk about commercial demonstration and development.”

Su is China’s lead negotiator at the ongoing United Nations-sponsored climate talks. The National Development and Reform Commission is China’s main economic planning agency.

To contact the reporters on this story: Alex Morales in London at amorales2@bloomberg.netJeremy van Loon in Berlin at jvanloon@bloomberg.net

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