Dow closures reflect industry trend - JPMorgan

31 August 2006 17:32  [Source: ICIS news]

HOUSTON (ICIS news)--JPMorgan said Dow Chemical's decision on Thursday to close several chemical plants is part of a trend to shift commodity production to the Middle East and Asia.

Dow announced a series of plant closures  in Canada and Italy through 2008. Dow shares on the New York Stock Exchange were trading at $38.12, up 22 cents, as of 10:30 am Central Standard Time (1630 GMT).

“We believe these announcements are a further step in Dow’s long-term programme to concentrate its commodity chemicals production in its most efficient facilities,” JPMorgan said. “This is being achieved in the shorter-term by concentrating existing production at fewer, larger facilities.”

“Dow will increasingly focus commodity production at new and existing low-cost facilities in the Middle East and Asia,” JPMorgan said. “Accordingly, new capacity will in part displace existing production in North America and Europe.”

Dow estimated the plant closures will reduce structural costs by $160m (€124m)/year when fully implemented and would incur a charge of $550m-$650m in the third quarter to reflect severance and asset write-downs.

JPMorgan said it believes Dow’s plan to halt its profitable chlor-alkali production in Fort Saskatchewan, Alberta means the earnings per share (EPS) benefit from plant closures will be less than the $160m reduction in structural costs.

PVC producers Georgia Gulf and Westlake Chemicals could benefit from Dow’s moves due to reduced chlorine/vinyls chain industry capacity, while Nova Chemicals could be hurt as it is loses a customer for its Canadian ethylene.

JPMorgan rated Dow shares as "overweight," which means it expects the stock to outperform the average total return of the chemical stocks in the analysts’ coverage during the next 6-12 months.

By: Brian Ford
+1 713 525 2653

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