INSIGHT: Dow Chemical cuts hard

26 October 2012 16:26  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Unlike some companies in the US this week, Dow Chemical’s shares did not crash when it revealed a sharp downturn in third-quarter net profits. Analysts had prepared investors for bad news but the company was able to produce a set of figures that beat expectations and showed remarkable robustness. Dow’s reaction to the global downturn caught the attention.

The early release of the third-quarter financial results followed sharply on the revelation that the company will slash 2,400 jobs worldwide. It will close plants and step away from some new business spending, such as that on lithium ion batteries, while it focuses on an increasingly important low-cost feedstock position in the US. The world cannot afford alternative energy, Dow Chemical CEO, Andrew Liveris believes.  

“The reality is that we cannot keep funding a wide spectra of opportunities in a world where markets are volatile and ... in many cases ... receding,” he said on release of the third-quarter financial results. Dow will cut spending on a range of projects while it restructures, particularly in underperforming Europe.

Dow’s propylene and ethylene expansions in the US are not at risk. They are based on the increased availability of relatively low-cost ethane and propane feedstock coming from shale gas wells in Texas. Liveris, however, turned the spotlight on Wednesday onto liquids crackers in Europe that are struggling to make a profit, and to the region’s dismal growth prospects.

Liveris says that Dow is in a good position with its liquids fed cracker complexes in Germany, the Netherlands and Spain. Others, he suggested are not.

It is clear though, that there may come a time when the US’s largest quoted chemical company thinks it is simply better to import some ethylene and propylene chain chemicals into Europe from its likely to be cost-advantaged plants in the US. Products that can’t be made in those units, could well be in the massive Sadara joint venture that Dow is part of in Saudi Arabia.

The high points for Dow in the third quarter were 2% higher volumes. Lower prices and adverse currency effects hit sales, however, which fell 10% year on year and net income slumped by 35%.

The planned cutbacks involve plant closures and job losses. Capital spending will be cut by $100m in 2012 from the $2.69bn spent in 2011 and by a significant further $700m (€539m) in 2013. Some $200m in new business spending will be stopped and the Dow Kokam lithium ion battery venture written down.

The third-quarter outturn in its Performance Plastics segments highlights a great deal of current Dow thinking. Margins in the segment grew despite the clear difficulties encountered in the quarter. Volume was up across all businesses, Dow said, with double-digit gains in end-market oriented businesses such as elastomers, electrical and telecommunications, and the company’s hygiene and medical operations.

The point is, however, that it was the strong shale gas-based feedstock advantage in North America that drove profitability. The positive impact was partially offset by what Dow called “low naphtha-based margins in Europe and Asia Pacific”.

Packaging business margins will continue to benefit from solid margins because of the shale gas advantage in North America but the company says that naphtha-based ethylene margins will continue to be challenging.

Given those challenges, it is not surprising to hear that Dow’s US Gulf Coast investments are on-track. The company will re-start a small cracker this year and its investment in propane dehydrogenation is due for 2015 start-up.

Both investments will enhance margins for downstream businesses Dow says. It is also very keen to emphasise that is not playing down its involvement in the Sadara project in Saudi Arabia with oil giant Saudi Aramco.

Liveris stressed that the still massive project will give it a strategic supply position and a product slate targeted at emerging regions and “technology rich” sectors. This joint venture in expected to produce EBITDA (earnings before interest, tax, depreciation and amortisation (EBITDA) margins of around 40% and $2bn of additional EBITDA for Dow in 2017.

($1 = €0.77)

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By: Nigel Davis
+44 20 8652 3214

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