Honda’s $140-a-Month Motorbikes Ease Car Market Pain

By Makiko Kitamura and Tetsuya Komatsu

March 3 (Bloomberg) -- Vanida Paipong, a 33-year-old noodle factory worker in Thailand’s Ubon Ratchathani province, pays installments of 5,000 baht ($140) a month on her 100cc Honda CZ- i motorcycle. She bought the bike in February after her last Honda motorbike lasted 10 years, hauling friends and family over dirt roads, without needing much maintenance, she said.

“That motorcycle was worth every baht,” said Paipong, who said the sticker price on the CZ-i was 38,000 baht. “I was willing to pay a premium to buy a Honda.”

Surging unemployment in the U.S. and Japan, Honda’s two largest markets, has smothered demand for $22,000 Accord sedans and $28,000 Pilot sport-utility vehicles. Incoming president Takanobu Ito, who commutes to work on a 546,000-yen ($5,600) Honda XR250 Baja motorbike, will have to rely on new motorcycles in Southeast Asia to avoid the losses plaguing Toyota Motor Corp. and Nissan Motor Co. -- neither of which make two- wheelers.

“Motorcycles are more resilient against a recession than cars because these products are used in Asia for people’s main mode of transport,” said Makoto Haga, president of Tokyo-based hedge fund Wing Asset Management Co. “Motorcycles give Honda an advantage over its rivals.”

On the Edge

Honda, the world’s largest motorcycle maker, is expected to post a profit of 18 billion yen ($185 million) next fiscal year, according to the median of 19 analyst estimates compiled by Bloomberg. Toyota may post a 121 billion yen loss and Nissan may bleed 290 billion yen, according to analyst estimates.

“The company’s earnings will teeter on the edge of a profit or loss,” said Yasuhiro Matsumoto, a credit analyst at Shinsei Securities Co. in Tokyo. “Motorcycle sales could help the company eke out a profit.”

President Takeo Fukui said in an interview he expects profit from the motorcycle segment, which will account for half of Honda’s earnings this fiscal year, to “rise significantly” next year.

Honda fell 1.3 percent to close at 2,285 yen in Tokyo. The stock has climbed 20 percent this year compared with a 5.3 percent rise for Toyota and a 5.3 percent drop for Nissan.

Closing Marysville

The introduction of the new Wave 110i small motorcycle in southeast Asia may add to this year’s 10 percent sales growth for the segment. Honda expects to sell 400,000 of the bikes a year in Thailand, where it costs 34,000 baht. The company is also aiming to boost its market share in the country to 90 percent from 68 percent. The overall motorcycle market grew 6.5 percent last year.

Asia was also the only region where Yamaha Motor Co., the world’s second-largest motorcycle maker, boosted sales last year. The company’s profit tumbled 97 percent to 1.85 billion yen. Suzuki Motor Corp. also forecasts a profit in the year ending March, helped by sales of motorcycles and minicars in India, its biggest market.

“You see four people piled on to a motorcycle in those countries,” said Yuuki Sakurai, general manager of financial and investment planning at Tokyo-based Fukoku Mutual Life Insurance Co., which manages $54 billion in assets. “With road infrastructure having a long way to go in countries like India, motorcycles make more sense than cars.”

As Honda expands in emerging markets, it’s shutting down a motorcycle plant in Marysville, Ohio, its first overseas facility, by June. The move effectively ends Honda’s production of motorcycles in the U.S., where demand for large leisure models has dwindled.

Declining sales also caused Harley-Davidson Inc., the biggest U.S. motorcycle-maker, to report a 58 percent drop in fourth-quarter profit. The company, which earned 72 percent of sales in the U.S. last year, is slashing 1,100 jobs and shuttering three facilities, it said in January.

Daily Commute

Honda started selling the 110i in Thailand in January. It hasn’t given targets yet for sales in Indonesia and Vietnam, where the motorbike will be introduced later this year.

Anugra Akbar, a 26-year-old information technology worker in Jakarta, bought his CS1, in January from Honda. He rides the bike 20 kilometers (12.4 miles) to his job in West Jakarta.

A motorbike “is more efficient with the bad traffic in the city,” he said, adding that he chose the CS1 for its “futuristic style,” engine and good handling. The bike’s price was 17 million rupiah ($1,400).

For the year ending in March, Tokyo-based Honda, which started as a motorcycle maker in 1949, forecasts profit will plunge 87 percent to 80 billion yen. Even with the drop in car sales, Honda’s profit estimate beats the 450 billion yen operating loss forecasted by Toyota and 265 billion yen deficit at Nissan.

All the carmakers are suffering as U.S. industrywide auto sales may plunge to a 27-year low of 10.5 million units this year, according to General Motors Corp. The drop in demand in the U.S. has forced GM and Chrysler LLC to turn to the U.S. government for more than $17.4 billion in aid.

“The four-wheel business looks very grim,” Honda President Fukui said last month. “But motorcycle demand in emerging markets is resilient.”

To contact the reporter on this story: Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net.

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Carney May Cut Canada Interest Rate to Record 0.5% as GDP Drops

By Greg Quinn

March 3 (Bloomberg) -- Canada’s central bank will probably cut its key lending rate to its lowest level ever today to counter record job losses and an economy shrinking at the fastest pace in almost two decades.

Bank of Canada Governor Mark Carney will probably cut the target rate on overnight loans between commercial banks to 0.5 percent from 1 percent today at 9 a.m. New York time in Ottawa, according to 15 of 23 economists surveyed by Bloomberg News.

Canada is being pulled into a recession as global demand for its automobiles and lumber plunges along with the prices for the commodities it produces. The world’s eighth-largest economy shrank at a 3.4 percent annualized pace in the fourth quarter, Statistics Canada reported yesterday, the most since 1991.

“Weakness in global markets and a deep downturn in the global and Canadian economies tips the balance toward further rate cuts,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. “Events will force their hand again.”

Canada’s decision comes two days before the European Central Bank and the Bank of England are also expected to cut their key interest rates to new lows. ECB President Jean-Claude Trichet signaled policy makers may pare their benchmark rate to a record low of 1.5 percent March 5 as a recession in the euro area deepens. The Bank of England cut to 1 percent last month, the lowest since it was founded in 1694, and economists expect the rate to fall to 0.5 percent this week.

The U.S. Federal Reserve reduced its benchmark to a range of between zero and 0.25 percent on Dec. 16.

‘Further Stimulus’

Carney has cut the central bank’s policy rate from 4 percent since taking over in February 2008, and on Jan. 20 reduced it below the old record of 1.12 percent set in 1958.

“We will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required,” Carney told a parliamentary committee Feb. 10. The phrase echoes what the central bank said on Jan. 20 when the main rate was cut half a point to 1 percent.

“Those who have an expectation that things are going to recover dramatically and quickly as we come out of this, that’s less and less likely all the time,” Royal Bank of Canada Chief Executive Officer Gordon Nixon told reporters Feb. 26.

Job Losses

Statistics Canada reported a record job loss of 129,000 in January, and the agency’s leading economic indicator fell the most since 1982 in January. Bankruptcies in December also jumped 47 percent from a year earlier. The Bank of Canada said Jan. 24 that output will shrink at a 4.8 percent pace in the first quarter and 1.2 percent in 2009.

Xstrata Plc, the largest exporter of coal used by power plants, said Feb. 9 it plans to eliminate 686 jobs as it shuts two Canadian nickel mines following a slump in demand and stops developing a new property.

Industry Minister Tony Clement said Feb. 20 that his government’s contribution to a General Motors Corp. aid package may total between C$6 billion ($4.7 billion) and C$7 billion. Canada wants to keep its 20 percent share of North American production as U.S.-based automakers grapple with falling sales.

“While 2008 was a difficult year for the industry, 2009 is expected to be worse,” Magna International Inc. Co-Chief Executive Officer Donald Walker said on a Feb. 24 conference call. Magna, based in Aurora, Ontario, is North America’s largest auto parts supplier.

Canada’s key rate will remain at 0.50 percent through the first quarter of next year, according to economists surveyed by Bloomberg News. Rates can stay low because inflation isn’t a big risk, said Don Drummond, chief economist at Toronto-Dominion Bank. The Bank of Canada is predicting 3.8 percent economic growth next year, still not enough to bring inflation to its 2 percent target until the first half of 2011.

“Suppose that we do recover to 3.8 percent next year, are we going to have an inflation problem? I don’t think so,” Drummond said. “Anybody, including the Bank of Canada, would be pretty darn pessimistic about what’s been happening lately.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

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Manhattan Apartment Sellers Cut Prices Most in 5 Years in 2008

By Oshrat Carmiel

March 3 (Bloomberg) -- Manhattan apartment sellers cut prices by the most in five years last year and unsold inventory rose to the highest since 1999 as the economy retreated.

The average listing discount rose to 4.1 percent, the highest since 2003, as buyers negotiated for reductions off the asking price. The number of condominiums and co-ops for sale jumped 41 percent last year to 9,081 even as the median price reached a record $995,000, appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said today.

New York City is bracing for a drop in property values after three of the five largest investment banks collapsed. In the Hamptons, on the eastern end of Long Island, prices are already falling. Banks and securities firms have cut more than 180,000 jobs in the past year, according to Bloomberg data, as the recession entered its second year and the global credit crisis forced writedowns and mortgage-related losses of $1.18 trillion.

“There clearly was long-running irrational exuberance out here in real estate,” said Diane Saatchi, senior vice president for broker Corcoran Group Inc. in East Hampton. “It’s gone full circle from people who would pay any price because they had to have the house, to people who pick a price and take any house at that price as long as they think it’s discounted.”

The median price in the Hamptons, New York’s summer playground for the rich and famous, fell almost 13 percent last year to $850,000, the first decline since 2000. Discounts on Hamptons homes rose to 11.1 percent in 2008, according to Miller Samuel-Prudential data.

Job Cut Forecasts

Wall Street firms are expected to lose $47.2 billion in 2008 and further shortfalls are expected in 2009, Mayor Michael Bloomberg said last week. Budget officials assume the city will lose 294,000 jobs from mid-2008 through 2010, including 46,000 in financial industries. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

The firings mirror the national recession that has driven unemployment in January to the highest since 1992 and pushed home prices down the most since the Great Depression, The securities industry accounted for 51 percent of the growth in wages in Manhattan’s private sector from 2003 to 2007, according to the U.S. Bureau of Labor Statistics

“Prices have to drop,” Dottie Herman, chief executive officer of Prudential Douglas Elliman Real Estate, said in an interview. “They have to, have to, have to--and they have.”

In Manhattan, the number of sales declined 23 percent last year from 2007, Miller Samuel and Prudential said. Falling sales and rising inventory preceded lower home prices nationwide. The increase in inventory in Manhattan was largely driven by a slowdown in transactions in the second half, said Jonathan Miller president of Miller Samuel.

Median Hits Record

The median sales price for the entire year rose 11 percent to a record $955,000, according to the record. The gain mostly reflects deals from the first half of the year, before the collapse of Lehman Brothers Holdings Inc., and closings from new condominium developments.

The Miller Samuel-Prudential report also shows the heights that Manhattan’s real estate market achieved over the last decade, an period of easy credit.

In 1999, the median sales price of all Manhattan apartments was just $310,000. By 2004, it almost doubled to $605,000. The average price per square foot also rose from about $400 in 1999 to $1,251 last year, the report said.

Townhouse Prices Skyrocket

Prices have also skyrocketed for Manhattan townhouses. In the past decade, the median has risen 156 percent to $4.995 million. They jumped even higher for the category known as “luxury townhouses,” which Miller defines as the top 10 percent of all sales. The median jumped last year to $31.8 million, up from $6.5 million a decade ago.

Now the market is making an about face. Prices for luxury apartments in Manhattan, defined by Herman as units selling at $3.5 million and above, are now selling at discounts of about 25 percent off the asking price, she said.

A three-bedroom, three-bathroom condominum on Tribeca’s Hudson Street is now selling for $4.6 million after being lowered almost $1.3 million since August, according to Streeteasy.com, a property data service. A condo in Trump Tower on Fifth Avenue in midtown was cut 16 percent to $4.95 million since it was first listed in November.

“You’re going to see stronger, less attractive numbers” in the first quarter, said Herman.

The reported available inventory tally does not include new developments where units have yet to go on sale, Miller said. .

“That is definitely an undercount,” he said. ‘There’s a lot of shadow inventory in the background.”

The trend is likely to continue, said Damon Liss, an interior designer who is now trying to sell a 3-bedroom cottage in East Hampton with a swimming pool for more than $1 million.

“There’s a big disconnect between buyers and sellers,” Liss said. “Buyers want 50 percent discounts and sellers don’t want to reduce the price at all. That’s why transactions are down. Both buyers and sellers are being equally unrealistic.”

To contact the reporter on this story: Oshrat Carmiel in New York at ocarmiel1@bloomberg.net.

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IMF Plans to Overhaul Credit Program Shunned by Its Members

By Christopher Swann

March 3 (Bloomberg) -- The International Monetary Fund may offer larger, more flexible short-term loans in an effort to sweeten the terms of an emergency credit program that member countries have shunned.

The fund’s board is considering extending the limit on the loans beyond five times member nations’ quota contributions, officials involved in the talks said on condition of anonymity. The changes would come after four months of zero demand for the facility Managing Director Dominique Strauss-Kahn intended for “strong” emerging nations in need of funds for short periods.

Strauss-Kahn is attempting to broaden the IMF’s influence beyond indebted nations that need loans for years to shore up their economies. The objective was likely hampered by a Federal Reserve agreement in October to swap dollars for the local currencies of Brazil, Mexico and South Korea, aiding some of the biggest emerging-market economies.

“Setting up a workable liquidity facility would help re- brand the IMF, ensuring that it remained relevant to responsible and stable countries as well,” said Michael Mussa, a senior fellow at the Peterson Institute and a former IMF chief economist. “The fund is willing to bend over backwards to make this program work.”

Proposals to redesign IMF lending arrangements are scheduled to be discussed at a gathering of leaders of the Group of 20 emerging and developed nations in London on April 2.

Longer Terms

Under the possible changes to the Short-Term Liquidity Facility, qualifying nations could withdraw funds for longer than the original three-month term, the officials said. Countries would also have wider discretion over when they could draw on the funds, they said.

There has been no shortage of interest in the IMF’s more traditional loans in recent months. In November, the Washington- based lender had the busiest month in its 60-year history, agreeing to extend a record $41.8 billion. Those loans are typically for several years, and include scrutiny over economic and budget policies.

Another hurdle Strauss-Kahn is confronting is resistance from officials concerned about how international investors and trading partners would perceive a nation that signed up for IMF assistance.

“It seems that even non-conditional IMF loans carry a stigma,” said Win Thin, emerging markets analyst at Brown Brothers Harriman & Co. “Countries are worried that dealing with the IMF unless they are forced to puts up a big red flag.”

Last Resort

Mark Dow, a money manager at Pharo Management LLC, a New York-based hedge fund with $2 billion under management, said the IMF typically is seen as a lender of last resort rather than an early line of defense. “Many emerging nations feel they have graduated from the IMF and to borrow from them under any conditions would be a step back,” he said.

Two days ago, Argentine President Cristina Fernandez de Kirchner said the global financial crisis should provide momentum to change how the IMF and other international organizations provide aid to emerging market economies.

Fernandez called on the IMF and World Bank to extend aid to countries without conditions, a position she said she’ll push at the G-20 talks next month.

“There needs to be reform of the multilateral lending agencies, which have until today operated by forcing restrictions on emerging markets,” Fernandez said in Buenos Aires. “The IMF and World Bank need to be changed into instruments of financing without conditionality.”

Camdessus’ Attempt

Strauss-Kahn isn’t the first IMF chief to create a liquidity facility within the fund.

In response to the Asian financial crisis of 1997 to 1998, then-Managing Director Michel Camdessus set up the “Contingent Credit Line” intended to be precautionary credit for members with sound policies. The program was introduced in 1999, enhanced in 2000 because of weak demand and expired in March 2003 after no borrowers came forward.

“There is a chance that Strauss-Kahn will eventually succeed where Camdessus failed,” said Claudio Loser, a former director of the fund’s Western Hemisphere department and now a fellow at the Inter-American Dialogue, a policy institute in Washington. “Conditions are becoming so hostile that even more stable, well-run countries may need help.”

The expected demand for the new liquidity facility is one reason Strauss-Kahn is seeking an injection of resources from IMF member countries. In January the former French finance minister said he wanted to double the IMF’s pre-crisis lending ability to $500 billion. A $100 billion contribution from Japan leaves the IMF $150 billion short of its goal.

To contact the reporters on this story: Christopher Swann in Washington at cswann1@bloomberg.net

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Pending Sales of Existing Homes Probably Declined in January

By Shobhana Chandra

March 3 (Bloomberg) -- Fewer Americans signed contracts to buy previously owned homes in January, signaling the housing slump will extend well into a fourth year, economists said before a private report today.

The index of pending home resales fell 3.5 percent after a 6.3 percent gain in December, according to the median forecast in a Bloomberg News survey of 32 economists.

A lack of credit and record foreclosures that are pushing property values even lower may keep prospective buyers out of the market for much of 2009. President Barack Obama has pledged to try to keep more Americans in their homes and to create jobs as his administration works to avert what threatens to become the worst recession in the postwar era.

“Home prices will probably keep falling into early 2010 because of pressure from foreclosures and credit concerns,” said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina. “We’ll have a very weak housing market.”

The National Association of Realtors’ pending resales report is due at 10 a.m. in Washington. Bloomberg survey estimates ranged from declines of 0.8 percent to 5 percent.

Pending resales are considered a leading indicator because they track contract signings. The Realtors’ existing-home sales report tallies closings, which typically occur a month or two later. The pending index was first published in March 2005 and included data going back to January 2001.

Sales Drop

Sales of previously owned homes, which account for about 90 percent of the market, fell in January to the lowest level since 1997, according to the Realtors group. New-home purchases, which make up the rest, plunged to the lowest level since records began in 1963, Commerce Department figures showed.

The median price for existing and new houses decreased in January from a year ago, the reports showed.

The Standard & Poor’s 500 Supercomposite Homebuilding Index fell 20 percent in the first two months of this year as sales plunged. The index dropped 76 percent over the last three years. Pulte Homes Inc., the largest U.S. homebuilder, last month reported its ninth consecutive quarterly loss.

Housing-related companies are also struggling. Home Depot Inc., the largest home-improvement retailer, had a fourth-quarter loss, closed its Expo design unit and is cutting about 7,000 jobs.

“The home improvement market in 2009 will remain just as challenging as 2008,” Chief Executive Officer Frank Blake said in a statement on Feb. 24.

Economy Shrinks

The economy shrank at a 6.2 percent annual rate in the fourth quarter, the most since 1982, revised government figures showed last week. Home construction contracted at a 22 percent pace following a 16 percent decline in the prior quarter.

Policy makers are counting on a series of steps to stem the deterioration. Obama last month introduced a plan to help as many as 9 million people restructure mortgages to avoid foreclosures. The Treasury Department is doubling the amount of stock purchases of Fannie Mae and Freddie Mac, the mortgage-finance companies now under government control.

Federal Reserve Chairman Ben S. Bernanke last week warned the recession may last into 2010 unless policy makers can stabilize the financial system.

                         Bloomberg Survey

=========================================
                          Pending
                            Homes
                             MOM%
=========================================

Date of Release              03/03
Observation Period            Jan.
-----------------------------------------
Median                       -3.5%
Average                      -3.3%
High Forecast                -0.8%
Low Forecast                 -5.0%
Number of Participants          32
Previous                      6.3%
-----------------------------------------
4CAST Ltd.                   -2.5%
Action Economics             -3.1%
AIG Investments              -4.5%
Ameriprise Financial Inc     -3.0%
Barclays Capital             -3.5%
BBVA                         -2.0%
BMO Capital Markets          -5.0%
Briefing.com                 -3.5%
Commerzbank AG               -3.0%
DekaBank                     -5.0%
Deutsche Bank Securities     -4.0%
DZ Bank                      -4.0%
Fortis                       -3.0%
Herrmann Forecasting         -4.1%
High Frequency Economics     -5.0%
HSBC Markets                 -3.5%
IDEAglobal                   -1.5%
Informa Global Markets       -4.0%
ING Financial Markets        -1.0%
J.P. Morgan Chase            -4.0%
Janney Montgomery Scott L    -4.5%
Moody’s Economy.com          -2.0%
Ried, Thunberg & Co.         -5.0%
Schneider Foreign Exchang    -4.7%
Scotia Capital               -2.0%
TD Securities                -3.0%
Thomson Reuters/IFR          -0.8%
UBS Securities LLC           -3.5%
University of Maryland       -1.5%
Wells Fargo & Co.            -3.1%
Westpac Banking Co.          -1.0%
Wrightson Associates         -5.0%
=========================================

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

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Orphanides Takes On Trichet Over ECB Go-Slow Rate-Cut Policies

By Ben Sills

March 3 (Bloomberg) -- A former Federal Reserve economist who made a name for himself telling his superiors they were wrong is now taking on European Central Bank President Jean-Claude Trichet.

Athanasios Orphanides, the governor of Cyprus’s central bank, was the first ECB official to argue in favor of zero interest rates, challenging Trichet’s position that cutting them so low would have “drawbacks” and should be avoided. Now, investors and economists are betting Orphanides, 46, is winning the argument as the euro region suffers its worst recession since World War II.

The ECB “can’t stand on the sidelines and use some weird voodoo economics,” said Erik Nielsen, chief European economist at Goldman Sachs Group Inc. in London. “Over time, the power of the right argument tends to win out over the wrong.”

At least seven members of the ECB’s 22-member Governing Council have lined up behind Trichet as they struggle to agree on new tools that would be needed with zero rates. Still, some have started to warm to the idea of deploying all the ECB’s rate ammunition and turning to unconventional methods, suggesting Orphanides may be securing support.

Bond markets expect Orphanides to prevail: Yields on two-year German bunds have fallen to their lowest level since at least 1990. All 55 economists surveyed by Bloomberg News predict the ECB will cut its main rate by a half-point to a record level of 1.5 percent on March 5.

Torn by Conflict

The market move accelerated after Orphanides, in a Jan. 28 speech, said the idea that monetary policy becomes ineffective when rates near zero is “dangerous” and a “fallacy.”

Orphanides was born in communist-ruled Czechoslovakia in 1962 to a Cypriot father and Greek mother. He grew up in Nicosia, the capital of Cyprus, a nation torn in two by violence between its Greek and Turkish communities. He was 12 years old when Turkey invaded, occupying a third of the Mediterranean island nation and dividing its main city.

Orphanides cut his teeth at the Massachusetts Institute of Technology, where he studied for his doctorate under Rudiger Dornbusch, the professor who told the Mexican government it was facing a currency crisis before the 1994 peso crash.

In his 17 years at the Fed, from 1990 until 2007, Orphanides became known for his willingness to disagree with bosses, said Vincent Reinhart, a former director of monetary affairs at the central bank and himself a target of the Cypriot’s criticism.

Inflation Forecasts

While Reinhart defended the Fed’s use of inflation forecasts in setting rates, Orphanides countered that such predictions were unreliable. In 2003 and 2004, Orphanides argued that the Fed should raise borrowing costs faster because they could not be sure that inflation would remain subdued.

Reinhardt recalled that when Fed Vice Chairman Donald Kohn asked him to justify his decision to appoint Orphanides as his senior adviser in 2006, he replied: “It shows that I have sufficient self-confidence to be told I am wrong often.”

Orphanides returned to Cyprus to head up the central bank in May 2007 in preparation for the country’s accession to the euro area in 2008. As a result, the ECB gained another 800,000 constituents and a monetary-policy heavyweight.

Orphanides may nevertheless have to adjust to European realities as rates approach zero. While his old Fed colleagues are deploying non-conventional measures, ECB officials are struggling with rules that restrict their room for maneuver.

The ECB is forbidden from buying debt directly from governments and purchases in the open market may run into political opposition from some countries.

Ignoring Difficulties

“Orphanides is ignoring the enormous political difficulties that the ECB would actually face,” said James Nixon, an economist at Societe Generale in London and a former ECB forecaster. “That lack of political acumen may limit his chances of higher office.”

That isn’t stopping Orphanides from deploying his scholarship bluntly.

“The fallacy that monetary policy is ineffective when short-term interest rates are close to zero is dangerous because it may promote inaction,” the central banker said in his Jan. 28 speech. A central bank has many policy tools at its disposal once the benchmark rate nears zero, Orphanides argued.

A 1999 research paper co-written by Orphanides may contain the seeds of future ECB action. The paper, titled “Efficient Monetary Policy Design Near Price Stability,” examined how policy makers might deal with deflation by steering market borrowing costs rather than just focusing on the key bank rate.

Winning Support

“This is a solution that may gain consensus in the council more easily than other direct measures of quantitative easing,” said Aurelio Maccario, chief European economist at UniCredit MIB in Milan. Orphanides, he said, “knows what he’s talking about, much more than other council members.”

The Frankfurt-based ECB left its main refinancing rate unchanged at 2 percent on Feb. 5. By contrast, the Fed’s key rate is close to zero and the Bank of England’s is at 1 percent.

Both have now started using other tools to boost their economies: They are buying debt securities in an effort to lower long-term interest rates and revive economic growth, and the Bank of England has asked for permission to create money.

At the ECB, meanwhile, more policy makers are beginning to back Orphanides publicly.

ECB policy makers “have not exhausted our creativity and our capacity to take initiatives,” Finland’s Erkki Liikanen said Feb. 20. A day later, Italian council member Mario Draghi said that “worrying about getting too close to the lower limit for nominal interest rates cannot be a reason for inaction.”

As the economy continues to contract, the ECB will eventually be forced to follow Orphanides’s advice, said Goldman’s Nielsen.

“He shot down all the nonsense,” he said. “Quantitative easing is just a matter of time.”

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net

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Swiss Economy Shrinks by Most in Four Years, Enters a Recession

By Joshua Gallu

March 3 (Bloomberg) -- Switzerland’s economy contracted by the most since 2004 in the fourth quarter, entering a recession as a global slowdown strangled exports and companies slashed spending.

Gross domestic product fell 0.3 percent from the third quarter, when it shrank a revised 0.1 percent, the State Secretariat for Economic Affairs in Bern said today. That’s the worst performance since the third quarter of 2004. Exports fell 8.1 percent and investment declined 3.1 percent.

Switzerland’s economic slump may deepen as falling global demand prompts companies to cut production and jobs and financial market turmoil erodes banks’ earnings. The Swiss National Bank has cut its benchmark interest rate by 225 basis points to 0.5 percent since early October in a bid to limit the fallout from the crisis.

“The fourth quarter was bad and the first quarter will be very bad as well,” said Bernard Lambert, an economist at Pictet & Cie in Geneva. “The central bank will probably keep rates at almost zero at least for the rest of the year. I don’t expect any recovery before the fourth quarter.”

Economists had forecast GDP would shrink by 0.8 percent, according to the median of 15 forecasts in a Bloomberg News survey. From a year earlier, the economy shrank 0.6 percent, today’s report showed, after growing 1.4 percent in the previous three months.

Central Bank Action

The SNB has joined central banks worldwide in flooding money markets with cash in an effort to jolt frozen credit markets back to life. Together with the government, the central bank also bailed out UBS AG, the country’s biggest bank, in October.

With rates already near zero, the central bank may buy government or corporate bonds, offer cheaper funds for longer terms, or intervene directly in currency markets to counter the slump, SNB Vice-President Philipp Hildebrand said Jan. 22.

UBS on Feb. 10 reported a record 19.7 billion-franc ($16.8 billion) loss for 2008 and said it will cut 2,000 more investment bank jobs. Credit Suisse Group AG reported a record fourth- quarter loss a day later.

Manufacturers are suffering as foreign demand weakens. The euro area economy, Switzerland’s biggest export market, shrank the most in at least 13 years in the fourth quarter, according to figures published on Feb. 13. At the same time, job cuts have pushed Swiss unemployment to the highest in almost two years, undermining household spending.

Georg Fischer AG, Europe’s largest maker of iron castings for cars, last month reported a 72 percent decline in 2008 profit and said it will move some production to China as it budgets for a “deep and long” slump. Chemical company Clariant AG is also cutting jobs.

“In 2009, the Swiss economy will shrink along with the economy in the rest of Europe,” SNB President Jean-Pierre Roth said late yesterday. “Investments and trade will continue to decline and unemployment will increase.”

To contact the reporter on this story: Joshua Gallu in Zurich at jgallu@bloomberg.net

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John Kerry Is Last Guy You Want Helping Banks: Caroline Baum

Commentary by Caroline Baum

March 3 (Bloomberg) -- Politicians and the press are having a field day with Wall Street bankers.

And who among us will stand up to defend them?

Populist sentiment is aligned against these titans of finance, who took big risks with other people’s money and made bad investment decisions in search of a fast buck. Now we’re all paying for their short-sightedness.

On Feb. 11, chief executives of eight large financial institutions endured a whipping from Barney Frank’s House Financial Services Committee.

Shortly after came news that the Northern Trust Corp. of Chicago, a profitable bank that received $1.6 billion of government money under the Troubled Asset Relief Program, had sponsored a golf outing for clients, spending millions of dollars -- and raising millions for charity -- to transport guests to Los Angeles and entertain them lavishly.

On Feb. 24, an outraged Senator John Kerry, Democrat of Massachusetts, said he planned to propose legislation that would “end the extravagant spending practices” of banks receiving TARP funds. His “TARP Taxpayer Protection and Corporate Responsibility Act” is intended to clamp down on such frivolous entertainment, which Kerry finds “unacceptable.”

“We must act to insure additional taxpayer funds are not wasted,” he said.

I don’t know about you, but I don’t want government bureaucrats making business decisions -- even if Washington politicians are experts when it comes to wasteful spending.

Government Lifer

Kerry has spent his entire life working for the government, from the U.S. Navy to the State of Massachusetts to the U.S. Senate. He did marry money -- Teresa Heinz Kerry, whose $1 billion net worth put her at No. 1,062 in Forbes list of World Billionaires in 2008 -- so maybe he has acquired some acumen in the area of wealth creation.

Still, as taxpayer-turned-Northern-Trust-shareholder, I want CEO Frederick Waddell calling the shots, not John Kerry or any of his Washington brethren.

The reason Northern Trust or any other profit-maximizing institution decides to sponsor a golf outing or entertain clients in other ways is because those expenditures deliver a solid return on investment for the bank. A company wouldn’t waste the money -- less available for those greedy executives! -- if no ROI were involved.

Social outings foster business relationships. They get the bank’s name out in the public, build customer loyalty, encourage new business and influence decisions when a company needs banking services.

Idiocy Defined

Kerry called Northern Trust’s spending “another idiotic abuse of taxpayer money while our country is on the brink.” One person’s idiocy may be another person’s good investment.

In 2007, Northern Trust signed a five-year agreement to sponsor the annual golf event at the Riviera Country Club in Pacific Palisades, California, one of the oldest stops on the PGA tour. Last year the bank had $640 million in net income while most of its peers were deep in the red.

It’s in our national interest for Northern Trust to invest in its business, turn a profit and add to its capital base so it can keep lending.

What about the symbolism? How does it look for Northern Trust clients to sip champagne at the Ritz Carlton in Marina del Ray or listen to a performance by Earth, Wind & Fire at a private hangar at the Santa Monica Airport when formerly middle-class folks are lining up at food pantries?

I don’t recall much outrage when the R&B band entertained the nation’s governors at the White House a few days later. And President Barack Obama’s guests didn’t exactly dine on mac ‘n cheese.

Capitalism Lite

Businessmen make bad decisions all the time. In a true capitalist system, they would be punished by the market and allowed to fail.

This time around, a lot of businessmen made a lot of equally bad decisions at the same time, shaking the foundation of the financial system. Elected officials and policy makers determined that failure was not an option, once Lehman Brothers had been cut loose.

Instead, the government is pouring money into financial institutions in what appears to be a policy of “No Bank Left Behind,” according to an e-mail from a regular reader.

It is not unreasonable for a major investor in a company to introduce new ideas on how to run a business or demand representation on the board of directors. Nor is it out of line to remove the management and install a new team.

There is no love lost for bankers nowadays. Most taxpayers would probably be happy to see the whole lot of them run out of town and replaced by new, professional management.

I doubt John Kerry is what taxpayers had in mind.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

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Gold Standard Fans Yearn for Great Depression: Michael R. Sesit

Commentary by Michael R. Sesit

March 3 (Bloomberg) -- Gold can be worn as jewelry, used as an investment and deployed as a hedge against economic and political risk. It can also serve as the anchor of a country’s monetary and exchange-rate policy.

The first is a matter of personal taste. Investments and hedges are often related; their success boils down to the price initially paid for the metal. History shows that as a hedge and investment, bullion over the years has performed both spectacularly and miserably, depending on the time frame.

A return to the gold standard, where countries peg their currencies to a given quantity of the metal and thus to one another, is a bad idea. Gold-based monetary systems are overly rigid and restrictive, possess a deflationary bias and can be volatile. They make long-term inflation dependent on the pace of mining output in places such as China, South Africa and Russia. Bullion-based policies are also as prone to political manipulation as those not anchored in the metal -- something few gold bugs are willing to acknowledge.

Gold has been on a tear. Futures soared 35 percent from $705 an ounce on Nov. 13 through March 2. Before retreating, the metal traded as high as $1,007 on Feb. 20, its first move above the $1,000 plateau in almost a year.

Extended Recession

The high price reflects investors’ concerns that massive deficit spending and ultra-loose monetary policies will reignite inflation. Paradoxically, worries about an extended recession and that policy makers won’t succeed in rescuing the global banking system also haunt investors.

Gold is now regarded as a hedge against both inflation and deflation, says Alan Ruskin, the chief international strategist at Greenwich, Connecticut-based RBS Greenwich Capital Markets Inc. The first is reflected in the high dollar price of bullion, the second by the surge in gold’s price in euros.

When gold last traded at more than $1,000 on March 18, 2008, the metal’s price was 643 euros an ounce. Yesterday, it was 743 euros in late European trading. Some folks interpret gold’s rally against the dollar at a time the greenback is strengthening against many currencies as a sign of investor disenchantment with fiat, or paper, money -- legal tender with no tangible backing except the good faith of the government that issued it. The risk is that hyperinflation may render it worthless.

‘No Safe Store’

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value,” former Federal Reserve Chairman Alan Greenspan wrote in 1966, when he was running consulting firm Townsend-Greenspan & Co. in New York. “This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.”

Not so fast, Mr. Greenspan.

A gold standard tends to have a recessionary bias. When speculators and others attack a country’s currency, the burden usually falls on that nation to adjust by contracting its economy and increasing unemployment. The system places no matching requirement on countries with “strong” currencies to adjust.

The inflexibility of the gold standard makes it difficult for governments to adopt policies best suited to their domestic economic needs.

Take South Korea. Its currency, the won, has fallen 29 percent against the dollar in the past six months. Such a depreciation wouldn’t have been permitted under a gold standard. Korea would have been required to support its currency by raising interest rates to maintain the won’s parity with bullion, exacerbating an already virulent recession.

Gold and Depression

In a parable with relevance to today’s economic environment, “attachment to the gold standard played a major part in keeping governments from fighting the Great Depression, and was a major factor turning the recession of 1929-1931 into the Great Depression of 1931-1941,” Bradford DeLong, an economist at the University of California, Berkeley, wrote several years ago.

Commitment to the gold standard prevented the Fed from expanding the money supply in 1930 and 1931, forcing President Herbert Hoover “into destructive attempts at budget-balancing in order to avoid a gold-standard generated run on the dollar,” DeLong said.

China, the U.S., South Africa, Australia, Russia and Peru make up the six biggest gold producers. If their mining operations were interrupted by, say, political upheaval, it could lead to deflation and rising unemployment. In contrast, major improvements in mining technology could ignite inflation.

Population’s Willingness

What’s more, a gold standard isn’t the panacea its advocates claim. A central bank’s ability to adhere to it is only as strong as the population’s willingness to endure the pain associated with enforcing the system.

Countries periodically abandoned the gold standard during times of war -- Britain during World War I, for example -- and free-spending Latin American countries were repeatedly forced to exit the system in the late 19th century. The Bretton Woods System collapsed in 1971 when the costs associated with fighting the Vietnam War forced President Richard Nixon to suspend the convertibility of dollars into gold.

If you don’t have faith in central bankers or politicians to ride herd over inflation, why would you trust them to keep a country on a gold standard for more than a short period of time?

(Michael R. Sesit is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Michael R. Sesit in Paris at at msesit@bloomberg.net

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Drax Earnings Drop as Profit Margin Narrowed in Fourth Quarter

By Paul Dobson

March 3 (Bloomberg) -- Drax Group Plc, owner of western Europe’s biggest coal-fueled power station, said earnings fell 6 percent in 2008 on lower profit margins.

Net income dropped to 333 million pounds ($470 million), or 98 pence a share, from 353 million pounds, or 99 pence, a year earlier, the Selby, England-based power producer said today in a statement distributed by the Regulatory News Service. That beat the 278 million-pound median estimate of nine analysts in a Bloomberg survey.

Drax’s earnings depend on the U.K. clean dark spread, a measure of profit for coal-fired plants that allows for fuel and carbon-dioxide emission costs, and wholesale power prices. The company’s shares are trading near a record low on speculation profit margins will narrow further as the economic slowdown reduces energy consumption.

U.K. power output fell 4.3 percent in the fourth quarter, government data show. The worst recession since World War II is curbing demand as businesses cut production and jobs. Germany’s RWE AG said Feb. 26 that below-average temperatures in the first months of this year countered a decline in power use by industry.

Drax Chief Executive Officer Dorothy Thompson is taking steps to cut the volume of carbon emissions per unit of electricity produced. She’s planning as much as 500 megawatts of output from the 4,000-megawatt Drax power plant to come from organic matter instead of coal.

The company also intends to build three biomass-fueled power stations in the U.K. with Siemens AG, generating as much as 15 percent of the country’s renewable power in 2014. The plan has required a change to Drax’s dividend policy, allowing it to keep 50 percent of earnings starting 2010.

Still, the investment in alternative energy won’t protect the company from a new government levy on electricity producers and suppliers to fund a program that will cut fuel bills in homes and improve energy efficiency.

The dark spread measure has fallen to about 13.50 pounds a megawatt-hour from almost 40 pounds on Sept. 26, according to calculations for rolling year-ahead prices based on energy- broker data.

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

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Santos Puts A$700 Million Moomba Carbon Storage Project on Hold

By Angela Macdonald-Smith

March 3 (Bloomberg) -- Santos Ltd., Australia’s third- biggest oil and gas producer, has put its Moomba carbon storage project on hold after a drop in crude-oil prices and lack of government support.

Indicative prices for carbon credits in Australia also aren’t sufficient to underpin the project in central Australia’s Cooper Basin, Matthew Doman, a spokesman at Adelaide-based Santos said today. Santos has previously estimated the project would cost more than A$700 million ($450 million).

Santos said in June 2007 it submitted a proposal to the federal government for a carbon storage project at the Moomba gas fields that would be used by major emitters in the eastern states. Carbon permits have been trading at as much as A$23 ($14.78) a metric ton in Australia’s over-the-counter market, while carbon-capture projects become viable at $50 a ton, London School of Economics professor Nicholas Stern said in January.

“The economic and financial factors are not in place at the moment to justify the heavy investment that it would require,” Doman said by telephone. “We’re going to focus on what we do best and that’s supply gas and particularly look to increase the provision of gas for power generation. That would be the most immediate contribution we can make to lightening the carbon footprint.”

The decision makes Santos’s Moomba project the latest low- emissions energy or carbon storage project to be delayed or scrapped even as Resources Minister Martin Ferguson promotes their development to cut greenhouse pollution. Royal Dutch Shell Plc and Anglo American Plc in December said they delayed plans to develop a A$5 billion project in Australia to convert coal into clean fuels, citing higher costs.

Santos and General Electric Co. in 2007 canceled a low- emissions venture in Queensland, while BP Plc and Rio Tinto Group in May dropped a plan to build a carbon capture power plant.

Santos has been talking to governments in Australia about the Moomba project “for some time, and whilst we have received strong interest, we haven’t had strong or direct support for it,” Doman said.

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

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Gazprom Third-Quarter Net Rises 16% on Record Prices

By Lucian Kim and Torrey Clark

March 3 (Bloomberg) -- OAO Gazprom said third-quarter profit rose 16 percent as Russia’s largest energy producer reaped higher natural-gas prices from its European customers.

Net income increased to 132 billion rubles ($3.65 billion) from 113 billion rubles in the same period of 2007, the Moscow- based company said today on its Web site. That missed a 149 billion-ruble estimate of 10 analysts surveyed by Bloomberg News.

State-run Gazprom expects to have posted a record year in 2008 as gas prices for European consumers rose in the wake of record oil prices that peaked in July. The subsequent drop in crude costs and the credit crisis mean even Russia’s largest company will have lower revenue and tighter access to funds for new projects.

“It’s been one of the best quarters in Gazprom’s history yet totally irrelevant given that today’s market is looking forward, not back,” said Ronald Smith, chief strategist at Moscow-based Alfa Bank.

Third-quarter sales rose 61 percent to 830 billion rubles from 516 billion rubles a year before. European gas prices lag behind crude oil with a six to nine month delay.

“The market is currently more concerned about the company’s operating performance through 2009,” VTB Group said in a note to clients before the results were published. “Nonetheless, Gazprom remains our top pick within the sector, particularly on a relative basis to peers.”

Ukraine Dispute

Gazprom, which makes most of its profit from sales to Europe, estimates it lost more than $2 billion during a price dispute with Ukraine. The company, which relies on its western neighbor to transit 80 percent of deliveries to Europe, cut exports via Ukraine for almost two weeks in January.

Ukraine has until March 7 to pay for Russian gas deliveries in February, according to an agreement reached by Russian Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Timoshenko on Jan. 19.

The company opened new export markets to Asia and Europe in February when it inaugurated Russia’s first liquefied-natural gas plant on Sakhalin Island in the Pacific Ocean. By 2030, Gazprom plans to sell 90 million tons of LNG, gas compressed to a liquid for transport by tanker, or more than nine times the full capacity of its Sakhalin plant.

To contact the reporters on this story: Lucian Kim in Moscow at lkim3@bloomberg.net; Torrey Clark in Moscow at tclark8@bloomberg.net

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Shell Intends to Accept BG’s Offer for Pure Energy

By Angela Macdonald-Smith

March 3 (Bloomberg) -- Royal Dutch Shell Plc said it intends to accept BG Group Plc’s takeover offer for its stake in Pure Energy Resources Ltd., taking BG closer to winning control of the Australian coal-seam gas explorer.

Shell will accept BG’s cash bid for its 11.2 percent stake in Brisbane-based Pure “in the absence of a superior offer,” the company’s Australian unit said today in a statement.

BG, the U.K.’s third-biggest natural gas company, on Feb. 27 sweetened its offer for Pure to A$1.03 billion ($660 million as it seeks to thwart a rival offer from Arrow Energy Ltd., Shell’s partner in coal-seam gas in Australia. The raised price of A$8.25 a share in cash is conditional on BG getting at least 90 percent of the target.

BG had 29.5 percent of Pure as of yesterday and Shell’s stake would raise its interest to 40.7 percent, while Arrow has 20.2 percent.

Brisbane-based Arrow said Feb. 26 it was still considering “all options” on the takeover. Its latest cash and stock offer values Pure at about A$6.82 a share based on today’s closing price.

Pure Energy today gained 3 cents, or 0.4 percent, to A$8.17 in Sydney trading, while Arrow dropped 3.6 percent to A$2.43.

BG, Shell and Arrow are seeking more reserves to feed proposed liquefied natural gas projects in Queensland that may meet rising demand in North Asia for cleaner-burning fuels.

Pure Energy today reiterated the recommendation from its independent directors that shareholders accept BG’s offer in its formal response sent to the exchange. “Pure’s share price is likely to fall if BG’s offer is not successful,” Chairman Robert Day said in the document.

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

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Sinopec to Boost Diesel Exports as Local Demand Falls

By Wang Ying

March 3 (Bloomberg) -- China Petroleum & Chemical Corp., Asia’s biggest refiner, plans to boost exports of diesel after domestic demand of the fuel dropped 30 percent in January.

China’s so-called apparent consumption of oil products, including diesel, fell 16.6 percent in January, China Petrochemical Corp., the parent of China Petroleum, said in a statement in its in-house newsletter today, without saying if the comparison is with the year-earlier period.

The world’s second-biggest energy user has been exporting diesel since December after a five-month halt as the domestic economy expanded at the slowest pace in seven years in the fourth quarter. The nation’s net crude-oil imports declined to the lowest level in more than a year in January, according to calculations based on government data released last month.

“Diesel demand fell mainly because manufacturers shut plants and cut production due to declining export orders,” Gong Jinshuang, an oil market analyst with China National Petroleum Corp., the country’s biggest oil producer, said by phone in Beijing today.

China’s oil demand will grow at a “noticeably lower rate” this year, the company said Feb. 10.

Sinopec, as China Petroleum is known, will increase gasoline production because supplies remain “relatively insufficient,” China Petrochemical said today. Gasoline use rose 8.4 percent in January, it said.

Sinopec’s refineries boosted gasoline supplies to its sales units by 150,000 metric tons in mid-February, it said, without giving details.

“China’s gasoline demand remains relatively strong because family use of automobiles didn’t fall,” said Gong.

Sinopec told its refineries to increase gasoline production last month after inventories fell and demand rose, according to a notice sent to provincial plants. Sinopec’s 30 refineries supply more than half of China’s fuel demand.

To contact the reporter on this story:

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Japan Refiners to Increase Maintenance, Curbing Oil Imports

By Yuji Okada

March 3 (Bloomberg) -- Japanese oil refiners led by Nippon Oil Corp. plan to shut down more capacity during the peak spring maintenance season in 2009, lowering demand for crude oil imports from the world’s third-biggest user.

Japanese refiners will halt 1.2 million barrels a day in the second half of June, 14 percent more than a year earlier, according to a table compiled by industry group the Petroleum Association of Japan and obtained by Bloomberg News. The total represents 25% of Japan’s refining capacity.

The maintenance will lower Japan’s crude imports and may force refiners to buy more oil products to build inventories ahead of the summer driving season. The move comes after 2008 domestic gasoline sales fell 4.2 percent, the most since 1952, and as Tokyo Electric Power Co. comes closer to winning final government approval to restart the world’s biggest nuclear power plant, which has been shut since a July 2007 earthquake.

“Heavier maintenance shutdowns this year will accelerate the decline in Japan’s crude oil imports for sure,” said Hidetoshi Shioda, a Tokyo-based senior analyst at Mizuho Securities Co. “It comes on top of already falling imports that tracked weak domestic demand and the likely start-up of the Kashiwazaki Kariwa nuclear power plant.”

Japan’s crude oil imports in January dropped 19 percent to 18.7 million kiloliters, about 3.8 million barrels a day, the Ministry of Economy, Trade and Industry said in a report released on Feb. 27. Imports fell for a fourth consecutive month as the global recession damped demand for energy from factories and businesses.

Exports Collapse

Industrial users trimmed fuel use as a collapse in exports forced companies including Toyota Motor Corp. to cut production. Japan’s factory output declined a record 10 percent in January.

Crude oil in New York traded at $39.48 a barrel at 10:18 a.m. Tokyo time, down 73 percent from a record $147.27 on July 11.

Tokyo Electric got approval from the trade ministry to restart the 1,356-megawatt No. 7 reactor at the Kashiwazaki Kariwa nuclear plant on Feb. 13. It would take about 215,000 kiloliters of crude a month, or 45,000 barrels a day, to generate the amount of power the reactor can produce.

A weaker appetite for oil from Asia’s second biggest consumer and refiner by capacity may trigger an additional output cut by members of the Organization of Petroleum Exporting Countries, Shioda said.

Iran, Venezuela and Iraq said OPEC is prepared to cut production again when it meets on March 15. The group agreed Dec. 17 to reduce supplies in January by 2.2 million barrels a day from December levels. That followed pledges to remove 2 million barrels a day in the fourth quarter of last year.

Oil Product Imports

“A series of refinery turnarounds may prompt some refiners to import gasoline components such as reformate,” Shioda said. “But the amount will be limited because refiners already have sufficient product inventories.”

Nippon Oil, the country’s largest refiner, expects sales of kerosene, used for heating, will drop 30 percent in February from the same month last year, Director Masahito Nakamura told reporters on Feb. 27. Fuel oil sales to local power utilities are likely to plunge 50 percent in February, he said.

“Domestic product demand has been falling below our sales target,” Nakamura said. “That resulted in a buildup in our inventories.”

Refiners in the Northern Hemisphere typically halt refining units for maintenance and safety checks between March and July. Fuel demand is lowest after the end of winter and before the start of the summer driving season. They also shut some units in October and November before the surge in heating fuel demand during winter.

Shutdown Schedule

A Nippon Oil spokesman, who asked not to be named because of company policy, confirmed the company will shut a 115,000 barrel- a-day crude distillation unit from early March until April 1. The company also plans to shut the 180,000 barrel-a-day No. 2 CDU at the Muroran refinery and the 24,000 barrel-a-day No. 1 CDU at Oita between mid-May and mid-June, he said, declining to give specific dates.

Showa Shell Sekiyu K.K. plans to halt the 65,000 barrel-a- day No. 3 CDU at the Keihin refinery between early April and mid- May and the 135,000 barrels-a-day No. 3 CDU at the Yokkaichi refinery between late May and late June, said a spokesman who asked not to be named. He declined to provide specific dates, explaining that the schedule often changes by a few days.

Idemitsu Kosan Co. spokeswoman Makiko Iinuma said the refiner will idle the 220,000 barrel-a-day No. 2 CDU at its Chiba refinery in early April, the 140,000 barrel-a-day No. 1 CDU at the Hokkaido refinery in June, and the 160,000 barrel-a-day No. 1 CDU at the Aichi refinery in October. She declined to give more details.

Kosuke Kai, a spokesman at Exxon Mobil Corp.’s Japanese unit, TonenGeneral Sekiyu KK, wouldn’t comment on refinery maintenance, citing company policy.

The following is the table of planned shutdowns.

---------------------------------------------------------------
Company   Refinery     CDUs        Capacity     Period
                               (barrels/day)
---------------------------------------------------------------
Nippon Oil Group:
Nippon Oil:
          Muroran    No. 2        180,000     May 18-June 28
          Sendai     No. 1        145,000     June 15-June 17
          Negishi    No. 1        120,000     Oct. 3-Nov. 4
                     No. 2         70,000     No Turnaround
                     No. 4        150,000     No Turnaround
          Osaka      No. 1        115,000     March 10-April 1
          Mizushima  No. 2        110,000     Sept. 1-Sept. 25
                     No. 3        140,000     No Turnaround
          Marifu     No. 4        127,000     No Turnaround
          Oita       No. 1         24,000     May 15-June 6
                     No. 3        136,000     No Turnaround
          TOTAL                 1,317,000
Nihonkai Oil:
          Toyama     No. 1         60,000     To be
                                            decommissioned
                                            on March 31.
          TOTAL                 1,377,000

Exxon Mobil’s TonenGeneral:
          Kawasaki   No. 1         67,000     No Turnaround
                     No. 2        185,000     No Turnaround
                     No. 3         83,000     No Turnaround
          Sakai      No. 1        156,000     May 23-June 25
          Wakayama   No. 2         40,000     Sept. 10-Nov. 10
                     No. 3        130,000     No Turnaround
          TOTAL                   661,000

Idemitsu:
          Hokkaido   No. 1        140,000     June 1-July 25
          Chiba      No. 2        220,000     April 6-May 17
          Aichi      No. 1        160,000     Oct. 1-Nov. 22
          Tokuyama   No. 2        120,000     No Turnaround
          TOTAL                   640,000

Cosmo Oil:
          Chiba      No. 1        110,000     Sept. 11-Nov. 12
                     No. 2        130,000     April 25-June 20
          Yokkaichi  No. 5         90,000     No Turnaround
                     No. 6         85,000     Oct. 2-Nov. 28
          Sakai      No. 1         80,000     Aug. 22-Nov. 15
          Sakaide    No. 1        140,000     June 10-Aug. 4
          TOTAL                   635,000

Showa Shell Group:
Toa Oil:
         Keihin      No. 3         65,000     April 1-May 6
                     No. 5        120,000     No Turnaround
Showa:
         Yokkaichi   No. 2         75,000     No Turnaround
                     No. 3        135,000     May 23-July 21
Seibu:
         Yamaguchi   No. 2        120,000     No Turnaround
         TOTAL                    515,000

Japan Energy Group:
Japan Energy:
         Mizushima   No. 2         95,200     March 12-May 9
                     No. 3        110,000     No Turnaround
Kashima Oil:
         Kashima     No. 1        210,000     No Turnaround
                    *No. 2         60,000     Sept. 5-Oct. 14
         TOTAL                    475,200
*Condensate splitter.

Fuji Oil:
         Sodegaura   No. 1         52,000     No Turnaround
                     No. 2        140,000     May 6-June 20
         TOTAL                    192,000

Kyokuto Petroleum:
           Chiba     No. 1        175,000     March 8-April 11

Taiyo:
         Shikoku     No. 1         88,000     July 7-July 22
                     No. 2         32,000     June 15-July 1
         TOTAL                    120,000

Nansei:
          Nishihara  No. 1        100,000     May 11-June 2

Teiseki:
Topping     Kubiki    No. 1          4,724     May 22-June 6
                                              Nov. 10-Nov. 14


---------------------------------------------------------------
         GRAND TOTAL            4,894,924
---------------------------------------------------------------
(Schedule is subject to change)

To contact the reporter on this story: Yuji Okada in Tokyo at yokada6@bloomberg.net.

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