New Zealand’s April House Prices Fall 9.2% From Year Earlier

By Tracy Withers

May 11 (Bloomberg) -- New Zealand house prices fell for the 10th straight month in April as a deepening recession and falling employment deterred buyers from the market.

Average prices dropped 9.2 percent from the year earlier month, Quotable Value New Zealand Ltd., the government valuation agency, said in an e-mailed report.

Employment slumped 1 percent in the first quarter, the most in almost a decade, adding to signs that New Zealand’s recession is likely to extend for at least a sixth quarter. As job losses mount, consumers and investors have become unwilling to borrow to buy homes.

“The threat of rising unemployment may affect an increasing number of home owners and potential home buyers,” said Blue Hancock, a spokesman for Quotable Value. “We expect values to remain relatively flat over the winter months.”

Property values have fallen about 9.6 percent since their peak in January 2008, Hancock said.

Reserve Bank Governor Alan Bollard has cut the official cash rate by 5.25 percentage points to a record-low 2.5 percent since July to bolster demand. Last month, he said he was unlikely to raise the rate until late 2010.

Lower borrowing costs and cheaper properties have encouraged some buyers into the market, said Hancock. House sales rose in March to a 16-month high, the Real Estate Institute said last month.

Home prices fell 9 percent in Auckland and 8.5 percent in Wellington. Prices across the nation’s 17 main urban centers dropped an average 9 percent.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

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China’s Consumer Prices Fall for Third Month on Food

By Paul Panckhurst and Nipa Piboontanasawat

May 11 (Bloomberg) -- China’s consumer prices fell for a third month on food and commodities, aiding government efforts to boost spending in the world’s third-biggest economy.

Prices dropped 1.5 percent in April from a year earlier, after falling 1.2 percent in March, the statistics bureau said today. The median estimate in a Bloomberg News survey of 21 economists was for a 1.4 percent decline. Producer prices fell 6.6 percent, the most since Bloomberg data began in 1999.

Falling prices may lower costs for businesses and encourage consumers to spend, helping the economy to recover after exports collapsed. The absence of inflation makes it easier for the central bank to maintain its “moderately loose” monetary policy after five interest-rate cuts last year.

“Prices are declining largely because of commodity and food costs and in both cases that’s more positive than negative for the economy,” said Wang Tao, an economist at UBS AG in Beijing. She said easing prices would give consumers extra spending power and lower costs for producers.

The yuan traded at 6.8214 against the dollar as of 11:03 a.m. in Shanghai, from 6.8209 before the number was released.

In April 2008, inflation was 8.5 percent as pork prices soared because of a shortage of the meat, a Chinese staple. The gains encouraged farmers to raise more pigs, leading to an oversupply.

Meat Costs

Now, pork has tumbled close to a level that may trigger purchases by the state to buoy farm incomes, the government says.

Food, which makes up the biggest part of the index, fell 1.3 percent from a year earlier, the statistics bureau said. Pork declined 28.6 percent.

McDonald’s Corp. is among companies to have cut prices in China this year.

“The sharp rise in food prices in early 2008, particularly for pork, poultry and vegetables, and subsequent declines explain much of the year-on-year fall,” said Jing Ulrich, Hong Kong-based chairwoman of China equities at JPMorgan Chase & Co. “Deflationary concerns appear to be subsiding as the economy shows signs of recovery.”

An exception among the declines for food was grain, which climbed 5.5 percent.

Non-food prices fell 1.5 percent, including a decline of the same size for consumer goods. Garments fell 2.5 percent. Services costs dropped 1.4 percent and utilities declined 2.2 percent.

Energy Costs

Producer prices plunged on lower raw-material and energy costs. Crude oil fell 53.6 percent, the government said.

The central bank is on guard against the risk that consumers, expecting prices to decline, will delay purchases, choking off demand and stifling economic growth. The government’s options include raising state-controlled prices of resources and purchasing farmers’ products to stabilize prices.

The flood of money into the economy from record new lending and a 4 trillion yuan ($586 billion) stimulus package makes protracted price declines less likely.

Around the globe, the worst economic slump since World War II has added to the risk of deflation, while the response to the crisis -- governments pumping cash into their financial systems -- may fuel inflation as economies revive.

Global Inflation Threat

The People’s Bank of China said last week that a recovering economy and strong lending growth are limiting price declines and a global economic revival may also help. It also highlighted risks that monetary easing by major central banks could lead to inflation risks for “the whole world.”

Ben Simpfendorfer, an economist at Royal Bank of Scotland in Hong Kong, expects prices to fall 1.5 percent in 2009, “a positive development” because of the extra spending power it will give consumers.

China has “some breathing space” before inflation makes a comeback, he said, predicting consumer prices will rise 2 percent in 2010, 5 percent in 2011 and 8 percent in 2012 because of shortages of labor, raw materials and land as the economy grows.

China may be the first economy in Asia to face inflationary risks as extra money in the financial system spurs gains in asset prices and then consumer prices, Chris Leung, a senior economist at DBS Bank Ltd. in Hong Kong, said last week.

To contact the reporters on this story: Paul Panckhurst in Beijing at ppanckhurst@bloomberg.net; Kevin Hamlin in Beijing at khamlin@bloomberg.net

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Australia May Face Debt Crisis From Grants to Young Home Buyers

By Jacob Greber

May 11 (Bloomberg) -- Australian Prime Minister Kevin Rudd’s bid to ensure his housing market avoids the global property slump may push a generation of buyers into a debt crisis.

Grants of as much as A$21,000 ($16,142) to first-time buyers and the lowest interest rates in 49 years have emboldened more than 40,000 young Australians to take out home loans since October, stoking demand for properties that cost less than A$500,000.

These buyers may be vulnerable when interest rates begin rising, potentially triggering a jump in foreclosures that will drive down property prices, cut profits at banks and damp household spending, which accounts for half the economy. A surge in defaults in America was a key trigger for the financial crisis that pushed the global economy into its worst recession since World War II.

“We’re mirroring what happened to the U.S. three years ago, when people who shouldn’t have been in the market bought houses,” said Martin North, managing director of Fujitsu Australia, a Sydney-based property-consulting company. “It’s a strategy set for an unfortunate outcome.”

As Australia slides into its first recession since 1991, Rudd’s payments have been criticized by economists and newspapers for fueling a property boom that may burst once the grants are reduced, possibly as soon as July 1.

No Subprime Crisis

While the central bank says Australia doesn’t have a subprime crisis because banks have tightened lending standards, recent reports show first-time buyers are driving a residential construction industry that employs 5 percent of the workforce. New home sales have surged 22 percent this year, and building approvals climbed 12 percent in February and March.

“March was the busiest month I’ve ever had,” said Peita Jackson, a real-estate agent at Bradfield & Prichard, who specializes in selling homes in Sydney’s eastern suburbs. “I sold six properties, and four were to first-time buyers.”

Former Prime Minister John Howard introduced the grants in 2000 to boost a slumping housing market. Last year Rudd tripled the payments for new homes to A$21,000 and doubled handouts for existing houses to A$14,000 to support the economy.

The increases coincided with record interest-rate cuts by Reserve Bank Governor Glenn Stevens, who has reduced the overnight cash rate target by 4.25 percentage points since September to a 49-year low of 3 percent.

Tax-Free Boost

The rate cuts have lowered payments on an average A$250,000 mortgage to A$1,470 from A$2,120. The Reserve Bank says that equals an 8 percent tax-free boost to family incomes. About 90 percent of Australians hold variable-rate loans that are adjusted when the central bank changes its benchmark rate.

“All these things have increased the demand side of property and not the supply side, which always results in increased prices,” said John Lindeman, head of research at property-information company Residex Pty in Sydney.

The 10 suburbs with the biggest prices gains in Sydney during the six months through March were all in locations where homes cost less than the city’s median price of A$564,500, according to Lindeman. The biggest jump was in Greenfield Park, 36 kilometers (22 miles) west of the city center, where the median price rose by A$23,700 to A$420,000.

“We’re setting up a whole generation of people for grief,” Lindeman said. “Interest rates will go up, and that’s when they will feel the pain.”

Prospective Owners

The government grants and interest-rate cuts have prompted first-time buyers, who accounted for a record 27 percent of dwellings financed in February, to borrow more than other prospective home owners. Lending to these consumers surged 6.1 percent between October and February to an average of A$280,600, the Statistics Bureau said. By contrast, home loans to all borrowers fell 1.1 percent to A$253,200.

“For many buyers, the grant was critical,” said Fujitsu’s North. “Over 30 percent had loan-to-valuation ratios on their properties of 95 percent or higher.”

This may eventually leave some new buyers with so-called upside-down loans, as they owe more on their mortgage than the market price of their home. That threat will be heightened if unemployment climbs above 7 percent from the current rate of 5.4 percent, as forecast by the government.

Rudd, Stevens and the International Monetary Fund have all said Australia is in a recession as companies such as BHP Billiton Ltd. and Qantas Airways Ltd. fire workers. Gross domestic product declined 0.5 percent in the quarter ended December 2008 from the previous three months.

Disappearing Jobs

While supporters of the grants say they have created 20,000 construction jobs, many of these jobs may disappear later this year. Rudd signaled last month that the increased handouts may not be extended beyond June 30, reverting to A$7,000 for new and existing homes.

“All good things must come to an end,” Rudd said April 23. The government will announce any changes to the grants when it releases its budget tomorrow.

Some prospective home buyers hope the grants will be cut.

Ludmila Soboleva, a 40-year-old drugs researcher, has been looking for an apartment in Sydney’s eastern suburbs since November, without success.

“Everyone told me this is the best time to buy something but for properties I can afford, it’s a nightmare,” she said. “I wish they would cut this grant so maybe there will be fewer people” trying to buy.

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

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Forex Exchange Morning Report

Daily Forex Fundamentals | Written by Westpac Institutional Bank | May 11 09 01:18 GMT |

News And Views Optimism intact. The US payrolls report was better than expected, but pointed to a still weak labour market. Nevertheless, risk aversion barometer VIX, at 32, is now convincingly in risk seeking territory (under 40), and is poised to head into its 20-30 range of calmer times. The S&P500 gained 2.4%, banks 12.1%, relieved that banks appeared sound post-stress test results. Oil gained 3.4% to $59, a break of the technical $60 looking ominous. US 3mth Libor fell 2bp to 0.94%, and 10 year treasuries had a good day, rallying 4bp. G20 sovereign credit spreads continued to contract, by 5 to 15 bp on Friday. Bank of America managed to sell $3 billion of 5yr notes without any FDIC guarantee, injecting confidence into credit markets. Bullish US equities gave chartists license to propel the US dollar (DXY) lower to 82.39 as it broke some important technical levels, namely the 200 day moving average (83.13) and rising trendline support. The EUR rallied accordingly from 1.3500 to 1.3650, in the process breaking upwards through its own 200 day m.a. at 1.3465. It was a similar story for USD/JPY, falling from 99.50 to 98.50. AUD/USD followed the script, accelerating from 0.7550 to 0.7700. A weekend McCrann article was not market related. NZD/USD was a tad less bullish, from 0.5950 to just above 0.6050, helping AUD/NZD firm slightly from 1.2700 to 1.2780. US non-farm payrolls down 539k in April. Although payroll jobs' 539k fall in April was the smallest contraction in employment for six months - in line with the less weak business surveys and slightly slower pace of initial jobless claims recently, most of the detail in the report remained consistent with a chronically weak labour market. Once again, revisions to the prior two months left them looking weaker (this month, by 66k fairly evenly spread between Feb and Mar). Private payrolls posted their sixth straight monthly loss of over 600k; the jobless rate surged another 0.4 pts to 8.9%, its highest since 1983; hours worked fell a steep 0.6% in April (in March they were flat); and hourly earnings grew by less than 0.1%. These last two factors will tend to weigh against household spending power this month. US wholesale inventories down 1.6% in March. The wholesale inventories decline in March was very steep and mostly volume driven, but as the Commerce Dept had already assumed a weak number, there are no obvious implications for revisions to the Q1 GDP report. The German factory sector did not shrink any further in March, (i.e. industrial production was flat) and with orders picking up that month, we might be starting to see a base form in this sector. Still, with IP down by a fifth compared to a year ago, that is still a very weak picture. UK producer prices subdued in April. Input prices fell last month and the core output measure continued to drift lower. Canadian employment posted its first rise for six months, of 36k, most unexpectedly. The gain was entirely due to full-time self employed service sector workers. With the economy now believed to be in a deepening recession - as evidenced by the renewed steep fall in housing starts, April's jobs growth is likely to be reversed next month. Outlook Global optimism remains intact, supporting the NZD. Today should see support at 0.5990, while a break of 0.6055 points to 0.6160. Today's card spending report for April will add insight to consumer sentiment. Events Today Date Country Release Last Forecast 11 May NZ Apr Electronic Card Transactions –0.5% – Apr REINZ House Prices %yr –4.0% – Aus Apr NAB Business Confidence –16.8 – US Fedspeak: Bernanke Jpn Apr Machinery Tools Orders %yr –85.2% – Can Mar New House Prices –0.7% –0.5% 12 May NZ Apr Food Prices 0.50% – Aus Mar Housing Finance 0.40% 5.50% Federal Budget, 2009/10 AUDbn – –55.0 US Mar Trade Balance $bn –26.0 –28.0 May IBD/TIPP Economic Optimism 49.1 51 Apr Federal Budget $bn 159 –20 Westpac Institutional Bank http://www.wib.westpac.co.nz/ Disclaimer All customers please note that this information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Australian customers can obtain Westpac's financial services guide by calling +612 9284 8372, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. © 2004 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.

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USD Crumbles As Non Farm Sparks Euro Rally

Daily Forex Fundamentals | Written by Easy Forex | May 11 09 01:08 GMT |

U.S. Dollar Trading (USD) finished the week at multi-month lows against the Euro as better than expected US Job Data allowed risk appetite to jump another notch higher. April Non-Farm Payrolls were down -539K vs. -590K forecast. The Unemployment Rate leaped to 8.9% vs. 8.5% previously. Crude Oil was up $1.92 ending the New York session at $58.63 per barrel. In US share markets, the Nasdaq was up 22 points or 1.33% and the Dow Jones was up 164 points or 1.96%. The Euro (EUR) held to the 1.3400 area before the US data prompted a rally that did not stop until above 1.3600. The catch-up of the Euro post ECB allowed most of the crosses to gain led by the EUR/GBP and EUR/JPY. March German Industrial Production remained flat vs. -1.3% expected. Overall the EUR/USD traded with a low of 1.3342 and a high of 1.3629 before closing at 1.3621. The Japanese Yen (JPY) even the relentless rise in risk appetite couldn’t stop the USD/JPY sliding on the back of USD weakness. Losses were limited however as crosses providing plenty of support. Overall the USDJPY traded with a low of 98.32 and a high of 99.60 before closing the day around 98.50 in the New York session. The Sterling (GBP) support at 1.5000 was tested with the market still worried about the expansion of the BOE’s Quantitative Easing program. The Key support held and the subsequent rally helped the Pound close above 1.5200 at its highest level since January. Overall the GBP/USD traded with a low of 1.4980 and a high of 1.5220 before closing the day at 1.5216 in the New York session. The Australian Dollar (AUD) continued to behave like a fast Euro shooting to above 0.7700 or 8 Month Highs. AUD/JPY buying and support from commodities underpinned the move higher. Resistance is thin at these levels and could see 0.8000 tested if stocks can continue to gain. Overall the AUD/USD traded with a low of 0.7509 and a high of 0.7707 before closing the US session at 0.7697. Looking ahead, April Nab Business Confidence previously at -13. Gold (XAU) struggled to take advantage of the USD weakness as demand for gold eased. Overall trading with a low of USD$905 and high of USD$920 before ending the New York session at USD$916 an ounce. Easy Forex http://www.easy-forex.com Easy-Forex makes no recommendations as to the merits of any financial product referred to in this website, emails or its related websites and the information contained does not take into account your personal objectives, financial situation and needs. Therefore you should consider whether these products are appropriate in view of your objectives, financial situation and needs as well as considering the risks associated in dealing with those products

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FX Technical Commentary

Daily Forex Technicals | Written by Easy Forex | May 11 09 01:12 GMT |

Euro 1.3620 Initial support at 1.3247 (May 6 low) followed by 1.3212 (38.2% retrace 1.2889-1.3736). Initial resistance is now located at 1.3628 (May 8 high) followed by 1.3739 (Mar 19 high) Yen 98.75 Initial support is located at 97.94 (May 6 low) followed by 97.15 (Apr 30 low). Initial resistance is now at 99.75 (Apr 17 high) followed by 100.43 (Apr 14 high). Pound 1.5210 Initial support at 1.4836 (May 4 low) followed by 1.4704 (Apr 30 low). Initial resistance is now at 1.5231 (May 8 high) followed by 1.5373 (Jan 8 high). Australian Dollar 0.7685 Initial support at 0.7337 (May 6 low) followed by the 0.7233 (Apr 30 low). Initial resistance is now at 0.7738 (Oct 6 high) followed by 0.8097 (Sept 30 high). Gold 917 Initial support at 895 (May 6 low) followed by 878 (Apr 21 low). Initial resistance is now at 933 (Apr 1 high) followed by 945 (Mar 26 high). Currency Sup 2 Sup 1 Spot Res 1 Res 2 EUR/USD 1.3212 1.3247 1.3620 1.3628 1.3739 USD/JPY 97.15 97.94 98.75 99.75 100.43 GBP/USD 1.4704 1.4836 1.5210 1.5231 1.5373 AUD/USD 0.7233 0.7337 0.7685 0.7738 0.8097 XAU/USD 878.00 895.00 917.00 933.00 845.00 Easy Forex http://www.easy-forex.com Easy-Forex makes no recommendations as to the merits of any financial product referred to in this website, emails or its related websites and the information contained does not take into account your personal objectives, financial situation and needs. Therefore you should consider whether these products are appropriate in view of your objectives, financial situation and needs as well as considering the risks associated in dealing with those products

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Oil Falls From Six-Month High as Global Supplies to Increase

By Gavin Evans and Christian Schmollinger

May 11 (Bloomberg) -- Crude oil fell from a six-month high on speculation last week’s 10 percent advance won’t be sustained as global output increases.

Exports from Iraq’s Kurdistan region will begin June 1 after the state oil ministry agreed to “expedite” shipments, the provincial government said on its Web site yesterday. Venezuela, OPEC’s fifth-largest producer, seized the assets of 60 oil-field service companies on May 8 to restore operations shut over contract disputes.

“At some point you do have to be asking the question as to just how far this can go,” said Toby Hassall, a research analyst at Commodity Warrants Australia Pty in Sydney. “The supply side really isn’t the focus of the market at the moment.”

Crude oil for June delivery fell as much as 68 cents, or 1.2 percent, to $57.95 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $57.99 at 11:58 a.m. in Singapore.

The contract rose 3.4 percent to $58.63 a barrel on May 8, the highest settlement since Nov. 11, as slowing job losses in the U.S. increased investor confidence and a drop in the dollar boosted the appeal of commodity investments.

Brent crude oil for June settlement declined as much as 54 cents, or 0.9 percent, to $57.60 a barrel on London’s ICE Futures Europe exchange.

U.S. Economy

Last week’s jobs report in the U.S., the world’s largest oil consumer, added to investor confidence that the worst of the recession there may be over, boosting demand expectations, Hassall said.

Ongoing weakness in the dollar will support commodities and oil may resume its rally if U.S. summer fuel demand is sufficient to start drawing down stockpiles there, he said.

Today, the euro has surged to a six-week high against the dollar as the gains in global equities has increased investors’ risk appetite.

Hedge-fund managers and other large speculators changed their bets on the direction of oil prices for a second time last week, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 11,285 contracts on the New York Mercantile Exchange on May 5, the commission said May 8. A week earlier, traders had bet on rising prices.

New York oil futures plunged to a four-year low of $32.40 on Dec. 19 as global recession slashed demand and producers cut production to slow rising stockpiles. Prices have gained 39 percent in the past two months as measures to restore global credit markets lifted global equity markets.

OPEC Meeting

The Organization of Petroleum Exporting Countries will review its output levels on May 28. Iran, the group’s second- largest member, will seek a price of $70 a barrel, the nation’s oil ministry said May 9, citing OPEC governor, Mohammad Ali Khatibi.

“I don’t believe OPEC is going to cut again, especially with what’s happened to prices the last couple of weeks,” Commodity Warrants’ Hassall said.

China Petroleum & Chemical Corp., Kuwait Petroleum Corp. and an overseas oil producer plan to build a $9 billion refining and petrochemical plant in southern China’s Guangdong province, according to the head of China’s energy authority.

The third company is either BP Plc or Royal Dutch Shell Plc, Zhang Guobao, head of China’s National Energy Administration, said in Beijing yesterday. Zhang spoke to reporters in Beijing after the Chinese and Kuwaiti governments signed trade accords.

The project’s location may be moved to Zhanjiang from an earlier plan of Guangzhou, Zhang said, adding that talks between the companies are still continuing. The plant will include an oil refinery and an ethylene plant, he said.

China Petroleum, also known as Sinopec, will have the “biggest” stake in the project, Huang Wensheng, Beijing-based spokesman for the company, said by telephone today.

To contact the reporters on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net; Christian Schmollinger in Singapore at christian.s@bloomberg.net

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China April Crude-Steel Output Falls 3.1% From March

By Lee Spears and Nerys Avery

May 11 (Bloomberg) -- Crude steel output in China, the world’s largest producer, fell 3.1 percent in the first 20 days of April compared with the daily average in March, the Ministry of Industry and Information Technology said.

The daily average production dropped to 1.41 million tons, the ministry said on its Web site today. Still, output was higher than the daily average of 1.37 million tons for the whole of last year, the ministry said.

Chinese steelmakers, which posted a first-quarter aggregate loss of 3.3 billion yuan ($484 million), need to rein in output to prevent an oversupply from depressing prices, according to the China Iron and Steel Association. China’s benchmark prices gained 2.3 percent last week.

“Recent gains in steel-product prices are mainly the result of a seasonal pickup in construction in the north, increasing demand and restocking,” the ministry’s statement said. “The outlook for the market is still sober as overcapacity persists and there’s yet to be a clear recovery in demand.”

The average spot price of Chinese hot-rolled steel, the benchmark, rose to 3,514 yuan on May 8 from 3,460 yuan a week earlier. The benchmark has fallen 11 percent this year.

Commercial stockpiles of steel products in major cities declined 8.1 percent from March to 9.96 million tons, led by the destocking of wires and reinforcement bars used in construction, the ministry said. The price of wiring rose to 3,387 yuan a ton, 82 yuan above this year’s lowest price, it said.

Rebar rose to 3,441 yuan a ton, or 74 yuan above 2009’s lowest level, the statement said. Hot-rolled plates increased to 3,319 yuan, or 87 yuan above the year’s lowest price, it said.

To contact the reporter on this story: Lee Spears in Beijing at lspears2@bloomberg.net.

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Zinc Prices May Fall as Plants Restart, Zhongjin Lingnan Says

By William Bi

May 11 (Bloomberg) -- Prices of zinc in China, the world’s largest consumer and producer, will probably drop as a recent surge led plants to resume production, according to Shenzhen Zhongjin Lingnan Nonfemet Co.

Smelters are restarting as much as 500,000 metric tons of annual capacity, Li Xialin, chief engineer at the country’s third-biggest producer said in an interview yesterday. Companies are also starting 700,000 tons of new annual capacity, he said.

Zinc, used to galvanize steel, has gained almost 30 percent this year in Shanghai and London trading after the Chinese government bought the metal to support producers and on optimism its $585 billion stimulus package will revive metal demand.

“Chinese prices cannot be sustained at recent highs of 13,000 yuan ($1,906) a ton, which should be the top end,” Li said. “London prices should also have a rapid decline.”

Zinc dropped 2 percent to 12,830 yuan a ton in Shanghai trading at 10:15 a.m. local time.

“The government’s stimulus plans can’t sustain demand for durable consumer goods in future months,” Li said. “China’s zinc imports will slow after the country restarts idled and new capacity.”

Stockpiles of the metal gained 6 percent, or 4,640 tons, to 80,074 tons last week, the Shanghai Futures Exchange said in a report on its Web site on May 8. China’s imports of refined zinc jumped 876% to 210,730 tons in the first quarter from a year earlier, according to customs data.

Li didn’t elaborate on his comment about consumer demand.

To contact the reporter on this story: William Bi in Beijing at wbi@bloomberg.net

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Fortescue, Indah Kiat, Sembcorp: Asia Ex-Japan Equity Preview

By Berni Moestafa

May 9 (Bloomberg) -- The following companies may have unusual price changes in Asia trading, excluding Japan. Stock symbols are in parentheses, and share prices are from the previous close, unless noted otherwise.

Banco de Oro Unibank Inc. (BDO PM): The largest Philippine bank by assets posted a 25 percent decline in first-quarter profit to 1.01 billion pesos ($21 million) on increased provisions for losses. SM Investments Corp. (SM PM), which owns the bank, separately said it bought 5.09 million additional shares in the lender last month when the stock advanced 18 percent. BDO was unchanged at 33.50 pesos. SM rose 3.8 percent to 272.50 pesos.

Fortescue Metals Group Ltd. (FMG AU): Australia’s third- largest iron ore producer may need between $3 billion and $4 billion to proceed with plans to almost double its output, shareholder Hunan Valin Iron & Steel Group said. Fortescue gained 6.5 percent to A$2.64.

Fraser & Neave Ltd. (FNN SP): Singapore’s largest beverage maker said second-quarter profit fell 34 percent after writing down the value of its investment properties. Net income fell to S$64.3 million ($44 million) from S$96.6 million, the company said. Fraser & Neave advanced 2.8 percent to S$3.35.

Hanjin Shipping Co. (000700 KS): South Korea’s largest container line plans to raise as much as 200 billion won ($161 million) in a sale of new preferred shares. The company said it will use the proceeds for working capital. Hanjin was unchanged at 23,000 won.

Pintaras Jaya Bhd. (PINT MK): The Malaysian builder said fiscal third-quarter profit fell to 4.57 million ringgit from 7.62 million ringgit a year earlier. Sales in the three months ended March 31 dropped to 29.4 million ringgit from 44.3 million ringgit, the company said. Pintaras rose 4.2 percent to 1.25 ringgit.

PT Indah Kiat Pulp and Paper (INKP IJ): The company’s parent, Asia Pulp & Paper Co., which defaulted on $14 billion of debt after the 1998 Asian financial crisis, said it agreed to a debt revamp plan with Gramercy Advisors LLC, one of the creditors. Gramercy sold its debt to a “third party,” and stopped all legal proceedings against the Indonesian company and its units, Asia Pulp said in an e-mailed statement. Indah Kiat rose 17 percent to 1,660 rupiah.

Rio Tinto Group (RIO AU): The company, which is battling political and investor opposition to its $19.5 billion investment deal with state-owned Aluminum Corp. of China, said the proposal was in Australia’s national interest.

“Rio Tinto believes its proposed partnership with Chinalco is consistent with the principles used to asses foreign investment related to government-owned investors,” the London- based company said in a submission to the Senate Economics Committee inquiry into foreign investment by state-owned entities. Rio Tinto, the world’s third-largest mining company, rose 0.8 percent to A$71.60.

San Miguel Corp. (SMC PM): The largest Philippine food and drinks company said it may bid for the government’s 600-megawatt Calaca power plant. San Miguel Class A shares, which are reserved for Filipinos, fell 1 percent to 51.50 pesos. Its Class B shares (SMCB PM), which have no ownership restrictions, declined 1 percent to 52 pesos.

Sembcorp Marine Ltd. (SMM SP): The world’s second-biggest oil-rig maker posted a 32 percent increase in profit in the first quarter as it worked through orders for offshore drilling structures. Net income climbed to S$120.2 million from S$91.3 million, the Singapore-based company said. Sembcorp advanced 1.9 percent to S$2.75.

To contact the reporter on this story: Berni Moestafa in Jakarta at bmoestafa@bloomberg.net

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EU Emission Permits Rise to Four-Month High as Oil, Stocks Gain

By Rachel Graham

May 8 (Bloomberg) -- European Union emission permit prices rose to a four-month high in London as crude-oil prices and stock markets advanced, signaling that the economy and demand for carbon allowances may strengthen.

EU carbon dioxide allowances for December added as much as 85 cents, or 5.7 percent, to 15.70 euros ($21.09) a metric ton on London’s European Climate Exchange. That’s the highest intraday price since Jan. 7. The contract traded at 15.58 euros as of 1:30 p.m. local time.

“It’s the whole positive environment,” Roland Stenzel, a trader at E&T Energie Handelsgesellschaft mbH, said by telephone from Vienna. “Oil has recovered well; equities are strong.”

Brent crude for June delivery rose for a third day. Stocks climbed after Federal Reserve Chairman Ben S. Bernanke said the U.S. review of the banking industry’s health “should provide considerable comfort.”

To contact the reporter on this story: Rachel Graham in London rgraham13@bloomberg.net

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Spanish Solar Subsidy Seduces FPL, Scorches Consumers

By Gianluca Baratti

May 8 (Bloomberg) -- Spain has turned itself into the world’s biggest builder of solar-energy plants, attracting developers from the U.S. and France by guaranteeing prices that weigh down Spanish consumers.

The government promotes clean fuels by letting generators charge as much as 10 times more for power from the sun or wind than from burning coal. The premium, added to bills of homes and businesses, has spawned a solar-investment boom by utilities, from Florida’s FPL Group Inc. to Electricite de France SA.

As a result, developers now plan enough solar thermal projects to generate the power of nine new atomic reactors, or 14,000 megawatts if all get built, Spain’s industry ministry said. That’s the biggest project pipeline, beating sun-blessed Australia and the U.S., where Congress increased aid this year for alternative energy, an Emerging Energy Research study said.

“Who wouldn’t want to enter a business that’s paid many times more than the market rate, and where the customer is guaranteed for life?” said Gabriel Calzada, an economist and professor at Rey Juan Carlos University in Madrid.

Spanish law forces distributors to buy all clean energy produced in the first 25 years of a plant’s life and resell it to consumers. With little oil and lots of sun, Spain is betting the sacrifice will pay off as fossil fuels get more expensive and need costly emission permits under global-warming treaties.

Forty-two percent of power bills, or 95 euros ($127) for every Spaniard, will cover subsidized clean energy in 2009, the ministry estimates.

‘Heavy Price’

“We’re all paying a heavy price for green power,” said Calzada, an opponent of subsidies.

The government raised rates in May 2007 for solar thermal plants, which concentrate sunlight to make steam for power generation. They now earn about 300 euros a megawatt-hour, seven times the average rate coal- or natural gas-fired plants got this year.

A megawatt-hour supplies about 1,500 Spanish homes for an hour, or about half as many homes in the U.S.

“The guarantee is more attractive than what other countries offer,” said Karsten von Blumenthal, an industrial analyst at Hamburg-based SES Research GmbH. “Actually the U.S. has better space for solar, in the deserts of California and Nevada.” Still, the combination of U.S. tax credits and grants are a lesser incentive for developers, he said.

Florida to Spain

Spain’s solar deal was interesting enough for Juno Beach, Florida-based FPL to cross the Atlantic and propose two 50- megawatt solar thermal plants. EDF, France’s biggest power company, raised its stake last year to 90 percent in Fotosolar, a Spanish photovoltaic developer. FPL, the largest U.S. producer of wind power, wouldn’t say which subsidy system it preferred.

“I would not define Spain as more or less attractive, rather it is a new opportunity,” Steven Stengel, a spokesman for FPL unit NextEra Energy Resources LLC, said in an e-mailed response. FPL plans two U.S. plants totaling 325 megawatts.

Neither country gets more than 1 percent of power yet from solar thermal or photovoltaic plants, which use a technology that turns sunlight directly into electricity. Spain installed the most of both technologies last year, trade group data shows.

The two nations lead the world in solar thermal projects coming online by 2011, according to Cambridge, Massachusetts- based Emerging Energy Research. About 1,750 megawatts will be switched on in the U.S. by that year and twice that level in Spain, the research firm said in April.

U.S. Momentum

The U.S. now is regaining momentum lost almost 10 years ago when the government “changed policy, leaving solar technology on the shelf,” said Edward Soler, a business development executive for Spanish builder Abengoa SA. During that decade “Spain underwent a learning curve that was aided by a change in regulations” that improved incentives, he said.

Abengoa, which set up a 20-megawatt solar thermal plant near its Seville, Spain, headquarters, plans one 14 times that size, billed as the world’s biggest, about 60 miles outside of Phoenix to feed local utility Arizona Public Service Co.

In the U.S., where President Barack Obama backed increased incentives this year, 6,000 megawatts of solar thermal projects are under way, said Fred Morse, an official at the Washington- based Solar Energy Industries Association trade group.

Promoters in the U.S. must convince utilities to contract their power, a necessary step for most project financing. Also, they may be reimbursed for 30 percent of the plant’s cost through a tax credit or grant and can apply for federal loan guarantees. They earn no special power rate.

The U.S. can’t catch up until more rules on aid are published, Morse said.

Better Incentives

“The incentives, if implemented promptly and effectively, should greatly facilitate the financing of these plants” in the U.S., said Morse, who prepared the first study on solar energy’s potential as a national resource for the White House in 1969.

In Spain, subsidies already spurred local utility Iberdrola SA of Bilbao and Madrid-based builder Acciona SA to become the world’s largest investors in wind, ahead of FPL and EDP-Energias de Portugal SA of Lisbon, with turbines in more than 20 nations.

Premium prices for solar, wind, biomass and co-generation power will cost Spaniards 4 billion euros in 2009, the National Energy Commission regulator estimates.

Developers also have come for the Mediterranean sun, which has attracted foreign retirees since the 1960s and fueled Europe’s biggest vacation-home market. The sun shines 2,800 hours a year in much of Andalucia. The southern region, home to British vacation favorite Malaga, now harbors solar plants by Abengoa, Acciona and builder Sacyr Vallehermoso SA of Madrid.

Photovoltaic Boom

Acciona and Heliosolar of Navarra, Spain, are among a group of developers that switched to solar thermal after doing photovoltaic projects. In two years, so many photovoltaic plants were rushed online that the Spanish government tightened rules for eligibility. For solar thermal, an unlimited number of licenses will be given out until at least 2011.

Developers bank on Spain continuing to force utilities Endesa SA, Iberdrola and Gas Natural SDG SA to buy all alternative energy produced. On especially windy or sunny days, they must ramp down coal- or natural gas-burning plants.

Acciona was one developer that began investing before its main business, construction, was hurt when the Spanish housing boom went bust in recent years, and as oil prices rose. Acciona has a solar-thermal plant in Nevada and five projects in Spain.

“All the investment in clean energy in the European Union grew from the summer of 2004, when Brent passed $40 a barrel and was giving clear price signals of a tension that wasn’t going to go away,” said Tomas Diaz, spokesman for the Spanish Photovoltaic Industry Association.

20 Billion Euros

Spain’s premium price paid to photovoltaic plants drew in 20 billion euros of investment in those projects in about one year, before the government made the terms less generous in 2008, the trade association’s Diaz said.

“Cash poured in since 2007 as investors fleeing the subprime crisis in the U.S. looked for a safe haven for their money,” Diaz said.

Even the U.S. insurer American International Group Inc., bailed out last year by the Federal Reserve, bought 300 megawatts of solar plants in Spain that it has since sold.

To contact the reporters on this story: Gianluca Baratti in Madrid at gbaratti@bloomberg.netTodd White in Madrid at twhite2@bloomberg.net

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Oil Set to Break Resistance Point, PVM Says: Technical Analysis

By Grant Smith

May 8 (Bloomberg) -- Crude oil is set to reach $62.65 a barrel “in the near future” and rally to $78 within six months as prices retrace the surge that started in 1998, according to technical analysis by PVM Oil Associates Ltd.

Oil is on the brink of breaking through resistance indicated by its climb from a low of $10.35 in December 1998 to an all-time peak of $147.27 last July, PVM said. If oil reaches $62.65, that is equivalent to 38.2 percent of the 10-year rally, a milestone in the “Fibonacci” sequences that suggests additional gains are likely, according to the London-based firm.

“I’m certain we’ll get to the first correction point at $62.65 in the near future,” PVM Director Robin Bieber said by telephone. “The market has been moving into a position from where it can start to attack the higher correction points.”

Oil for June delivery traded as high as $58.57 yesterday on the New York Mercantile Exchange, the most since Nov. 17.

Gains of 38.2 percent and 50 percent are significant in the so-called Fibonacci sequence, technical analysts say. They use the ratios, sometimes known as the golden mean, to find points of support or resistance as prices retrace rallies or declines.

PVM forecast March 26 that oil would fall to $48.55 a barrel after prices failed to close above their five-day moving average. Crude prices declined to that level two days later.

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

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Shell Withdraws Alaska Well Project Amid Opposition

By Fred Pals

May 8 (Bloomberg) -- Royal Dutch Shell Plc, Europe’s largest oil company, has formally withdrawn a three-year plan for exploration in Alaska’s Beaufort Sea because of environmental issues.

“The 2007-2009 plan of exploration no longer represents Shell’s current drilling objectives,” The Hague-based Shell said in an e-mailed statement today. “Additionally, Shell will file a 2010 plan of exploration that reflects Shell’s current drilling plans for Camden Bay,” the company added in the statement.

Environmental groups and local villagers claimed that drilling in the Beaufort Sea might harm the whales and fish that Inupiat native Alaskans depend on. The U.S. Court of Appeals in San Francisco in November threw out the Interior Department’s approval of the project. The U.S. Court of Appeals in Washington said last month that plans to allow drilling in the current program were approved without adequate review of the effects.

Shell, which re-entered Alaska in 2005 after it abandoned the area in 1998, has said it invested $200 million in the project to drill wells in the sea. The U.S. Minerals Management Service in July 2005 awarded Shell 84 leases in the Beaufort Sea.

To contact the reporter on this story: Fred Pals at fpals@bloomberg.net

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AES Net Income Falls on Lower Power Sales, Prices

By Mark Chediak

May 8 (Bloomberg) -- AES Corp., the U.S. power producer and distributor with operations in more than two dozen countries, said first-quarter profit fell 6.4 percent on lower electricity sales and prices.

Net income declined to $218 million, or 33 cents a share, from $233 million, or 34 cents, a year earlier, Arlington, Virginia-based AES said today in a regulatory filing.

Profit excluding quarterly adjustments to the value of contracts used to lock in prices or currency rates and one-time items was 37 cents, 13 cents higher than the average of three analyst estimates compiled by Bloomberg. Profit on that basis was 35 cents a year earlier, AES said.

AES rose 97 cents, or 12 percent, to $9.11 at 10 a.m. on the New York Stock Exchange. The stock has five buy ratings from analysts and two holds.

First-quarter revenue fell 17 percent to $3.38 billion. AES owns or operates 132 power plants worldwide with generating capacity of 43,000 megawatts. Its utilities deliver power to 11 million homes and businesses.

(AES’s conference call started at 10 a.m. New York time, accessible on the company’s Web site at http://www.aes.com.)

To contact the reporter on this story: Mark Chediak in San Francisco mchediak@bloomberg.net.

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Eni, StatoilHydro Get Go-Ahead for Arctic Development

By Marianne Stigset

May 8 (Bloomberg) -- Eni SpA, Italy’s biggest energy company, and StatoilHydro ASA got approval from Norway’s government to develop the country’s first Arctic oilfield.

The recommendation for the Goliat field, 85 kilometers (52 miles) northwest of Hammerfest on Norway’s northern tip, will be sent to parliament for approval, Oil and Energy Minister Terje Riis-Johansen said in Oslo today. The project is estimated to cost in excess of 28 billion kroner ($4.3 billion).

“The Barents Sea will be an important part of Norway’s petroleum industry going forward,” he said at a press conference. “We have a development in the Norwegian petroleum industry where oil production is falling. It’s falling fast.”

Norway, the world’s fifth-largest oil exporter, is opening more of its unexplored north to drilling as oil output sinks in the North Sea. Goliat, discovered in 2000, is estimated to hold 174 million barrels of oil, the government said today.

Eni is the operator and owns 65 percent, while StatoilHydro holds the rest. Should the parliament give approval, construction will start next year and production in 2013, according to an Impact Assessment Plan. The field is expected to be in production for 15 years, the ministry said.

Open For Exploration

StatoilHydro rose 3 kroner, or 2.2 percent, to 139.5 kroner as of 3:12 p.m. in Oslo, the third consecutive day of gains. Eni rose 58 cents, or 3.5 percent, to 17.27 euros.

About 25 percent of the recoverable resources on Norway’s continental shelf have yet to be discovered and only about 50 percent is open for exploration, according to the Petroleum Directorate. Norway’s Barents Sea may hold 1.03 billion cubic meters of oil equivalent in undiscovered oil and gas. About 53 percent is gas, equal to about five times Norway’s annual output, according to the directorate.

Norway awarded 21 new exploration licenses last week in the country’s 20th licensing round, including 9 in the Barents Sea, out of which 3 were to Eni. In total, 34 companies were awarded blocks, including Total SA, Exxon Mobil Corp., Chevron Corp. and Royal Dutch Shell Plc.

Off Limits

State-controlled StatoilHydro is the only producer in the Barents Sea, with the Snohvit gas field.

Norway is keeping parts of the Arctic off limits to protect the environment including areas in the Barents Sea as well as waters off Troms and Finnmark and the so-called Nordland 6 and 7 areas. Helge Lund, StatoilHydro’s chief executive officer, said in January that the best exploration opportunities lie in the Nordland and Troms areas.

The approval of Goliat will have no bearing on a decision whether to allow exploration in the northern areas of Lofoten and Vesteraalen, which is expected in 2010, Riis-Johansen said.

“The Lofoten and Vesteraalen area is special, most notably when it comes to the fishing industry’s interests,” the minister said. “The potential level of conflict is much greater than in other territories.”

Eni in February chose Sevan Marine ASA’s Sevan 1000 floating production, storage and offloading vessel, or FPSO, model for Goliat. The company still has to award contracts for engineering, procurement and construction of the vessel.

The company is holding off on awarding contracts in anticipation of lower service prices, Eni spokesman Jone Stangeland said in February. Producers are cutting costs because of the 60 percent plunge in crude prices since July’s record. Stangeland couldn’t be reached for a comment today.

Goliat’s “costs are at a whole different level than what we’ve seen for other projects” in Norway, Riis-Johansen said. “Therefore the vulnerability to fluctuations in oil prices will be completely different.”

To contact the reporter on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net;

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Repsol Profit Falls 57% on Declining Oil, Gas Prices

By Gianluca Baratti

May 8 (Bloomberg) -- Repsol YPF SA, Spain’s largest oil company, said first-quarter profit fell 57 percent as crude and natural-gas prices declined and production dropped.

Net income slid to 516 million euros ($692.6 million) from 1.21 billion euros a year earlier, the Madrid-based company said today in a regulatory filing. Net adjusted for recurring items sank 59 percent to 401 million euros, beating the 333 million- euro median estimate of nine analysts surveyed by Bloomberg News.

Repsol and competitors Royal Dutch Shell Plc, BP Plc and Total SA, Europe’s three largest oil companies, have reported lower quarterly earnings as the recession curbed energy demand. U.S. oil prices averaged $43.31 a barrel in the period, 56 percent lower than a year earlier, while U.S. natural-gas futures were down 49 percent.

Profit beat estimates because Repsol benefited from currency gains and lower-than-expected taxes, Jason Kenney, head of pan-European oil and gas equity research at ING Wholesale Banking, said in an e-mailed note. The company’s tax rate was 39.5 percent in the period, below the 42 percent forecast by ING.

Repsol rose as much as 2.5 percent to 15.40 euros in Madrid trading, and was up 2.2 percent at 15.35 euros as of 11:01 a.m. local time, valuing the company at 18.8 billion euros.

Refining Margin Drops

Repsol’s refining margin, or the profit from turning crude into fuels, fell 13 percent to $4.60 a barrel in the quarter, mainly because of narrower middle-distillate spreads and a smaller difference between light and heavy oils, the company said. Earnings from the liquefied natural gas business dropped 7.8 percent to 284 million euros.

Refining, marketing and LNG operations “underperformed forecasts,” Kenney said. “LNG saw lower Spanish electricity prices and a drop in sales to Spanish combined-cycle gas turbines as well as tighter margins,” the Edinburgh-based analyst wrote. Kenney recommends retaining Repsol shares.

Repsol’s oil and gas production slumped 4.8 percent from a year earlier to 317,000 barrels of oil equivalent a day. Adding output from the company’s Argentine YPF SA unit, production fell 4.9 percent. YPF, which is 84 percent owned by Repsol, reported a 59 percent drop in first-quarter net income on May 6.

Repsol’s net income adjusted for inventories retreated 28 percent to 1.33 billion euros. The company recorded an inventory loss of 23 million euros in the quarter, compared with an inventory gain of 274 million euros a year earlier.

To contact the reporter on this story: Gianluca Baratti in Madrid at gbaratti@bloomberg.net

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Oil Rises as Fewer Job Losses Signal Economy Is Stabilizing

By Mark Shenk

May 8 (Bloomberg) -- Crude oil rose, heading for the biggest weekly gain since March, after a report showed that the U.S. cut fewer jobs in April, a signal that the worst of the recession has passed and fuel consumption may rebound.

Oil prices are up 8.3 percent this week as reports on U.S. home sales and manufacturing in China boosted optimism about the economy and after U.S. crude-oil supplies rose less than forecast. Payrolls fell by 539,000, after a 699,000 loss in March, the Labor Department said today in Washington. A loss of 600,000 jobs was forecast in a Bloomberg News survey.

“Clearly, the better-than-expected jobs number supports the recent rally that’s been based on early signs of an economic recovery,” said John Kilduff, senior vice president of energy at MF Global Inc. in New York. “There is a natural skepticism that comes with this rally because the fundamentals of the oil market are so poor.”

Crude oil for June delivery rose 88 cents, or 1.6 percent, to $57.59 a barrel at 10:23 a.m. on the New York Mercantile Exchange. Futures are poised for the largest weekly gain since the week ended March 20. Yesterday, oil closed at $56.71, the highest settlement since Nov. 14.

Gasoline also rose after Exxon Mobil Corp. shut a unit that produces the fuel at its Baton Rouge, Louisiana, refinery, the second-largest in the U.S. Gasoline for June delivery climbed 1.31 cents, or 0.8 percent, to $1.6786 a gallon in New York.

U.S., European and Asian stocks increased after Federal Reserve Chairman Ben S. Bernanke said results of the government’s review of the banking industry’s health “should provide considerable comfort.”

Risk Appetite

“As increasing risk appetite pushes equity markets higher, sentiment in the oil market has become quite optimistic,” said Eliane Tanner, an analyst at Credit Suisse Group AG in Zurich. “The momentum could take us to $60, but we’re skeptical about the short-term fundamentals while U.S. demand remains so weak.”

U.S. crude supplies rose 605,000 barrels to 375.3 million last week, the highest since 1990, an Energy Department report on May 6 showed. A 2.5 million-barrel increase was forecast by analysts surveyed by Bloomberg News.

Total daily fuel demand averaged 18.2 million barrels in the four weeks ended May 1, down 7.9 percent from a year earlier, the department said. It was the lowest consumption level for a four-week period since May 1999.

“Prices were divorced from the market fundamentals last year and we are seeing that again,” Kilduff said. “We will have to take out $60 and see if the market recalibrates to reflect the fundamentals.”

Oil surged to a record $147.27 a barrel on July 11 on concern that rising demand in China, India and other emerging economies would outpace production.

‘Consistent Run’

“Oil is maybe moving to a higher trading range, pushing through what looked like a key resistance level of $55 a barrel,” according to technical analysis by PVM Oil Associates Ltd.

Futures climbed from a low of $10.35 a barrel in December 1998 to its peak in July. If oil reaches $62.65, that is equivalent to 38.2 percent of the 10-year rally, a milestone in Fibonacci technical analysis studies that suggests additional gains are likely, according to the London-based PVM.

The Organization of Petroleum Exporting Countries is likely to extend its record production cut when the group meets in Vienna on May 28, Mehr news agency reported, citing Ali Khatibi, the Iran’s OPEC governor.

Brent crude oil for June settlement rose 78 cents, or 1.4 percent, to $57.25 a barrel on London’s ICE Futures Europe exchange.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

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Peru, Chile Lower Rates, Say More Cuts May Be Ahead

By Sebastian Boyd

May 8 (Bloomberg) -- Chilean and Peruvian central bank policy makers cut lending rates and signaled they are prepared to carry out further reductions in a bid to spark consumer spending and fend off the effects of a global economic slump.

Peru’s bank cut its benchmark interest rate 1 percentage point to 4 percent late yesterday, the fourth consecutive monthly reduction. Chile trimmed borrowing costs by half a point to 1.25 percent, a record low.

Chile and Peru are acting to spur growth as the global financial crisis undercuts demand for their exports and curtails spending at home. Other regional central banks may follow suit with more aggressive rate cuts in a bid to fend off recession, said Alfredo Coutino, director of Latin America at Moody’s Economy.com Inc. in West Chester, Pennsylvania.

“All the countries in Latin America are being hit strongly by the international recession, and now they are trying to synchronize monetary policy with fiscal stimulus,” Coutino said. “The first two central banks doing this are Chile and Peru and the rest of the central banks in Latin America are going to have to be more aggressive in coming months.”

The International Monetary Fund predicts that Latin American and Caribbean economies may shrink a combined 1.5 percent this year. As gross domestic product falls, concerns that inflation may accelerate are abating, giving policy makers more room to cut rates.

Consumer prices in Chile have dropped for five of the previous six months, and Peru’s monthly inflation is near a two- year low. Meanwhile, Chile’s economy is shrinking at the fastest pace in more than a decade and Peru’s economic growth has fallen to the lowest in eight years.

Government Spending

Chile plans to spend at least $4 billion in government savings on tax breaks and subsidies to fuel growth. Peruvian Finance Minister Luis Carranza plans to spend $3 billion on a stimulus plan designed to spark domestic consumption.

Chile has trimmed borrowing costs by 7 percentage points this year, more than any other central bank rate tracked by Bloomberg, while Peru has trimmed 2.5 points from its key rate.

Elsewhere in the region, Brazil’s central bank lowered the so-called Selic target rate by 3.5 percentage points this year to 10.25 percent and the Colombian central bank lowered its overnight rate by 3.5 percentage points to 6 percent.

Mexico has cut borrowing costs by 2.25 percentage points to 6 percent. The central bank, led by Governor Guillermo Ortiz, will probably lower its benchmark rate by 0.75 percentage point to 5.25 percent on May 15, according to the median estimate of 12 economists surveyed by Bloomberg.

Rate Outlook

Peru’s central bank said yesterday that it will keep easing monetary policy as long as inflation and domestic demand keep slowing and the global economy gets worse. Chile’s rate-setting committee yesterday said it “doesn’t rule out that it may be necessary to reduce the monetary-policy rate again.”

After expanding 9.8 percent in 2008, Peru’s economy has stalled, growing just 0.2 percent in the year through February, the slowest pace in eight years.

Falling commodity prices may cut economic growth to 4 percent in 2009, according to Peru’s Finance Ministry.

Prices of copper, zinc, tin and silver, which account for 60 percent of Peru’s export revenue, have all dropped at least 22 percent since early July on declining demand. Exports fell for a sixth month in March, slumping 23 percent, according to state exporter association ComexPeru.

Chile’s decline in mining output and slowing consumer demand are shrinking the economy by the most in a decade. The economy contracted 0.7 percent in March from a year ago, a fifth straight monthly decline. It fell 3.9 percent in February, the deepest year-on-year contraction since 1999.

Commodity Exports

Copper, Chile’s biggest export, has fallen 47 percent since reaching a record $4.08 a pound in July. The value of exports from Chile slumped 40 percent in April from a year earlier.

Industrial production fell 7.1 percent in March from a year earlier, less than the 11.5 percent annual decline in February.

Retail sales fell 3.5 percent in March from a year earlier and purchases of durable goods such as washing machines and cars slumped 12.3 percent, the sixth month that durable goods sales have fallen, according to the statistics institute.

“In Chile you’ll have a recession; in Peru it’s a severe deceleration from a very high level,” said Alberto Ramos, an economist at Goldman Sachs Group Inc. in New York.

Chile’s peso appreciated 0.4 percent against the U.S. dollar as of 10:37 a.m. in New York to 562.80 pesos. So far this year it is the best-performing of 26 emerging-market currencies tracked by Bloomberg.

The Peruvian new sol rose for the fifth straight day, appreciating 0.3 against the U.S dollar to 2.9555 per dollar.

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

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