Dow's 2010 profits to be hit by deluge of new C2 capacity - Citi

15 April 2010 09:48  [Source: ICIS news]

SINGAPORE (ICIS news)--Dow Chemical's earnings may be hit in 2010 as an expected increase in global ethylene (C2) capacity could affect its leading position in the ethylene market, US research firm Citigroup said in a report released on Thursday.

Citigroup forecasts Dow to post an earnings per share (EPS) of $1.76 (€1.28) this year and an EPS of $2.60 for 2011. The US chemicals producer made $336m in net profit last year, which translates to an EPS of $0.32.

“We believe that there will be possible capacity overhang as supply growth would exceed demand growth and adversely impact (Dow’s) earnings going forward,” Citigroup said i its report.

About 8-10% of global ethylene capacity was expected to come online in 2010, it added.

Between December 2009 and March of this year, a total of 6.7m tonnes/year of additional ethylene capacity came on stream from new crackers in Thailand, Singapore, China and the Middle East.

Global ethylene capacity, excluding Russia and the Commonwealth of Independent States (CIS), was pegged at 138,490 tonnes/year as of end March 2010, based on ICIS data.

“A Dow joint venture with a Middle Eastern company would mitigate some of this risk, as the company would have access to lower cost feedstock,” Citigroup said.

Dow Chemical would also benefit from its acquisition of specialty materials maker Rohm and Haas, despite the huge debt it incurred for the deal, it added.

“We expect that Dow will utilize most of its free cash flow to repay debt related to the acquisition of Rohm and Haas,” Citigroup said.

The acquisition had favourably shifted Dow's portfolio toward higher margin specialty businesses, which now accounted for around 70% of the company’s net earnings in a normal year, the firm added.

“Dow’s synergy and cost-cutting initiatives related to the Rohm and Haas acquisition total an impressive $2.5bn (€1.83bn),” it added.

($1 = €0.73)

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By: Nurluqman Suratman

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