INSIGHT: Dow can capture strategic gains in 2011

08 February 2011 17:43  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Dow Chemical is likely to maintain some earnings momentum in 2011 as it pulls further away from commodities and becomes a more specialties-oriented player.

After acquiring Rohm and Haas in 2009 the focus had to be on cash and on paying down debt, and numerous divestments followed. The Styron spin-off and eventual sale to Bain Capital was a significant strategic step.

But Dow executives’ claims that the business has been transformed are beginning to ring true - and decisions are being taken which highlight the realignment in commodities and the push into specialties, particularly in emerging economies.

The latter is needed if the company is to grow at above-average rates and become more deeply embedded as a supplier of essential chemicals in some of the world’s fastest-growing markets.

“Dow is a very different company than it was even just a few years ago,” CEO Andrew Liveris said last week as the company released particularly strong full-year 2010 financial results and a bullish outlook.

Liveris stressed, however, that Dow was committed to its strategic agenda and would stay the course in 2011.

The underlying thrust is to make the most of opportunities acquired with Rohm and Haas and those that can be developed through integration within Dow.

It is clear that Dow wants to invest preferentially in this so-called performance products portfolio. These are chemicals and processes that can help it capture growth in both the developed and developing world and possibly introduce greater earnings ability.

Dow can tap into the megatrends of an expanding global population and a growing global middle class with some of these.

In its fourth-quarter and full-year earnings presentation it talked about elastomers and HPPO (hydrogen peroxide to propylene oxide) production start-ups in Thailand this year, as well as plans to invest in polyglycols. The HPPO technology, which Dow developed with BASF, provides a more environmentally friendly and cheaper route to propylene oxide (PO) for polyurethanes.

Liveris mentioned chemicals for electronics in China, South Korea, Japan and Taiwan, acrylic polymers in Vietnam, Dubai and southern China, and developments in its Agrosciences business in Brazil.

The performance division expanded margins above the company average in the second half of 2010 and further growth is expected through capacity additions and new product introductions, he added.

Dow expects to make capital investments of $2.4bn in 2011 and spend $1.7bn on research and development with, it says, a focus on growth. It reckons 500 products in its innovation pipeline aligned with megatrend opportunities have a potential value of $30bn.

The company is not so much tying up the loose ends in its basic chemicals and plastics businesses, but making them more fit for purpose. It said at the time of the results presentation that it would close vinyl chloride monomer (VCM) capacity in the US - it finalised a chlor-alkali joint venture with Japan’s Mitsui in 2010.

Liveris hopes for some sort of deal in plastics this year and expects a “favourable outcome” from the dispute with Kuwait’s PIC over their failed plastics joint venture.

Dow’s polyethylene business turned around sharply in 2010 and the company is clearly benefiting from strong demand for exports and its low-cost ethane feedstock position (for ethylene) in the US. By starting up a joint venture solution polyethylene train in Thailand last year, it increased regional Asia polyethylene volumes by 30%. It has a renewables plastics project in Brazil.

The smaller investments probably say more about the changing nature of Dow than anything else. But the company is still pursuing its Saudi Arabia and China megaprojects.

The proposed venture with Saudi Aramco has been downgraded and moved to Al Jubail. But Liveris says that an investment decision is expected in mid-2011. Some progress has been made with the coal-based complex planned with the Shenhua Group in China.

Liveris still talks of Dow’s equity-light, or asset-light, strategy through which it wants to add the production capacity to support growth of the performance and market-driven businesses.

Indeed, that is what current Dow strategy is all about. The company needs a fit for purpose and low-cost - possibly equity-light - basic chemicals asset base upon which it can build a stronger specialties and market-oriented portfolio.

“The earnings power of our portfolio is tremendous,” Liveris says.

For more on Dow Chemical visit ICIS company intelligence
To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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