INSIGHT: Dow deal exposes commodity ambitions

11 July 2008 16:48  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Dow’s acquisition of Rohm and Haas goes a long way to fulfil the long-held ambition of CEO Andrew Liveris and his team to align the company much more closely with market value and growth.

The $18.8bn deal ticks the right boxes for the largest chemical company in the US, even though it has come at a not insignificant price.

It brings opportunities for stronger growth, enhanced earnings and product and raw material synergies.

With a new Rohm and Haas Advanced Materials division, Dow will be able to tap into businesses that collectively are projected to grow at something like 8% a year. It will be in a better position than either the old Dow or Rohm and Haas to grow profitably.

In the short term that will be beneficial. The chemicals sector is heading for a downturn which Dow puts between 2010 and 2011. Companies will need all their firepower to retain prices and volumes as markets weaken. Dow is already fighting that battle in the upstream petrochemicals and polymers area.

Over the longer term this is indeed a transforming move for Dow. Coupled with the merger of some of its upstream olefins and commodity polyolefins capability with Kuwait’s Petrochemical Industries Company (PIC) it shifts the portfolio signficantly.

When the two deals are complete (the PIC joint venture possibly within the next few weeks and the Rohm and Haas deal early next year) 69% of Dow’s sales will be in specialties, from 51% today.

Rohm and Haas gives Dow particular opportunities in electronic materials; coatings; packaging products such as adhesives; and advanced polymers, acrylate and ion exchange resins. The new Dow will be spending something like $1.7bn on research and technology.

But the questions that need to be asked now are just where is Dow going and can it get there fast enough?

Dow has to pay for the “jewel” that is Rohm and Haas just as it is running into a commodities-led downturn. And, remember, Dow is still very much a commodities player.

Closing the PIC merger is essential to the strategy which places $19bn of the most exposed olefins and polyolefins assets at arms length. That deal was struck at the top of the cycle and the valuation of the assets involved will have plummeted with the downturn. In December 2007 Dow expected to receive $9.5bn from the merger.

But deals such as these are struck with the long term, and their strategic importance, in mind.

If that is the case then does the rationale for the huge Ras Tanura project with Saudi Aramco still hold? A similar question could be asked of Dow’s involvement in the significant coal-to chemicals venture in China with the world’s largest coal producer Shenhua. (It will take a year to complete the feasibility study for that venture.)

Dow’s ambitions at Ras Lanuf with Libya’s National Oil Company could also be called into question.

Dow seems to want to continue its push into low-cost commodities while pursing specialties – or what it likes to call market-facing businesses - with vigour. Whether it can do both successfully remains to be seen.

Question marks must hang over the big proposed commodities ventures, particularly, given the fact that they will put such a great drain on financial resources.

Dow probably can pursue one strategy but perhaps not both. Can it realistically seek to satisfy its ambitions upstream as well as down, particularly at a time of such sector-wide uncertainty?

In some respects, Dow is following a well-trodden path: move out of commodity cracker products and commodity plastics; acknowledge the feedstock-driven competitive advantage of others.

At the same time, Dow recognises what CEO Andrew Liveris on Thursday called the “mega trends” impacting chemicals. Dow’s management is shifting the portfolio towards higher added value businesses that are serving growing customer and wider societal needs.

But others have been here before, and not always successfully. They have also moved much earlier to rid themselves of low cost commodities while pursing ambitions in specialties and materials in some form or other.

Dow has been hampered by history. In the early years of this decade it was intent on acquiring the commodity polyolefins major, Union Carbide. It has struggled since to integrate that acquisition and make it work.

The deal with Kuwait’s PIC, removes the burden of the earlier buy. That with Rohm and Haas, to paraphrase the company’s words, crystallizes Dow’s transformation.

The worrying feeling is that the transformation in being made too late.

To discuss issues facing the chemicals industry visit ICIS connect

By: Nigel Davis
+44 20 8652 3214

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