INSIGHT: Dow suffers from US slowdown

29 January 2008 16:25  [Source: ICIS news]

LONDON (ICIS news)--Dow Chemical had a tough fourth quarter and it doesn’t look as though it is going to get any easier for the US producer.

Operating profits were down sharply despite significant sales gains largely on the back of higher prices.

Somewhat surprisingly the basic chemicals and polymers segments, which produce chemicals as diverse as ethylene oxide and ethylene glycol and polystyrene, did better than the more specialised parts of the business, suggesting demand slowdown in the US hit hard. 

Overall, operating profits (earnings before interest and tax, or EBIT) were down 11.8% for the quarter (at $1,18bn) if operating segments' special charges and gains are taken into account.

Full-year underlying EBIT for the chemicals giant was down 8.3% at $5.31bn.

Dow says it had a good quarter. Sales were up 16% at $14.2bn, setting a new quarterly record, and demand was stronger outside North America. Volumes were up 4% and prices a strong 16% higher.

Dow gained an 11% increase in prices in North America but volumes were off 2%. The company is doing much better in other parts of the world.

Set against increased group-wide sales, however, were much higher feedstock and energy costs - up 31% on the same period of last year - and 11% higher selling, administrative and research and development (SARD) expenses.

Dow has bought some performance businesses recently so the extra SARD costs might be expected. The company says the increase also reflects “a disciplined investment strategy” to build and expand markets, products and offerings in several of its market-facing businesses.

The additional feedstock and energy costs amounted to $1.7bn in the quarter which is the greatest ever year-on-year increase. Its total energy and feedstocks bill last year was $24.6bn, three times that paid in 2002.

Dow is going to have problems offsetting those higher cost levels in the early part of 2008 particularly given the pressure being put on chemicals demand in a weakening global economic environment and continued weakness in the US.

Dow made a lot of money - $1.1bn - in 2007 from its key joint ventures most notably Dow Corning, Kuwait's Equate Petrochemical Co, MEGlobal and Optimal and equity earnings were up 21% in the fourth quarter at $294m.

But there were some weak spots in the performance of Equipolymers and Siam Polyethylene in the fourth quarter and the Optimal oxo products joint venture in Malaysia, which suffered an extended outage on its butyl acetate unit.

Its basics business also demonstrated that price and volume management works wonders in a tough cost environment. Underlying basic plastics segment profits were up 4.6% at $482m - although on sales up 18% at $3.49bn.

Basic chemicals profits, excluding restructuring charges, were $316m in the quarter against $213m last time boosted by strong increases from MEGlobal and Equate. Basic chemicals sales were up 24% at $1.63bn.

Dow struggled in its performance plastics businesses with demand lower in North America and Asia Pacific largely the driver. EBIT excluding segment-related restructuring charges was 21% down in the quarter at $342m on sales up 12% at $3.97bn.

Underlying performance chemicals profits were also down 30% at $207m on sales up 6% at $2.13bn.

Underlying EBIT was flat in the agriculture segment at $39m on sales up 6% at $864m.

Dow is in the midst of restructuring many of its business lines and putting in place its big joint venture with Kuwait’s Petrochemical Industries Co so the quarterly and full-year numbers are littered with restructuring charges which in the latest quarter totalled $590m.

The charges include asset write-downs and write-offs and some severance costs. The underlying business performance, however, shows just how difficult business has become in many chemicals lines over the past few months and the impact of the slowdown in the US housing and construction markets.

The major worry going into 2008 has to be the sharp slowdown of the US economy.

CEO Andrew Liveris acknowledges this but also points to the fact that Dow now makes two-thirds of its sales outside the US.

“Our global footprint will allow us to continue to capture growth in key regions of the world, such as Brazil, eastern Europe/Russia, India and China,” he said in a statement on Tuesday.

Continued focus on financial discipline and price volume management and performance of the JVs is expected to bring another solid year of earnings, he added.

Dow didn’t grow sales at all in North America in 2007. Volumes declined 2% and were offset by modest price increases. On a sales basis, Dow is doing best in Europe with Asia Pacific not far behind - based on geographical sales totals.

It is going to have to work its overseas businesses even harder to stave off the worst impacts of a possible US recession.

By: Nigel Davis
+44 20 8652 3214

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