Google-Oracle Meeting Ordered by Court May End Legal Dispute Over Android

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Google Chief Executive Officer Larry Page arrives at court. Photographer: Ryan Anson/Bloomberg

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Oracle Chief Executive Officer Larry Ellison arrives at court in San Jose, California on Monday. Photographer: Ryan Anson/Bloomberg

Google Inc. and Oracle Corp. (ORCL) chief executive officers are squared off in court today to resolve a dispute that may pose the biggest threat to Google’s Android mobile software, now running on more than 150 million devices.

Google’s Larry Page and Oracle’s Larry Ellison were ordered to appear before a federal court magistrate in San Jose, California, after tussling over patents for more than a year. Oracle accused Google of infringing patents related to its Java software, and a settlement means the companies avoid the risk of having a jury decide whether Google owes royalties.

“It’s like Gorbachev and Reagan,” said Scott Daniels, a lawyer with Westerman Hattori Daniels & Adrian LLP in Washington. “The greatest chance of settling the case, of ending the Cold War, to use the analogy, is to have the two highest figures there.”

Oracle’s suit, filed in August 2010, may represent a bigger menace to Google’s software than challenges from Apple Inc. (AAPL), which has already won patent decisions against Android device makers. In settlement talks, Page aims to avoid having to pay Oracle licensing fees that analysts at Citigroup Inc. said could be as high as $15 per device. That sum might slow the adoption of the software, which Google gives away.

‘Productive Day’

“We are looking forward to a productive day,” Page said as he arrived at the courthouse today.

Ellison is under pressure to wring profit from the acquisition of Sun Microsystems Inc. and its Java software after a report in June showed falling hardware sales, raising concern that Redwood City, California-based Oracle may not be making most of the $7.3 billion deal, which closed last year.

“We’ll do the best we can,” Ellison said today when he got to court.

Jim Prosser, a spokesman for Mountain View, California- based Google, said that the discussions, after more than 10 hours, had ended for the day. Prosser declined to comment further on the talks. A second court conference is scheduled for Sept. 21, according to court records.

Deborah Hellinger, a spokeswoman for Oracle, declined to comment earlier in the day.

Ellison, 67, has demonstrated his mettle as an opponent, said Neil Herman, an analyst at Ticonderoga Securities. He prevailed in 2009 after an almost two-year fight against Swiss billionaire Ernesto Bertarelli over who can determine the challenger in the America’s Cup yachting competition.

And after a trial where Ellison testified, a federal jury awarded Oracle $1.3 billion in damages against rival SAP AG (SAP), which it accused of stealing software. While a judge ruled this month that the verdict was “grossly excessive,” Oracle vowed to pursue “the full measure of damages” it believes are owed.

“Larry Ellison has been masterful historically in his ability to hire good attorneys who give good advice and has been quite successful in the legal battleground,” said Herman, who is based in New York.

‘Well-Matched CEOs’

Page, 38, who succeeded Eric Schmidt in April, may prove a worthy opponent, said Paul Saffo, managing director at San Francisco-based Discern Investment Analytics Inc., which provides financial tools for institutional investors.

Ellison, who founded Oracle in 1977 and has been its CEO since that year, is known for his blunt manner, Saffo said. Within days of becoming CEO in April, Page shook up the company’s leadership, promoting seven of his managers to senior executive positions to streamline decision making.

On Page’s watch, Google has also bulked up on patents and the attorneys it needs to defend against allegations of infringement. The company agreed in August to buy Motorola Mobility Holdings Ltd. for $12.5 billion, gaining more than 17,000 patents.

“The only difference between these two men is their age, not their skills,” said Saffo, who said he holds some shares of Google. “They are two well-matched CEOs.”

‘Wishful Thinking’

Both executives were “strongly” urged to attend today’s session by U.S. District Judge William Alsup, who has been overseeing the case, after opposing sides initially said they would send lower-ranking executives.

Magistrate Judge Paul Grewal in San Jose will oversee settlement talks. Grewal’s role is to play devil’s advocate to each side, said Paul Janicke, a lawyer and professor who teaches intellectual property law at University of Houston Law Center.

“You try to portray the worst case for each side --‘Here’s what could happen to you’ -- so that they will see their down side,” said Janicke, who has mediated patent disputes.

Oracle initially estimated that damages from allegedly unauthorized use of Java technology would amount to as much as $6.1 billion. Alsup threw out the tally, calling it “wishful thinking,” according to a July 22 order.

In the same order Alsup also took Google to task for what he called “Soviet-style negotiation” in suggesting that a reasonable royalty would be at most $100 million.

Royalty Fees

Undeterred by the judge’s reproach, Ellison will likely ask for an ongoing licensing fee for each device that sports Android software, said Walter Pritchard, an analyst at Citibank Global Markets. Oracle may seek anywhere from $5 to $15 per device, he said. Richard Windsor, an analyst at Nomura Securities, said Oracle may seek less than $1 a device.

Any amount would add up quickly. More than 550,000 Android devices are activated each day, Page said last month. Introduced in 2008, Android has become the leading software for smartphones, with 43 percent of the market in the second quarter, up from just 17 percent a year earlier, according to Gartner Inc.

Java, the point of contention, has emerged as an industry standard for writing business software and is widely used to create Web-based applications. After buying Sun in January 2010, Oracle said it would make more money from Java than its inventor had. Sun collected just $220 million in Java-related revenue in fiscal 2008.

Oracle’s Dilemma

Companies including Research In Motion Ltd. (RIMM), Amazon.com Inc. and Sony Corp. already license Java. Oracle claims that Google’s Android relies on technology that infringes Java patents, and that Google should take a license.

Android has proven itself vulnerable in legal battles before. Apple won a U.S. International Trade Commission ruling in July in a patent-infringement case targeting HTC Corp. (2498)’s Android-based mobile phones.

Oracle’s efforts could be more damaging to Android, said Jack Gold, an analyst at J. Gold Associates LLC in Northborough, Massachusetts.

“It strikes the foundation of Android,” Gold said. “What Oracle is saying is, ‘No, Android is fundamentally flawed in that it’s based on our invention and you’ve copied our invention.’ It much more goes at the core of Android.”

Android Cost

A royalty fee would increase the cost of using Android and may cause some handset makers to consider alternative operating systems. Still, Google, with its $39.1 billion in cash and short-term securities, could absorb some of the fee charged to partners that make the devices, said Will Stofega, program director at IDC. While giving away the software, Google aims to make money through advertising that it puts on the smartphones.

If Oracle does score a victory against Google, it won’t want to extract too high a fee, said Ray Valdes, an analyst with Gartner. Android needs to be successful for Oracle to get any royalties from the devices, he said.

The case is Oracle America Inc. v. Google Inc. (GOOG), 10-03561, U.S. District Court, Northern District of California (San Francisco).

To contact the reporters on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net; Aaron Ricadela in San Francisco at aricadela@bloomberg.net; Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Michael Hytha at mhytha@bloomberg.net

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Autodesk’s SketchBook IPhone Application Brings Flood of Users, CEO Says

By Danielle Kucera and Emily Chang - Sep 20, 2011 8:56 AM GMT+0700

Autodesk Inc. (ADSK) spent almost 30 years selling engineering and design software to accumulate 12 million customers. It took a single iPhone app -- and less than two years -- to attract 7 million more.

Autodesk’s SketchBook application, which also works with the iPad and Android devices, has boosted the company’s user base and drawn new kinds of customers, Chief Executive Officer Carl Bass said today in an interview. The $1.99 product, released in September 2009, can create sketches and paintings on touch screens with a range of brushes, colors and layers.

While SketchBook users bring in much less revenue than Autodesk’s engineering customers, the app’s popularity has raised the company’s profile and spotlighted a broader shift away from traditional personal-computing software, Bass said. Customers are increasingly turning to Internet apps and cloud computing, which relies on massive data centers for storage and processing power.

“The biggest thing has been the move to the cloud,” Bass, 54, said in a televised interview with “Bloomberg West.” “We are reaching an audience that is far larger than we have ever reached before.”

Autodesk, the world’s largest seller of engineering-design software, also is seeing its manufacturing and architectural programs shift to the cloud. Bass estimates that the “vast majority” of software will be delivered via cloud computing within five years.

Cloud Market

Cloud services, offered by Google Inc., Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN) and dozens of other companies, provide an alternative to businesses maintaining their own software and servers. The cloud-computing market is expected to increase to $241 billion in 2020 from $40.7 billion this year, according to Forrester Research Inc. (FORR)

For engineers, cloud computing offers the promise of limitless processing power, Bass said. An auto-industry designer, for instance, can test aerodynamics and safety in a fraction of the time.

Autodesk generated $1.95 billion in revenue last year, up 14 percent from the previous year. The San Rafael, California- based company serves as a bellwether for the broader economy because customers rely on it for major construction projects and creating new product lines. Its software has been used in everything from bridge design to the special effects in the movie “Avatar.”

Autodesk shares have tumbled 25 percent this year, hurt by concerns that economic growth is slowing. The stock fell 66 cents to $28.79 today on the Nasdaq Stock Market.

To contact the reporters on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net; Emily Chang in San Francisco at echang68@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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‘Angry Birds’ May Slingshot Into Starbucks

By Olga Kharif - Sep 20, 2011 6:50 AM GMT+0700

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Animation graphics from the computer game Angry Birds are seen at the headquarters of Rovio Mobile Oy in Espoo, Finland. Photographer: Henrik Kettunen/Bloomberg

“Angry Birds” game creator Rovio Entertainment Oy is working on alliances with Starbucks Corp. (SBUX) and other retailers to reach new customers and sell a wider range of products.

Rovio, whose smartphone game has been downloaded more than 350 million times, is in discussions with Starbucks about in- store promotions, Wibe Wagemans, a senior vice president at the Espoo, Finland-based company, said in an interview. Rovio may offer virtual goods and set up electronic leader boards in stores to tout top-scoring “Angry Birds” players.

The company is trying to convert its digital success into a real-world empire by selling “Angry Birds” books, stuffed animals, T-shirts and other gear. Rovio also is planning a movie version of the game. It’s part of an effort to diversify sales and attract more customers ahead of an initial public offering, which the company says may take place within the next few years.

“It’s tying in the real world with the virtual world,” Wagemans said. “Retailers get new customers who’ve not been to their stores yet, and repeat customers.”

Having leader boards encourages customers to play “Angry Birds” on their devices at the store, so they can see their scores spotlighted, he said. The game involves using a slingshot to fire birds at enemy pigs, who build increasingly elaborate fortifications.

Starbucks Partnership

Starbucks, the world’s biggest operator of coffee shops, declined to comment on any talks with Rovio.

“While we are always looking for great partnerships to better meet the needs of our customers, at this time we have no announcements regarding any work with Rovio Entertainment,” the Seattle-based company said in an e-mailed statement.

Rovio is expanding into new areas as the market for mobile and social-networking games intensifies. While “Angry Birds” is one of the best-selling applications for smartphones and tablets, new competitors emerge daily. Among paid apps, “Angry Birds” has been bumped from the top of the U.S. iPhone download charts by Firemint Pty Ltd.’s “Spy Mouse.”

Rovio, which offers merchandise on its website, already sells 1 million stuffed animals a month, Wagemans said. He declined to discuss financial results. The company raised $42 million in funding in March, and has held talks about another investment that would value Rovio at about $1.2 billion, people familiar with the matter said last month.

Barnes & Noble

Rovio began running “Angry Birds” leader-board promotions at Barnes & Noble Inc. (BKS)’s U.S. locations this year. It also sells merchandise through the bookstore chain, as well as Toys “R” Us Inc.

“Angry Birds” is now seeking to crack the market for social-networking games, where Zynga Inc. dominates. Rovio has a game for the Google+ service, and a version for Facebook Inc. is in the works, Wagemans said.

Getting the game on Facebook could shake up the market, said Elizabeth Shaw, an analyst at Forrester Research Inc. (FORR), a research firm based in Cambridge, Massachusetts.

“I’d definitely predict a big splash,” Shaw said. “It would definitely rev up competition.”

Rovio has versions of the game for personal computers and the Roku streaming service, and it’s looking to bring it to more television-connected devices, Wagemans said.

Users of Barnes & Noble’s Nook e-book readers who stop by the bookstores can get a free virtual item -- a Mighty Eagle. The bird, which normally costs 99 cents, appears in the game and helps players advance to the next level.

Tens of thousands of people have received Mighty Eagles in stores, Wagemans said. And more than 10,000 people have spent more than 30 minutes playing at Barnes & Noble locations, boosting the stores’ foot traffic, he said.

“There are retailers out there who have a lot to gain by increasing the time spent at their location, and increasing the money spent there,” Wagemans said.

To contact the reporter on this story: Olga Kharif in Portland, Oregon, at okharif@bloomberg.net

To contact the editor responsible for this story: Thomas Giles at tgiles5@bloomberg.net

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Gold to Top $2,000 This Year: Survey

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Gold has surged 25 percent this year, touching a record $1,923.70 in New York on Sept. 6. Photographer: Carla Gottgens/Bloomberg

Gold will probably top $2,000 an ounce by year-end amid surging investor demand, a Bloomberg survey showed.

Prices will rise to a peak of $2,038 before Dec. 31, based on the average of 16 respondents in a Bloomberg survey at the London Bullion Market Association’s annual conference in Montreal. Next year, gold will peak at $2,268, according to the average in the survey.

Gold has surged 25 percent this year, touching a record $1,923.70 in New York on Sept. 6. The metal climbed as escalating debt woes in Europe and the prospect of faltering U.S. growth boosted demand.

“This is largely a crisis of confidence, and gold is a safe haven,” Rujan Panjwani, the president of Edelweiss Financial Services Ltd., said in an interview at the conference. “I see little chance of gold falling.”

Gold is in the 11th year of a bull market, the longest winning streak since at least 1920 in London, as investors seek to diversify away from equities and some currencies. Holdings in exchange-traded funds backed by the metal have jumped 31 percent in the past two years, reaching a record 2,260.5 metric tons on Aug. 8.

The Federal Reserve has kept U.S. borrowing costs at a record low near zero percent and conducted two rounds of asset purchases, or so-called quantitative easing, in a bid to boost growth. Greek Prime Minister George Papandreou’s government will hold another call with its main creditors after a “productive” round of talks aimed at staving off default.

‘Bullish Environment’

“We’re going to continue to be in a bullish gold price environment for the next five to seven years,” Richard O’Brien, the chief executive officer of Newmont Mining Corp., said in an interview at the 2011 Denver Gold Forum in Colorado Springs. “It’s going to take that long for people to get their fiscal house in order.”

Gold prices may have already peaked this year, and won’t climb higher than $2,000 in 2012, according to Dipankar Basu, a manager and dealer at the State Bank of India.

“If we see signs that the U.S. and European economies are improving, we will see a sharp correction, and we could see that within maybe six months,” Basu said in an interview in Montreal.

Prices may rally through June before dropping, according to Gerhard Max Schubert, the head of precious metals, consumer banking and wealth management at Emirates NBD.

“I think people should look for an exit strategy in the second half of next year,” Schubert said in an interview in Montreal. “Nothing is going to happen in U.S. policy until the presidential election, and it gives a year to sort things out in Europe and come up with a credible solution.”

India, China

Rising consumption in India and China, the world’s top gold buyers, will continue to support prices, and the next 10 to 20 years will be “defined” by increased purchases in Asia, Pierre Lassonde, the chairman of Franco-Nevada Corp., said during a presentation at the Montreal conference.

“There’s very broad-based global demand,” Mark O’Byrne, the executive director of GoldCore Ltd., a brokerage, said in an interview in Montreal. “The monetary, geopolitical, macroeconomic and systemic risks are driving it, and until those risks are reduced somewhat, the outlook is fairly sound.”

To contact the reporter on this story: Joe Richter in Montreal at jrichter1@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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Electric Vehicles Fail to Connect Consumers

Klaus Doerrzapf, who has solar panels on his home, has no plans for an emission-free car in his garage. He’s one of the reasons why automakers like Nissan Motor Co. won’t recoup investments in electric vehicles anytime soon.

“It’s too early,” the 50-year-old manager at an electrics company said at the International Motor Show in Frankfurt. “Range and price are a problem. Battery life and charging times are also concerns,” Doerrzapf said, while looking at an electric-powered Focus from Ford Motor Co. (F)

Bayerische Motoren Werke AG (BMW), Volkswagen AG (VOW) and Nissan partner Renault SA (RNO) talked up their electric vehicles at the Frankfurt motor show as they rolled out a record number of models and began the search for a return on their development spending. Nissan, the maker of the all-electric Leaf, is investing 4 billion euros ($5.5 billion) together with Renault to build electric cars.

Following the introduction last year of the Leaf, Mitsubishi Motors Corp. (7211)’s i MiEV, and General Motors Co. (GM)’s Chevrolet Volt, the new models will test consumer appetite for electric vehicles, which cost more than double the price of conventional models. Consumers are balking at paying up, concerned that their own investment will be wiped out in a few years because the batteries may not last.

“We’re about to find out what happens when several big manufacturers try to sell electric vehicles to real people,” said Ian Fletcher, a London-based analyst with IHS Automotive. “The signs aren’t all good.”

Sales Targets

Nissan has delivered 12,000 of the Leaf model since its introduction in December, Chief Executive Officer Carlos Ghosn said in Frankfurt. PSA Peugeot Citroen, which beat Renault to the market with two electric city car last December, targeted 7,000 combined deliveries of the iOn and C-Zero models for 2011. It has sold 3,000 since Jan. 1.

Yokohama, Japan-based Nissan said last November it planned to sell as many as 25,000 units of the $32,780 Leaf in the U.S. during the model’s first year. Through August, U.S. sales of the model totaled just 6,168.

The Leaf, which has a range of about 100 miles per charge, costs 25,990 pounds ($40,776) in the U.K., even after the deduction of a 5,000-pound government incentive, while the brand’s similarly sized Note starts at 11,200 pounds. In France, the 5,000-euro government contribution lowers the starting price of Peugeot’s iOn to 35,350 euros, compared with 9,700 euros for the gasoline-burning Peugeot 107.

Battery Barrier

“I wouldn’t buy one just yet,” said Jean-Pierre Ahtuam, 38, who runs a juice bar in central Paris. “I’d be worried about where I’d plug it in and whether it will be worth anything in a couple of years -- that’s got to be a concern with any new technology the first time around.”

Costly batteries and limited driving range remain the key sticking points for the technology. Public charging stations are also conspicuously absent in most markets. Even the technology’s strongest advocates recognize that success hinges on years of generous subsidies from increasingly cash-strapped governments.

“As things stand, it’s only with this support that we can make the cars affordable for consumers,” said Thomas Orsini, electric-vehicle business development director at Renault, which is predicting a 10 percent global market share for battery cars by 2020. “If the subsidies disappear too soon, the market won’t get off the ground.”

Subsidies help to absorb the 7,000-euro cost of a battery that will propel a compact car about 100 miles on flat terrain between charges -- providing that heating and other energy- draining functions are used sparingly or not at all.

‘Sudden Death’

The batteries’ price and limited lifespan will combine to make electric vehicles depreciate faster than combustion-engine models in the used-car market, according to research by the University of Greenwich in London.

“Electric cars suffer from the certainty, not just risk, of a large fixed cost a few years down the line,” said Michael Wynn-Williams, a business professor and author of the study. “This is sudden death, the point where an otherwise attractive vehicle is worth nothing.”

To get around this problem, Daimler AG (DAI) plans to follow Renault’s lead by initially leasing the batteries with its cars. The electric-powered Smart city car will start at less than 16,000 euros, with the battery costing an additional 60 euros a month.

Ghosn, chief executive officer of both Renault and Nissan, remains bullish. Demand for Nissan’s Leaf has outstripped expectations, he said Sept. 12.

“When we first predicted a 10 percent market share, people said we were being extremely optimistic,” the CEO said. “Since then, it’s the experts who have increased their forecasts.”

‘Nice to Drive’

Not all industry analysts got Ghosn’s memo. Fletcher at IHS expects battery-powered cars to claim about 1 percent of global production in 2020, while rival research firm J.D. Power and Associates puts their market share below 2 percent. The forecasts exclude cars with range extenders, like GM’s Volt, which use a small on-board gasoline generator to recharge the battery on the move.

Even some of the auto executives showing pure electric models in Frankfurt sounded skeptical about their future. Peugeot Citroen sees three times more global demand for hybrids, which combine electric propulsion with a combustion engine.

“Everything we’re seeing today confirms that vision,” said CEO Philippe Varin.

Consumers like Doerrzapf, who owns a VW Passat and works for a company supplying the type of electronics equipment needed to recharge the vehicles, may yet change their minds.

“They are nice to drive,” he said.

To contact the reporters on this story: Laurence Frost in Paris at lfrost4@bloomberg.net; Alexander Webb in Frankfurt at awebb25@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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S&P Cuts Italy Rating on Weak Growth Outlook

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Pedestrians pass the Colosseum in Rome. Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries having their credit rating cut this year. Photographer: Alessandra Benedetti/Bloomberg

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Sept. 20 (Bloomberg) -- Komal Sri-Kumar, chief global strategist at TCW Group Inc., talks about Standard & Poor’s downgrade of Italy’s credit rating, the outlook for the European economy and stocks. Sri-Kumar speaks from Los Angeles with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Italy’s credit rating was cut by Standard & Poor’s on concern that weakening economic growth and a “fragile” government mean the nation won’t be able to reduce the euro-region’s second-largest debt burden.

The rating was lowered to A from A+, with a negative outlook, S&P said in a statement. S&P said Italy’s net general government debt is the highest among A-rated sovereigns, and the company now expects it to peak later and at a higher level than it previously anticipated.

The decision sent the euro sliding for a third day against the dollar as investor concern rises that European policy makers will fail to contain the debt crisis. Greece’s government plans another call with its main creditors today as it seeks to stave off default, while U.S. Treasury Timothy F. Geithner urged the region to adopt additional tools.

“It’s a reminder that we’ve had the market in control but policy makers have been slow to think in any forward-looking context,” said Adrian Foster, head of financial-market research for Asia at Rabobank Groep NV in Hong Kong. “Policy makers across the euro-zone have been well and truly asleep at the wheel for quite a while now and are only taking measures when the market pushes them to it.”

Euro Falls

The euro fell 0.5 percent to $1.3625 at 9:25 a.m. in Tokyo. Stocks also retreated, with the MSCI Asia Pacific index down 1.1 percent, and futures on the U.S. S&P 500 index losing 0.6 percent.

S&P said it lowered its outlook for Italy’s growth to a 0.7 percent annual average for 2011 to 2014, from a prior projection of 1.3 percent. “We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve,” it said.

Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries having their credit rating cut this year. Prime Minister Silvio Berlusconi passed a 54 billion-euro ($73 billion) austerity package this month that convinced the European Central Bank to buy its bonds after borrowing costs surged to euro-era records in August. The plan to balance the budget in 2013 wasn’t enough to sway S&P.

“We expect that Italy’s fragile governing coalition and policy differences within parliament will continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges,” S&P said.

U.S. Rating

The decision comes just weeks after S&P stripped the U.S. of its AAA credit rating for the first time. While the Aug. 5 move roiled global markets, bond investors ignored S&P’s warnings about U.S. creditworthiness and piled into Treasuries. The yield on the benchmark U.S. government bond fell to a record 1.8770 on Sept. 12.

Italy’s downgrade may aggravate a volatile political situation -- Berlusconi faces four trials -- after a decade with virtually no economic growth that has undermined debt reduction. Its government debt was 119 percent of gross domestic product last year, more than any euro country after Greece.

Unlike Ireland and Portugal, which followed Greece in seeking bailouts from the European Union and the International Monetary Fund, Italy until July had managed to skirt the worst of the fallout from the debt crisis.

While its budget gap was 4.6 percent of GDP in 2010, lower than France and Germany, debt will reach 120 percent this year.

Growth Outlook

Italy’s economy expanded an average 0.2 percent annually from 2001 to 2010, compared with 1.1 percent in the euro area. GDP rose 0.3 percent in the second quarter from the three months through March, when it grew 0.1 percent, the national statistics institute said on Sept. 9.

With austerity in the pipeline, “we now expect the economy to contract in 2012 and 2013,” Ben May, an economist at Capital Economics Ltd. in London, said in a Sept. 9 note.

Berlusconi pushed through two packages of deficit cuts since mid-July totaling about 100 billion euros. Measures included raising the value-added tax by one percentage point to 21 percent and a levy on incomes of more than 300,000 euros to balance the budget by 2013. The second, announced on Aug. 5, was a condition of ECB support.

While ECB purchases knocked more than 100 basis points off the yield in a week, borrowing costs began rising again as the government diluted the package. That prompted Berlusconi to revise the plan, introducing the increase in the value-added tax, raising the levy on high earners and lifting the retirement age for women.

Yield Premium

The yield on 10-year notes was at 5.6 percent yesterday, pushing the difference investors demand to hold Italian bonds instead of benchmark German bunds to 379 basis points. The cost of insuring Italian debt against default was 488 basis points compared with 240 on Dec. 31, 2010.

S&P in May and Moody’s Investors Service in June first warned that they may downgrade Italy, saying the government may miss its revenue and deficit targets amid chronically sluggish growth and possible political instability.

The government’s first budget package approved in May wasn’t enough to convince S&P that Italy will be able to reduce its debt. The rating company said on July 1 that even with the budget cuts, there’s a “one-in-three likelihood that the ratings could be lowered within the next” two years because anemic economic growth would undermine fiscal goals.

Greek Calls

Meantime, Greek Finance Minister Evangelos Venizelos held “substantive” discussions with European Union and International Monetary Fund officials about securing a sixth installment of rescue funds, the Athens-based finance ministry said in an e- mailed statement after a teleconference last night. A second call will be held tonight.

Geithner said that new crisis-fighting measures may eventually be agreed even after some European officials poured cold water on his proposals at a summit in Poland at the weekend.

“I think you’re going to see them draw on the lessons of our crisis, draw on the lessons of things that worked here in the United States,” Geithner said in a Bloomberg Television interview yesterday in Washington. “I think you’ll see that reflected in some of the choices they make.”

To contact the reporter on this story: Jeffrey Donovan in Rome at jdonovan26@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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Geithner: Europe Will Follow ‘Lessons’ of U.S.

By Ian Katz and Julianna Goldman - Sep 20, 2011 5:49 AM GMT+0700
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Treasury Secretary Tim Geithner arrives for a meeting of the G7 Finance ministers and 'Deauville Partnership' in Marseille, southern France, on Septembre 10, 2011. Photographer: Gerard Julien/AFP/Getty Images

U.S. Treasury Secretary Timothy F. Geithner predicted that Europe will adopt some of the same measures the U.S. took to battle the financial crisis that started in 2008.

“I think you’re going to see them draw on the lessons of our crisis, draw on the lessons of things that worked here in the United States,” Geithner said in a Bloomberg Television interview today in Washington. “I think you’ll see that reflected in some of the choices they make.”

In the aftermath of the September 2008 bankruptcy of Lehman Brothers Holdings Inc., the U.S. adopted the $700 billion Troubled Asset Relief Program and the Federal Reserve conducted stress tests of the 19 largest financial institutions to ensure their capital was adequate to withstand a more severe economic downturn. The Fed also set up the Term Asset-Backed Securities Loan Facility, or TALF, to keep consumer credit flowing.

Geithner visited Poland last week to meet with European officials, who rebuffed his suggestions for fixing their debt crisis. The Treasury secretary urged European leaders to set aside their differences to excise “catastrophic risks” from the markets.

“The Europeans are under a lot of pressure still,” Geithner said today. “They’re going through a really tremendously difficult job of trying to build a stronger union, stronger economic union with a very strong financial firewall to help those countries that are undertaking reforms.”

Europeans “have a lot of work to do,” Geithner said. “They recognize that more than anybody.”

Stocks Slide

Stocks in Europe slid today, halting a four-day rally for the Stoxx Europe 600 Index, as investors speculated that Greece may not receive an aid payment that would help it avoid default.

Greek Prime Minister George Papandreou’s government will hold another call with its main creditors tomorrow. Finance Minister Evangelos Venizelos held “substantive” discussions with officials from the European Union and International Monetary Fund about securing a sixth installment of rescue funds, the Athens-based finance ministry said in an e-mailed statement. A second call will be held tomorrow evening.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Julianna Goldman in Washington at jgoldman6@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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OPEC’s $1 Trillion Cash Quiets Poor on $100 Oil

By Ayesha Daya and Vivian Salama - Sep 20, 2011 3:01 AM GMT+0700

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Egyptian demonstrators rally in downtown Cairo's Tahrir square on July 29, 2011. Photographer: Khaled Desouki/AFP/Getty Images

Saudi Arabia will spend $43 billion on its poorer citizens and religious institutions. Kuwaitis are getting free food for a year. Civil servants in Algeria received a 34 percent pay rise. Desert cities in the United Arab Emirates may soon enjoy uninterrupted electricity.

Organization of Petroleum Exporting Countries members are poised to earn an unprecedented $1 trillion this year, according to the U.S. Energy Department, as the group’s benchmark oil measure exceeded $100 a barrel for the longest period ever. They are promising to plow record amounts into public and social programs after pro-democracy movements overthrew rulers in Tunisia, Egypt and Libya and spread to Yemen and Syria.

Unlike past booms, when Abu Dhabi bought English soccer club Manchester City and Qatar acquired a stake in luxury carmaker Porsche SE, Gulf nations pledged $150 billion in additional spending this year on their citizens. They will need to keep U.S. benchmark West Texas Intermediate crude oil at more than $80 a barrel to afford their promises, according to Bank of America Corp.

“A sharp increase in spending to accommodate social pressures has averted potential disquiet over governance in most countries, though in the longer-term economic reforms will be needed to buoy private-sector growth and job creation,” Jean- Michel Saliba, a London-based economist at Bank of America, said in an e-mail Sept. 8. “Without the social spending, Gulf protests would possibly move the nations toward constitutional monarchy.”

OPEC’s basket of crudes, a weighted average of the group’s main export grades, has been trading at above $100 since Feb. 21. The basket price was $110.69 a barrel on Sept. 16 while WTI on the New York Mercantile Exchange closed that day at $87.96.

Arab Spring

Tunisia’s ouster of President Zine El Abidine Ben Ali in January set up the so-called Arab Spring, as protests led to the end of Hosni Mubarak’s 30-year reign in Egypt and threatened the Assad family’s hold on Syria.

Libya’s rebel council met Sept. 19 to form a cabinet after seven months of fighting to end Muammar Qaddafi’s 42-year rule. Yemeni President Ali Abdullah Saleh is under pressure to step down after 33 years running the Arab world’s poorest country. Unemployment is at 11 percent in the Middle East and North Africa and as high as 22 percent in Algeria, according to the United Nations Development Program.

Across Yemen’s northern border, in Saudi Arabia, OPEC’s biggest member is funding housing, salary increases and the creation of 60,000 new jobs at the interior ministry, according to royal decrees announced on March 18. At least 1 billion riyals ($267 million) has been allocated to the Saudi Ministry of Islamic affairs and The Commission for the Promotion of Virtue and Prevention of Vice after clerics backed a ban on domestic protests.

Religious Funding

The religious establishment’s new funds include 500 million riyals to restore mosques and 300 million riyals to support Islamic call and guidance offices, according to the decrees. Money is being spent on installing devices in public squares, markets and schools to deliver audio and video broadcasts with “advice and moral lessons,” the Commission’s President Muhammad al-Eidy said in May.

“They probably feel like they’ve got to do a lot more spending this time and they are focusing on social spending, whereas previous investments were business or private-sector driven,” said Gabriel Sterne, associate director in London at Exotix, an investment bank, and a former economist at the International Monetary Fund and the Bank of England.

$1 Trillion Revenue

OPEC will need WTI at above $80 a barrel to maintain the increased social spending because the costs of Persian Gulf budget obligations have more than doubled since 2006 to $77, with Saudi Arabia needing an average $82, according to Deutsche Bank AG. OPEC’s basket price at more than $100 puts it on course to earn $1.01 trillion this year, the U.S. government said.

During the oil rally that peaked in 2008 before the onset of the global financial crisis, Abu Dhabi, holder of most of the U.A.E.’s crude reserves, pledged $22 billion to construct Masdar City, powered by renewable energy that would rest on concrete blocks under which electric driverless vehicles would transport residents. Qatar began building an academic hub, attracting American institutions such as Georgetown University in Washington and Texas A&M University in College Station, Texas, with funding from a government-run foundation.

Shoring Up Support

This time, rulers are shoring up domestic support. Demonstrations in Saudi Arabia, the Arab world’s biggest economy, failed to take off in March as citizens were offered extra money for housing. Government employees had their salaries increased 15 percent and got two months extra pay. Kuwaitis received 1,000 dinars ($3,664) and free food for 13 months, state news agency KUNA said in January. Earlier this month, Qatar’s crown prince Sheikh Tamim bin Hamad al-Thani ordered 30 billion riyals ($8.2 billion) in civil servant salary increases and pension-fund allowances.

“As soon as the government announced handouts, people went out and bought cars,” said John Stadwick, managing director of General Motors Co. (GM)’s Middle East operations. Sales in Saudi Arabia climbed as much as 48 percent a month since April, compared with a decline in February and March, he said.

Gulf nations are also aiding neighboring Sunni monarchies to prop up dynasties that have ruled parts of the Middle East for centuries. They pledged $20 billion for Oman and Bahrain to fend off protests and invited Morocco and Jordan to join the six-member Gulf Cooperation Council which will include economic assistance. In addition, newly democratic Egypt received $20 billion from Qatar and $4 billion from Saudi Arabia as the Gulf seeks to retain influence in the most populous Arab nation.

OPEC Spending Rises

Of OPEC’s 12 members, nine increased 2011 budgets and of the remaining three, only Nigeria amended its budget lower, while the U.A.E. doesn’t disclose its public spending. Nigeria, Africa’s biggest oil producer, set up a $1 billion wealth fund in May split into an infrastructure fund, a future generations fund and a stabilization fund. Algeria’s cabinet approved a 25 percent budget increase to pay for the salary raise and food subsidies amid protests that have ended 19 years of emergency rule and led to a review of the election law.

OPEC decided against raising oil supplies at its June meeting even as Libya’s conflict curbed exports. Output of about 30 million barrels a day lags behind the 31.3 million barrels the world needs from the region in the third quarter, according to the International Energy Agency. Half of Saudi Arabia’s 8 percent increase in June production to 9.7 million barrels a day was used in its own power plants as domestic demand reached a record, data from the Paris-based IEA showed.

Cut Production

“Saudi Arabia will cut back after its summer surge,” said Leo Drollas, London-based chief economist at the Centre for Global Energy Studies, the researcher founded by former Saudi Oil Minister Zaki Yamani. “If it doesn’t trim now then prices might lurch downwards on lower demand, and it needs a minimum basket price of $90 for what it wants to do this year.”

Oil in New York has dropped 25 percent since its April 29 high of $113.93 on concern demand will fall as Europe grapples with its debt crisis and unemployment in the U.S. hovers at 9 percent. WTI averaged $92.66 in the past year.

The OPEC basket will stay above $100 a barrel for the rest of this year, according to forecasts from five banks and consultants, including Barclays Plc and Sanford C. Bernstein & Co. Its previous record period above this level was from April 7 to Sept. 8, 2008. OPEC’s members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

Not all the spending initiatives work right away, even though citizens praise the changes.

Give More Power

Abu Dhabi plans to provide more services to poorer citizens by focusing on communities like Ras Al Khaimah after academics and journalists signed an online petition calling for the country’s Federal National Council, an advisory body with no executive authority, to be chosen by universal suffrage and given more power.

Less than a week after Mubarak’s ouster in Egypt, the city of 250,000 people got a visit from Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed Al Nahyan. Learning they lacked electricity, Sheikh Mohammed, who is next in line to the nation’s presidency, summoned a utility executive who arrived within two hours by helicopter. “Give them power now,” he ordered.

Sheikh Mohammed “sat with the people and listened to our needs,” said Yousuf al-Nuaimi, chairman of the Chamber of Commerce in Ras Al Khaimah, one of seven U.A.E. cities whose per capita income is 45 times less than Abu Dhabi. The Crown Prince promised electricity to the northern sheikhdom, home to one of five pro-democracy activists arrested this year, from a plant in nearby Fujairah and 1 billion dirhams ($270 million) for road and housing improvements, al-Nuaimi said.

Seven months after the visit, Ras Al Khaimah is still waiting for power but residents don’t blame the crown prince.

“Abu Dhabi is not the problem,” al-Nuaimi said. “The Federal Water and Electricity Authority is the problem. They need to do the connection but they are not. I hope the next step will be for Abu Dhabi to take over FEWA so that we can enjoy the power they promised us.”

To contact the reporters on this story: Ayesha Daya at adaya1@bloomberg.net; Vivian Salama in Abu Dhabi at vsalama@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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Samsung considers legal action over Apple's new iPhone: source

Tue Sep 20, 2011 12:27am EDT

(Reuters) - Samsung Electronics Co is considering legal action to ban sales of Apple's new iPhone, a source familiar with the matter said on Tuesday, in what could be its strongest step to defend against claims by the U.S. firm that the South Korean firm had copied its product designs.

The source declined to elaborate further on where Samsung planned to take legal actions and the Maeil Business Newspaper reported that the South Korean firm may seek injunction request on Apple's new iPhone in Europe.

Samsung said it would not comment on ongoing legal issues.

The two technology firms have been locked in intensifying legal battles in nine countries over their flagship smartphone and tablet products.

The move comes after Apple successfully blocked Samsung from selling its latest tablets in Germany and some smartphone models in the Netherlands and forced its rival to indefinite delay launching new tablets in Australia.

After Apple's latest legal victory in Germany earlier this month, Samsung said it would take all available legal options.

Apple has not produced a new version of its best-selling iPhone for more than a year. The product is crucial for the world's No.1 smartphone maker to keep its strong sales momentum as Samsung is quickly closing on the gap with its Galaxy line of products.

Apple sold 20.3 million iPhones in the second quarter and Samsung shipped just one million units less than that.

Media reports have said Apple's product will go one sale in October.

Apple first sued Samsung in April, claiming its strongest competitor had "slavishly" copied its product designs, and Samsung had since counter-sued, arguing Apple infringed on its mobile technologies.

Samsung is also a major supplier of chips and displays for Apple's smartphones and tablet products.

(Reporting by Miyoung Kim; Editing by David Chance)

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Obama offers $3 trillion debt plan, tax hikes on rich

US President Barack Obama gestures as he talks about cutting the U.S. deficit by raising taxes, from the Rose Garden of the White House in Washington, September 19, 2011. [Photo/Agencies]

WASHINGTON - U.S. President Barack Obama laid out a $3.6 trillion plan on Monday to cut U.S. budget deficits partly by raising taxes on the rich, but Republicans rejected it as a political stunt and made clear the proposal has little chance of becoming law.

Highlights of Obama's plan: TAX INCREASES The plan would raise nearly $1.6 trillion from changes to the U.S. tax code. Of that, $866 billion in savings would come from allowing President George W. Bush's tax cuts for individuals making more than $200,000 to expire. An additional $710 billion would come from ridding the tax code of special breaks. Obama has proposed limiting deductions for higher-income households and eliminating breaks for oil and gas companies and firms that purchase corporate jets. The plan would also boost taxes on certain income earned by fund managers often called "carried interest." Hedge fund managers and some others pay a lower capital gains tax rate for managing clients' investments. In a populist step designed to appeal to voters, Obama would require millionaires to pay higher taxes. He has called that idea the "Buffett Rule" because it is based on a suggestion put forth by billionaire Warren Buffett, an ally of the president. Buffett has written that rich people like himself often pay less in tax than those who work for them because of tax-code loopholes and the low rates he pays on his investment income. DOMESTIC SPENDING PROGRAMS Obama's plan includes $580 billion in cuts to domestic spending programs. Of that, $248 billion will come from savings in the Medicare health program for older Americans with most of the cuts targeting payments mainly to insurance companies and hospitals. Obama would seek savings of $72 billion in the Medicaid health program for the poor. Administration officials said Obama will pledge to veto any plan that would cut benefits for Medicare recipients unless the wealthy and big corporations are required to pay their "fair share" of taxes. In a decision that is likely to please many Democrats, Obama is not proposing raising the age at which Americans become eligible for Medicare benefits, currently set at 65. He also is not proposing any changes to Social Security. The plan includes $250 billion in savings from other mandatory programs, including $33 billion in savings from agriculture subsidies, payments, and programs. It also includes $42.5 billion in reforms to federal employee benefit programs. HIGHER MORTGAGE FEES The plan proposes a 10 basis point increase in "guarantee fees" that Fannie Mae and Freddie Mac charge to mortgage customers, to produce projected savings of $28 billion over 10 years. The White House has backed increasing guarantee fees as part of a way to lessen the government's footprint in the U.S. housing finance system. WINDING DOWN WARS The plan assumes $1.1 trillion in savings from winding down the war in Iraq and moving ahead with planned troop reductions from Afghanistan. Critics have labeled this element of the plan a gimmick because it does not represent new policy but instead reflects drawdowns of U.S. forces that have already been announced. POSTAL SERVICE RESTRUCTURING Obama's plan includes a reform of the postal system, which has been facing a funding crisis. "These reforms would provide U.S. Postal Service with over $20 billion in cash relief over the next several years and in total would reduce the federal deficit by $19 billion over 10 years," according to the plan. SAVINGS ON INTEREST PAYMENTS The plan assumes $430 billion in savings on interest payments because of the cuts elsewhere in the budget.

Vowing to veto any plan that relies solely on spending cuts to reduce deficits, the Democratic president's recommendations set the stage for an ideological fight with Republicans opposed to tax increases that will stretch through Election Day 2012.

"I will not support any plan that puts all the burden of closing our deficit on ordinary Americans," Obama said. "We are not going to have a one-sided deal that hurts the folks who are most vulnerable."

Obama's speech reflected a more aggressive defense of Democratic principles after he took a battering in two previous budget battles with Republicans this year that helped drive his approval rating to new lows.

Most Americans say they are unhappy with Obama's economic leadership, and the president's re-election hopes could hinge on his ability to convince voters that Republicans represent the rich, not the middle class.

On Monday, he repeatedly said all Americans must pay their "fair share" of taxes, and he sharpened the difference between his vision for America and that of Republicans in a speech meant to regain support among core supporters who have said Obama has failed to stick to liberal principles.

Republicans have consistently opposed any measures resembling tax hikes, saying they will hurt the struggling economy by increasing the burden on job-creating businesses. Republican leaders stuck to that position on Monday, quickly rejecting Obama's plan.

"Veto threats, a massive tax hike, phantom savings, and punting on entitlement reform is not a recipe for economic or job growth," said Republican Senate leader Mitch McConnell.

John Boehner, speaker of the House of Representatives and the top Republican in Congress, said Obama failed to offer a "serious" recommendation to the special bipartisan congressional committee tasked with finding at least $1.2 trillion in savings.

"Pitting one group of Americans against another is not leadership," Boehner said.

Politics, but a plan?

Analysts were skeptical Obama's plan would help America's standing with credit rating agencies such as Standard & Poor's, which last month downgraded U.S. government debt and expressed concern that Washington was too divided to tackle its mountain of debt.

Obama's plan, which will be sent to the "super committee" of six Republicans and six Democrats considering deficit reduction, proposes $3 trillion in savings over 10 years.

These include cuts to Medicare spending aimed mainly at healthcare providers, particularly big drug companies, and some hospital stocks fell sharply on Wall Street on Monday.

But roughly half of overall savings come from higher tax revenues, under the president's proposal.

That would include allowing tax breaks for upper income Americans to expire at the end of 2012, capping popular deductions for things like mortgage interest and charitable donations, and closing corporate tax loopholes.

"This is purely politics, aimed at Obama's demoralized base. It undoubtedly has been poll-tested, so now Obama has a populist campaign issue. There's obviously no chance this could pass" on a vote in Congress, said Greg Valliere, chief political strategist at consultancy Potomac Research Group.

Rudolph Penner, a former director of the Congressional Budget Office, said rating agencies would not be impressed by Obama's failure to recommend deeper healthcare cuts.

"If I were S&P I would not change my rating on the basis of this proposal," he said.

"Buffett rule"

Obama's call to overhaul the U.S. tax code included a "Buffett Rule," named after billionaire investor Warren Buffett, that would set a minimum tax rate for people earning more than $1 million a year.

The tax would only apply to a tiny minority of the millions of Americans who file tax returns, but White House aides said it would set a standard of fairness.

Senior Senate Democrat Charles Schumer said Congress should run with the "Buffett Rule" and urged lawmakers put it into legislation that could be voted upon.

While critics derided Obama's plan as purely political, some analysts saw a sober bid to tackle big fiscal problems.

"Obama's new plan is both a serious legislative proposal and an effort to stake out his ground for his re-election campaign," said Sarah Binder, a senior fellow at The Brookings Institution, although she said Republicans' resistance to tax hikes would likely thwart a compromise.

The super committee must propose a deficit plan by Nov. 23. Congress must then vote on the panel's proposal by Dec. 23 or automatic spending cuts will be triggered across government agencies, beginning in 2013.

Palatable to be left

Obama said his plan, together with savings agreed under an August debt ceiling deal, will cut $4 trillion from the deficit over 10 years, helping deflect Republican claims he is a "tax and spend liberal" that have hurt him with independent voters.

Obama's suggestions do not raise the eligibility age for Medicare recipients, something he proposed during debt ceiling negotiations with Boehner over the summer.

Instead, he is proposing something more palatable to the left wing of his party -- $248 billion in savings from Medicare, the government health program for the elderly. The bulk of that would come from reducing overpayments to health care providers.

Medicare and Medicaid are viewed by analysts as the biggest contributors to long-term U.S. deficits, a driving issue in the election. The U.S. budget deficit in 2011 is expected to be about $1.3 trillion.

taken from : chinadaily
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LNG Price Boom Seen as Japan Vies With China While Exxon’s Shipments Grow

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A liquefied natural gas (LNG) tanker is moored in Sodegaura City, Chiba Prefecture, Japan. Liquefied gas costs surged about 33 percent after Japan’s March 11 earthquake and tsunami and have since climbed toward $16 per million Btu. Photographer: Tomohiro Ohsumi/Bloomberg

Liquefied natural gas prices are surging to a three-year high as demand from Japan, China and India outpaces supply increases, boosting sales for producers from BG Group Plc (BG/) to Exxon Mobil Corp. (XOM)

Record Japanese imports to replace nuclear power after the Fukushima Dai-Ichi disaster, plus a 27-percent jump in China’s first-half purchases, may send prices to about $20 per million British thermal units this winter, up 71 percent from 2010 and the highest since 2008, according to data compiled by Bloomberg. The world’s spare production capacity shrank about 50 percent this year as consumption grew, and will continue to decline through 2014, Sanford C. Bernstein & Co. says.

Rising LNG prices are encouraging Exxon and BG, which got 27 percent of its operating profit from the fuel in the first half, to develop and transport more. That may spur North American exports by 2016 and help the world’s fastest-growing economies contain inflation from rising oil and coal costs.

“LNG demand will go up, there’s no other alternative,” said P.K. Jain, the New Delhi-based director of finance at GAIL India Ltd. (GAIL), the nation’s biggest gas distributor and a co-owner of Petronet LNG Ltd., the largest buyer. “Demand will rise in Asia as Japan increases LNG use after Fukushima and even in Europe, with countries moving away from nuclear, long-term demand for LNG may rise.”

More Optimistic

Demand for gas cooled to liquid and transported by ships may be making U.S. forecasters more optimistic about natural gas. Bulls outnumber bears by about six to one, a reversal from the one-to-two ratio a month ago, according to Bloomberg data. While gas futures on the New York Mercantile Exchange have slumped 14 percent this year to $3.801 per million British thermal units, LNG, which is not exchange-traded, has gained.

Liquefied gas costs surged about 33 percent after Japan’s March 11 earthquake and tsunami caused reactor meltdowns at Tokyo Electric Power Co.’s Fukushima plant, and have since climbed toward $16 per million Btu, according to Mark Greenwood, an analyst at Citigroup Inc. in Sydney. They may rise to $20 this winter, according to the median forecast in a Bloomberg News survey of eight analysts.

The country bought spot shipments at $15 per million Btu in July, according to Ministry of Finance data. Spot deliveries, typically from utilities facing emergency and weather-related needs, reached a 33-month high in June and July. The 10 regional power suppliers bought and consumed record amounts for a second month in August amid all-time low utilization rates at nuclear plants, the Federation of Electric Power Companies said.

Price Forecasts

“We see prices going to $20,” said Peter Buchanan, an economist at CIBC World Markets Inc. in Toronto. His forecasts for natural gas at Henry Hub in Erath, Louisiana, the benchmark for futures traded on the Nymex, were the second-most accurate after Bank of America Corp. for the eight quarters ended June 30, according to data compiled by Bloomberg.

Sixty percent of the 19 analyst forecasts compiled by Bloomberg on Sept. 9 were bullish on U.S. gas, while 13 percent were negative. That compares with 29 percent that were optimistic and 57 percent bearish a month earlier.

Global LNG demand grew 9 percent in the first half and 13 percent over the past 12 months, Bernstein Research said in an Aug. 29 report. Spare production capacity is likely to shrink to 26 million metric tons a year in 2011 and to 2 million by 2014, stoking prices and benefiting BG, Royal Dutch Shell Plc (RDSA), Total SA (FP) and PetroChina Co., according to the report.

‘Insufficient Supply’

“Given the underlying strength in demand from emerging markets and Japan, there is insufficient supply coming onto the market over the next three years which will lead to tighter spare capacity and higher prices,” Neil Beveridge, the Hong Kong-based senior analyst at Bernstein, said in an e-mail. “Asian customers will increasingly be competing with European customers, which will lead to higher gas prices outside of North America.”

Atomic power provided about 30 percent of the electricity in Japan, the world’s third-biggest economy, before March 11. About 76 percent of Japan’s 54 reactors are offline, with more scheduled to shut for maintenance. Demand is unlikely to ease anytime soon as Prime Minister Yoshihiko Noda, who replaced Naoto Kan as premier on Sept. 2, struggles to win public support for restarting reactors.

The Japanese government and Tokyo Electric Power Co. are expected to say tomorrow they plan to finish cooling reactor pressure vessels at the crippled Fukushima Dai-Ichi nuclear power plant by the end of this year, Tokyo Broadcasting System reported on its website.

German Decision

“The Japanese tsunami certainly did increase the demand quite dramatically for LNG imports into the region, which effectively tightened the global LNG market more quickly than most people had anticipated,” said Allison Nathan, a senior commodities economist at Goldman Sachs Group Inc. in New York. “We now see the global market as tight.”

Supplies have become scarcer partly because Germany decided on March 15 to close eight of its 17 atomic stations following Fukushima. Qatar, the world’s biggest LNG producer, said Sept. 5 it will shut three of seven production lines for maintenance through October.

Japan’s senior vice minister of trade and industry, Seishu Makino, asked U.S. Energy Secretary Steven Chu at a meeting in San Francisco last week to increase exports.

Cheniere Energy, the Houston-based Blackstone Group LP- backed owner of the Sabine Pass terminal in Louisiana, got approval to ship fuel to Japan in May. The Freeport terminal in Freeport, Texas, and the Lake Charles facility in Lake Charles, Louisiana, are also seeking clearance for exports, according to Akinobu Yoshikawa, deputy manager for Japan’s Petroleum and Natural Gas Division.

“The impact for our imports will be big,” Yoshikawa told reporters in Tokyo Sept. 14.

North American Exports

Before the tsunami, Japan used about 70 million tons of LNG a year. The demand will rise as much as 15 million tons, or 21 percent, in the 2011 fiscal year and as much as 20 million tons in 2012, the Institute of Energy Economics said in August.

North America may export about 5 billion cubic feet a day of LNG, or roughly the combined LNG export capacity of Nigeria and Algeria, globally by 2017 from projects that turn surplus gas from shale-rock formations to LNG for shipment to customers in Asia and Europe, according to the Eurasia Group, a New York- based consultant. That’s about half of the six proposed developments by companies including Cheniere in the U.S. Gulf Coast and British Columbia.

The U.S. may produce more than 12 trillion cubic feet of shale gas a year by 2020 in a “high-case scenario,” about a three-fold jump from last year’s level, as it boosts output by hydraulic fracturing, or fracking, of gas trapped in shale deposits, Gaffney, Cline & Associates, a unit of Baker Hughes Inc., the world’s third-largest oilfield-services provider, said in a presentation in Singapore on Sept. 12.

2020 Surplus

“In the high-case scenario, U.S. shale gas could provide an exportable surplus by 2020,” Stuart Traver, a consultant for the company in Singapore, said in the presentation. Shale gas accounted for approximately 20 percent of total U.S. production in 2010.

In fracking, producers force chemically treated water into underground shale wells to break up rock and let gas flow. About 84 trillion cubic feet of undiscovered, technically recoverable gas lie in the Marcellus Shale under New York and seven other states, the U.S. Geological Survey said Aug. 23. The U.S. Environmental Protection Agency is studying the effects of fracking because opponents say it’s a threat to drinking water.

Qatar and producers such as Australia, Malaysia and Indonesia are competing to satisfy demand for LNG from China and India, the world’s fastest-growing major economies. China’s imports rose 27 percent to 5.2 million tons in the first half of 2011 from a year earlier and reached a record in July, according to customs data.

PetroChina Terminal

PetroChina started trial operations at its 3.5 million ton- a-year Jiangsu LNG terminal in May and is buying two spot cargoes a month. It may boost purchases in coming months, Liu Wenfei, a director at the terminal, said Sept. 16. China National Offshore Oil Corp., operator of three terminals, may increase imports by 16 percent via its Guangdong facility this year, a company official said the same day.

India’s LNG imports increased 26 percent in the first half, according to Bernstein estimates. The country’s gas use may double to as much as 400 million cubic meters a day by 2016, while domestic supply may be about 200 million cubic meters, A.K. Balyan, managing director of New Delhi-based Petronet LNG, said last month. The company is planning a 50 percent expansion of capacity to convert LNG back into gas and has held talks with Cheniere on supply contracts, Balyan said in June.

While their LNG needs increase, the economies of Asia are struggling to damp rising prices, including the costs of coal and oil. China has raised interest rates five times since October to contain inflation, which has been above the government’s 2011 target of 4 percent every month this year. Indian inflation has held above 9 percent throughout 2011 even after six rate increases.

Higher Costs

Newcastle coal from Australia, an Asian pricing benchmark, surged 29 percent since Sept. 24, 2010, to $122.90 a ton. Brent crude oil futures rose 41 percent in the past year to $111.54 a barrel.

The U.S. may export enough LNG within five years to push down global gas prices if the cost disparity between domestic supplies and those in Europe and Asia remains about the same, Gerard Mestrallet, the chairman and chief executive officer of Courbevoie, Paris-based GDF Suez, Europe’s largest LNG importer, said in a Sept. 9 interview in New York.

Asia’s purchases of term LNG, or contractual supplies, are typically priced off a basket of imported Japanese crude oil, known as the Japan Crude Cocktail. Spot LNG is usually linked to the U.K.’s National Balancing Point, with Asia paying a premium to divert cargoes away from Europe.

U.S. Prices

Natural gas in the U.S. trades at about $4 per million Btu, while Asia pays at least $14, Traver said in the presentation. North American LNG could be delivered at about $9 per million Btu, encouraging utilities in Asia to seek a new pricing regime linked to the U.S. benchmark, he said. Term supplies of LNG to Asia have been linked to oil prices since Japan first started buying the fuel more than four decades ago.

Australia may produce an additional 60 million tons of LNG from projects in western Australia and coal seam gas ventures in Queensland by 2016, according to Bernstein Research. That includes the Gorgon project, developed by Chevron Corp. (CVX), Exxon and Shell.

Short-term demand will be affected by temperatures in the coming Northern Hemisphere winter, when heating requirements increase.

“If Japan gets terribly cold weather, they’ll be out buying in the spot market, driving up prices,” said Zach Allen, president of Pan Eurasian Enterprises Inc., a Raleigh, North Carolina-based tracker of LNG shipments who predicts prices may rise 26 percent this winter. “Prices can always spike much higher than that over very short periods.”

To contact the reporter on this story: Dinakar Sethuraman in Singapore at dinakar@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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Hedge Fund Heavyweight Says Gold Bet Not Over

Gold, platinum and Brent oil will lead gains in commodities as investors seek to protect their assets and shortages emerge, according to Tony Hall, the hedge- fund manager who earned 33 percent for his clients this year.

Gold may climb 21 percent to a record $2,200 an ounce by the end of 2011, platinum may gain 10 percent and Brent could rise 25 percent to $140 a barrel in six months, said the London- based chief investment officer of Duet Commodities Fund Ltd., which manages more than $100 million of assets. Its eight-month gain compares with a mean return of 0.6 percent across commodity hedge funds tracked by HedgeFund.net and beat larger rivals such as Clive Capital LLP and Fortress Commodities Offshore Fund Ltd.

“The fear of recession, the fear of worse economic numbers is weighing on commodities and stopping gains from fundamentals from coming through,” said Hall, 31, who spars as a heavyweight boxer. “We still believe in the gold story. If you believe the world is in trouble or in further economic growth disruption, then gold is a good safe haven. If you believe that the world is going to come out okay, then it’s a good inflation hedge.”

At a time when the MSCI All-Country World Index of global equities declined 10 percent this year, the Standard & Poor’s GSCI measure of 24 commodities advanced 2.7 percent, led by silver, gold and energy.

Investors held about $431 billion in raw materials by July, an almost fivefold gain in six years, Barclays Capital says. As equity holders contend with losses of $8.5 trillion since May, speculators made their biggest wagers on higher commodity prices in almost three months in the week to Sept. 6 as they anticipated that even weaker economic growth will mean shortages.

Winning Run

Gold advanced 28 percent to $1,819.88 this year, heading for an 11th consecutive annual gain, the longest winning streak in at least nine decades. It’s the second-best performer in the S&P GSCI behind silver, which rose 31 percent. Gold is trading at 45 times the price of silver, down from a multiple of 84 in 2008. Silver, the precious metal most used in industry, rose more than threefold to $40.4338 since the end of that year.

The gold price of $2,200 predicted by Hall would be 15 percent more than the all-time high of $1,921.15 reached Sept. 6. It would still be below the then-record $850 reached in 1980, equal to $2,337 now in inflation-adjusted terms. Bullion had tumbled 5.7 percent from its all-time high by Sept. 16.

Central banks are expanding their gold reserves for the first time in a generation. Euro-area nations added 0.8 metric ton to their holdings this year, the first increase since 2001, International Monetary Fund data show. Central banks and government institutions worldwide bought 192.3 tons in the first half, according to the World Gold Council.

Arno Pilz

“I’d say gold will have a very good run higher, and a very good retracement would be justified,” Hall said. “If we see a retracement back to $1,700, I think at that point would be a good opportunity to get in.”

Gold and platinum-group metals, used mostly in jewelry and catalytic converters for cars, were the best performers for Duet in the past two months, said Hall, who has traded commodities for about a decade. The fund also profited from betting against silver in May and June, he said. Silver futures traded on the Comex exchange in New York fell from $49.845 an ounce on April 25 to as low as $32.30 on May 12.

That trading idea came from Arno Pilz, 42, who founded the fund with Hall in July 2010. The former head of metals trading at Lehman Brothers Holdings Inc. oversees the fund’s investments in precious and industrial metals while Hall runs the energy trades. They plan to add an agricultural specialist in second- half 2012 at the earliest and cap total assets at $1 billion.

Clive Capital

Pilz, who has traded metals since 1999, has a Master of Philosophy degree in management studies from Oxford University’s Templeton College. He makes his own cider and salami and is building a 1:2 scale Land Rover for his two daughters.

Hall and Pilz beat larger rivals including Clive Capital, which oversees $4.8 billion and fell 11 percent this year, and the $1.1 billion Fortress Commodities Offshore Fund, which returned about 1.8 percent, according to people with direct knowledge of the funds’ performance.

Duet’s best trade was on Brent crude in the second quarter, Hall said. The contract, traded on ICE Futures Europe in London, gained as much as 34 percent this year as fighting erupted in Libya, which has Africa’s largest oil reserves. The disruption to supplies of light crudes, which yield a higher proportion of more profitable products including gasoline, increased demand for similar grades such as Brent.

‘New Highs’

Brent costs about $24.59 a barrel more than the West Texas Intermediate grade traded on the New York Mercantile Exchange, a global benchmark, up from about parity in 2009. The premium dropped from $25.93 on Sept. 6 after a 600,000-barrel cargo of Libyan crude was offered for shipment, a sign exports may resume, said three people with direct knowledge of the transaction.

Brent slumped 12 percent to $111.81 a barrel since early April because of concern that slower economic growth will curb demand for energy. The Paris-based International Energy Agency cut global oil demand forecasts for this year by 200,000 barrels a day and 400,000 a day for 2012 on Sept. 13, and said stockpiles in developed nations fell to below the five-year average for the first time since the global recession in 2008.

“Eventually the crude fundamentals will come through and become the dominant factor,” said Hall, who holds an economics degree from University of Bath. “We are going to see new highs in Brent over the next six months.”

More than half Duet’s commodity book is expressed through options, with crude and precious metals positions concentrated in periods three to six months ahead, said Hall, who previously worked for Credit Suisse Group AG and Deutsche Bank AG.

Gasoil Cracks

Fuel was also the fund’s worst trade, on a view concerning price differentials of gasoil and other products.

“Energy relative value has been the most disappointing part of the portfolio this year, with our view that middle distillates would outperform other products,” he said.

The so-called cracks, reflecting the spread between the price of the refined product and crude, slumped 29 percent since peaking at $24.17 a barrel on March 16, according to data from PVM Oil Associates, a London-based brokerage. Gasoil is typically used as a heating fuel.

Speculators held 1.275 million net-long futures and options across 18 commodities tracked by the U.S. Commodity Futures Trading Commission in the week ended Sept. 6, the most since the week ended June 14, data compiled by Bloomberg show. They had raised that combined position for four consecutive weeks. They cut their bullish bets by 5.2 percent in the latest week.

Platinum Bull

Duet is also bullish on platinum, which gained 2.3 percent to $1,810.38 an ounce this year. The metal, mined mostly in South Africa, will trade as high as $2,000 to $2,200 this year, Hall said. Holdings in exchange-traded products backed by the commodity are at a near-record 44.3 tons, valued at about $2.6 billion, data compiled by Bloomberg show.

Platinum is trading at a ratio of 2.5 times the price of palladium, compared with a 10-year average of 3.5. The metals are mined together and both are used in autocatalysts.

Platinum supply will fall 21,000 ounces short of demand this year, widening to a deficit of 54,000 ounces in 2012, Barclays Capital estimates. Mining companies are going as deep as 1.4 miles underground to maintain output, pumping chilled air down mine shafts to cool seams as hot as 160 degrees Fahrenheit.

“Platinum looks like great value in the precious metals complex,” Hall said. “Platinum is a store of value, a precious metal and an industrial metal. If the economy picks up we’re going to see bigger demand in catalytic converters.”

To contact the reporter on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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