European Business News (EBN), 97-05-01

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From: The European Business News Server at <http://www.ebn.co.uk/>

Page last updated Thu, May 01 7:12 PM CET

CONTENTS

[01] Shell posts flat first-quarter earnings and warns oil prices may remain weak

[02] US manufacturing growth slows down but stays strong

[03] US authorities agree budget balancing framework

[04] European Union, US reach accord on most meat inspection standards

[05] Rubin conveys U.S. conditions on financial services

[06] Time Warner to end interactive TV project

[07] European Union is hopeful that a Labour government in Britain would end the go-slow era

[08] Corporate and Economic Briefs

[01] Shell posts flat first-quarter earnings and warns oil prices may remain weak

Stock in Shell suffered a mild setback after the company announced first quarter results roughly in line with market expectations along with a fairly cautious statement on its prospects.

Merrill Lynch analyst Jon Wright noted that the group was ''even more cautious than it usually is.''

Shell painted a fairly depressing picture of the second quarter, when it expects crude prices to show further weakness and refining marging remain under pressure.

Wright said investors don't rely too heavily on Shell and the other multi- nationals as defensive plays on the stock market. ''Valuations are looking solid and therefore there is potential for correction. And the macro- environment is looking a bit tricky,'' he said.

But Wright prefers Shell over British Petroleum because BP doesn't have the same sort of leverage over oil prices.

Other analysts were more optimistic. Panmure Gordon's Liz Butler said oil prices were relatively strong given the glut of oil and mild weather.

The average price in the first quarter of this year was $21.20 a barrel, around $2.60 higher than a year ago. Thursday, Brent crude futures for June delivery were at $18.42.

''Under normal circumstances you would have the expected oil price to be down to $13 to $14,'' Butler said.

Although Shell's statement was fairly cautious, Butler said she was pleased the group's chemicals business is showing signs of improvement, even though the outlook in the second half remains uncertain.

She said the improvement in refining outside the US is also good news.

But the best tonic is the group's continuing cash generation, Butler said. The question remains what Shell is going to do with its cash. Butler said she expects the company to generate £750 million ($1.2 billion) of spare cash again this year.

Given that Shell has never made a major acquisition, she discounted the possibility that it may. A share buy-back is a possibility, though. Butler noted that Shell Canada started buying back shares yesterday.

Analysts' were surprised at the extent to which sterling's strength hurt results. Shell took a hit of about £21 million in the first quarter; Butler had pencilled in a figure of between £10 million to £12 million.

Butler remains a short-term holder of Shell, because she expects the poor sentiment generated by today's statement to hang about. But she urged in vestors to stay over-weight in the integrated oil and gas sector in the long-term.

Lower refining and marketing earnings were to blame for a 4.9% drop in Shell's first quarter ''clean'' replacement cost net income to £1.55 billion. Analysts were looking for the oil giant to post net income of around £1.36 billion.

Shell said although demand for oil remains strong, production increases from both OPEC (Organization for Petroleum Exporting Countries) and non- OPEC members are likely to exceed demand growth, allowing global inventories to rise.

[02] US manufacturing growth slows down but stays strong

[03] US authorities agree budget balancing framework

Clinton was reviewing the plan with his negotiators at the White House, deciding whether to embrace a few final details on tax cuts and domestic spending, said officials who spoke on condition of anonymity.

House Republican leaders briefed a group of conservatives late Wednesday, and several leadership sources Thursday said there was only muted protest. 'We can sell this to our members,' one source said. 'Now it is up to Clinton.'

One Democratic negotiator, Rep. John Spratt of North Carolina, said today that 'the big parameters are about to be settled, I think.'

Asked about that, Clinton said: 'Spratt is a smart man.' The White House conceded there were sure to be protests from liberals if Clinton embraced the package. But several administration sources said Clinton was determined to seal a deal during the day.

On Capitol Hill, Republican leaders said they plan to win over the party rank-and-file by calling the deal a budget balanced with honest numbers, permanent tax cuts, steps to improve solvency of Medicare - the federal health programme for the elderly - and a reduction in the 'size and scope of the federal government.'

Tom Daschle, leader of the Senate's Democratic minority, said 'there is increasing evidence there could be an agreement today.' But, he warned, 'I'm not going to sell it if I don't believe in it.'

House Democratic leader Richard Gephardt, though, was decidedly unhappy.

'It's unfortunate that this has not been a budget summit arrangement that has included House Democrats,' he told reporters. 'It does not give me great optimism or confidence that you'll get enough Democrats' to pass any legislation.

Republicans hold a majority in the House, but the budget deal-makers will need a significant slice of the Democratic caucus to assure passage of any budget legislation.

[04] European Union, US reach accord on most meat inspection standards

The agreement, which takes effect Oct. 1, will expand U.S. pork, beef, dairy and egg product and pet food exports to the E.U., Drazek said.

However, negotiators were unable to resolve their differences over the way U.S. poultry plants treat contaminated poultry meat.

As a result, the U.S. will still be blocked from shipping about $50 million a year in poultry to the E.U. In retaliation, the U.S. will immediately ban E.U. poultry exports to the U.S., which are small by comparison, totalling about $1 million a year, Drazek said.

''It's unfortunate that we still have some unresolved issues related to poultry processing standards,'' U.S. Agriculture Secretary Dan Glickman said in a statement. ''The fact that we are losing trade in poultry is completely unacceptable.'

The E.U. continues to refuse to recognise the use by U.S. poultry plants of chlorinated water to decontaminate chicken carcasses, which the USDA claims is safe. In E.U. plants, contaminated poultry meat must be cut away with a knife.

As a compromise, the E.U. has said it would accept the use by U.S. poultry plants of two other liquids - lactic acid and trisodium phosphate - as substitutes for chlorinated water for six months. It has also proposed that a scientific panel assess the best ways to decontaminate meat.

The USDA's Drazek said both sides will work in the future to resolve their differences over the poultry issue.

[05] Rubin conveys U.S. conditions on financial services

According to a copy of the letter obtained Wednesday by Kyodo News, Rubin offered to be flexible, but urged other nations for such commitments as allowing 'full majority ownerships' by foreign companies and giving them 'national treatment on a non-discriminatory basis.'

U.S. Trade Representative Charlene Barshefsky intends to press for progress on the negotiations on financial services at a three-day quadrilateral meeting with her Canadian, European Union (EU) and Japanese counterparts that started Wednesday in Toronto, U.S. officials said.

Last year, Washington refused to join an interim deal reached on financial services, complaining about a lack of commitments by some European and Asian nations.

But the negotiations resumed on April 10 under an agreement reached last December at the first WTO ministerial meeting in Singapore.

'For the U.S., a successful agreement must incorporate certain fundamental principles,' Rubin said in the letter.

'To be an effective participant, foreign firms must be able to establish and operate in the form of their choice, including branches,' he said.

'Full majority ownership is crucial to firms' effective management. Fundamentally, the existing rights of foreign financial services providers must be assured,' Rubin said. 'Of course, the principle of national treatment on a non-discriminatory basis underpins the entire agreement.'

[06] Time Warner to end interactive TV project

The so-called Full Service Network was initially the centrepiece of Time Warner's ambitious plans to dominate the information superhighway, but the high-tech cable system proved far too costly to introduce nation-wide.

In addition, development efforts in the interactive world now are almost exclusively focused on the Internet, not dedicated cable systems. Other cable companies and phone companies have also largely dropped such plans.

In Orlando, Time Warner equipped each customer with a cable box that was 10 times more powerful than a 486 personal computer. Analysts estimate that each set-top box cost thousands of dollars and that Time Warner spent tens of millions of dollars on the system, which was activated to much fanfare in December 1994.

Almost from the outset, Time Warner has been back-pedalling on its projections for Orlando, and lately it has positioned the network as a test and a valuable source of market research.

'It was a cash drain,' said John Aronsohn, a senior analyst at the Yankee Group. 'I'm sure they regret drawing so much attention to it.' He added, 'Unfortunately, the Full Service Network will go down in history as a very expensive technological whiz-bang trial that never really did much, other than provide Time Warner with some marketing data.'

Time Warner declined to say how much it had invested in the network.

At year end, Time Warner said it will pick up the test boxes and replace them with standard cable boxes.

Time Warner Chairman Gerald Levin acknowledged in a speech early this month that the company's focus on the 'medium' of the Full Service Network was 'off the mark.'

But Levin noted that the explosion of interest in the Internet validates the company's focus on developing a major interactive presence. 'He who makes a living from crystal ball must learn to eat ground glass,' Levin joked.

[07] European Union is hopeful that a Labour government in Britain would end the go-slow era

However, no one is making any assumptions about life in Brussels after May 1. ''We're under no illusions whatsoever about Labour's program,'' said a senior E.U. Commission official speaking on condition of anonymity. ''There are too many variables in Blair's Europe equation.''

The official was referring to Labour Party leader Tony Blair, who is widely favoured in public opinion polls to become the next prime minister of the U.K. on May 2.

''A lot depends on how big the Labour majority would be, and the level of noise made by the Euroskeptics in the Labour camp,'' he said. ''Blair seems to be more flexible on European issues, but how fast will that happen? I don't know.''

The political focus in Brussels these days is the so-called intergovernmental conference, a negotiation on political reforms launched in March 1996 to prepare the bloc for the entry of as many as 10 to 15 new members in the next decade. Despite scant progress up to now, E.U. leaders hope to wrap up the IGC at a summit in Amsterdam June 16-17.

British Prime Minister John Major has been pushed by his Conservative Party's own euroskeptics into a virtual non-cooperation stance on the talks. His approach has stymied efforts by the other 14 member states to mark meaningful reforms on majority voting, the role of the European Parliament, and other key political matters.

In the event of a Labour victory, E.U. forces hope to quickly get Blair behind at least a few essential IGC measures, then blaze to Amsterdam with a good chance for conclusion. The Dutch, who currently hold the rotating E.U. presidency, are organising an extra summit May 23 in Maastricht to welcome Blair and speed the IGC train.

For E.U. officials, the main variable is whether or not Blair will be willing or able to take quick steps on European issues directly after the election, or whether he will choose to tread lightly until the usual post- election media and public focus on the incoming government dies down.

Some in Brussels contend that it's in Blair's interest to get IGC issues out of the way as soon as possible, before the Labour's euroskeptics gear up for battle. Said a diplomat from a northern European country: ''If he lets things linger, it can only lead to trouble for him. It means the Europe debate can mushroom.''

Still, even if Blair comes to Maastricht and then Amsterdam willing to make a deal, the jury is out on just what he's willing to offer. As E.U. officials see it, Blair's main challenge is to come out of the summit looking every bit as much a British patriot as Major would have been.

Last week in a U.K. newspaper article, Blair wrote that under a Labour government ''national identities will be protected and not submerged.''

A problem for Major has been the concept of majority voting on E.U. decisions. While Blair hasn't embraced the concept wholeheartedly, there are areas in which he has indicated willingness to compromise, and that seems good enough for E.U. negotiators.

By Peter Goldstein

[08] Corporate and Economic Briefs

Turkey's February trade deficit was $1.241 billion up 20.6% from $1.029 billion in February last year, the government's state institute of statistics said. For the first two months of 1997, the trade deficit was $2.597 billion, up 12.6% from the same period of 1996, when the deficit was $2.307 billion, the institute said. The country's imports were worth $2.988 billion and exports worth $1.746 billion, it said, while January-February combined imports were $6.314 billion, up 8.7% from those two months of 1996, and exports $3.717 billion, up 6.1%

The German Finance Ministry said last night that it had sold the state property company Deutschbau to Veba Immobilien and Deutsche Immobilien Anlagegesellschaft for more than DM 2 billion ($1.2 billion). Veba Immobilien, the property arm of German utility Veba, was last month awarded the tender to privatise Deustchbau, which was then 58% state owned and 42% owned by the German post office. Deutschbau had been split 50/50 between Veba Immobilien and Deutsche Immobilien Anlagegesellschaft, a unit of Deutsche Bank.

L-3 said it is a newly created, independent company 50% owned by Lehman Brothers Capital Partners, 35% owned by Lockheed Martin and 15% owned by L-3's management team led by Frank C. Lanza and Robert V. LaPenta. Frank C. Lanza, chairman and chief executive of L-3 Communications, was president and chief operating officer of Loral Corp., which merged with Lockheed Martin in 1996.

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