INSIGHT: Dow looks at new ways to complete its transformation

08 November 2010 19:28  [Source: ICIS news]

By Nigel Davis

PHILADELPHIA (ICIS)--For most of this year Dow Chemical has been surprisingly upbeat on ethylene.

While others have talked of the impending wave of new capacity, Dow has pointed to the potential for ethylene chain demand growth. In its positive scenario, this has been greater than 5% a year.

Given slower-than-expected incremental production growth and the upside from the inventory correction that has helped drive the upturn, the immediate future has not looked too bad.

The Midland, Michigan–based industry giant has been proved right in 2010. Volume growth globally this year has been much healthier than almost anyone expected - it has persisted through the third quarter and, to some extent, into the fourth.

There is some slowdown now, certainly. And the question is whether this is a seasonal hiatus or something more fundamental. But it is difficult not to be at least a little bullish given the way in which demand for the most fundamental building block chemicals has recovered from the slump.

For Dow, alongside all other players in the North American ethylene business, there is something more fundamental at work.

The development of shale gas deposits across the continent change the forecast price dynamics of the business. No longer in the doldrums, there is talk of additional ethylene capacity in the US, possibly in Canada.

If not that, competitively priced ethane will prompt players to at least squeeze more from their crackers, possibly to help service fast growing demand in the world’s developing economies.

Move a couple of steps down from ethylene and the outlook remains bright, at least from a North America point of view. And it is not as depressed, long or short term, as it was only a few quarters ago.

"We believe industry pundit forecasts for 2011 are too bearish," Dow  CEO Andrew Liveris, said at an investor day last week.

“We remain bullish on plastics,” he declared, suggesting that ethylene derivatives demand would grow at 1.4 times gross domestic product (GDP) in 2011.

This is not yet the shale gas revolution at work, at least not totally. But it gives an inkling of the shape of things to come.

Given a sustainable competitive advantage from the shale gas play, Dow has revisited its polyethylene (PE) strategy alongside the long-term strategy for the group.

Dow needs ethylene and propylene for many things. It is tapping into propylene supply from the big new propane dehydrogenation unit just started up in Texas.

A more broadly based, advanced polymers and materials business since the acquisition of Rohm and Haas, Dow needs its olefins for a myriad of chemicals apart from the basics.

But the shale gas dynamic is hugely attractive and has changed Dow’s strategic outlook. There will be no "big bang" divestment of polyethylene and a few crackers, Liveris suggested last week.

The failed K-Dow deal with Kuwait’s Petrochemical Industries may have dealt a blow to its initial intention to move away from PE.

Now the shift out of commodities is likely to be more subtle.

Dow acquired high density PE (HDPE) and polypropylene (PP) businesses when it bought Union Carbide in 2001. It wants to focus on higher-added-value polymers, including linear low density PE (LLDPE).

In terms of markets, it is looking more toward food and speciality flexible packaging, and toward health and hygiene. The geographic focus is toward China and countries in the ASEAN.

“Our thinking has changed,” Liveris told financial analysts and others. “We resisted exiting at a low [valuation] multiple earlier in the year.”

Dow will keep working on the commodity part of its portfolio, he told ICIS on the sidelines of the meeting, and he suggested “selective deals” and some transactions in “the next 12–24 months”.

Given the current industry dynamic, that makes a great deal of sense from Dow's standpoint.

Dow is able to seek greater value for smaller parts of the portfolio. It does not need a big bang merger or divestment.

The company has more time to make considered steps. It has sought a stronger feedstock play for its crackers in Europe but "big bang" is no longer the answer.

Completing the transformation in plastics remains top of the Dow strategic agenda, but will be done differently.

For more on Dow visit ICIS company intelligence
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By: Nigel Davis
+44 20 8652 3214

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