INSIGHT: Dow unpicking commodities but pulls plastic additives sale

20 September 2013 16:47  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Dow Chemical CEO Andrew Liveris said earlier this week that his company had decided to pull its plastics additives business off the market because of the low bids offered by potential buyers.

But he also made a strong case for pushing ahead with more extensive portfolio management and the potential sale of Dow chlorine derivatives and epoxy businesses which have combined sales of $6bn.

Dow is not getting out of chlorine, Liveris stressed – the company is deeply rooted in chlorine chemistry and needs chlorine for its added-value businesses. But it is prepared to assess its options for chlorine derivatives and epoxy products that are commoditised and have lost pricing power

Liveris said that Dow would continue to run the plastics additives business for cash – that is, cut back on growth investments but keep the assets up to scratch for a potential spin-off or sale at some time – and was prepared to do so for several years. But he said that a searching portfolio analysis had identified the potential divestments that would help lift the collective return on capital of the company.

Chlorine derivatives and epoxy are producing earnings before interest, tax, depreciation and amortisation (EBITDA) to sales margin in the 10-12% range which is far removed from the 20-25% range of cash margin in other parts of the portfolio such as packaging and agrochemicals.

Liveris talked of the “carefully orchestrated, surgical approach” Dow has taken to the assessment of its complex portfolio as it tries to push returns higher in a volatile and uncertain market environment. He was presenting to financial analysts and investors at a Credit Suisse Chemical and Agricultural Science Conference.

The $6bn of potential divestments identified by the company in its second-quarter financial results announcement in July come on top of the $1.5bn divestment plan which is currently underway and, Liveris said, will be added too. However, he stressed that Dow is not planning a fire sale. “We will walk away from an offer that doesn’t offer fair value,” he said.

The chlorine derivatives and epoxy carve out is likely to be complex with Dow untangling the production of chlorine from the commoditised downstream. Chlorine is a vitally important raw material for many of the products Dow makes. The company is the largest producer of chlorine in the world. It makes epoxy resins and other epoxy products in Germany, the US, Brazil, South Korean and China.

A model could be the 2010 chlor-alkali joint venture with Mitsui which was created around construction of an 800,000 tonne/year membrane plant in Freeport, Texas.

Dow’s interest is in chlorine for its own downstream businesses while it converts chlorine to ethylene dichloride (EDC) for its partner to market worldwide. Dow operates the plants and sells caustic soda from the chlor-alkali unit.

Another model is the carving out of Styron from Dow’s styrenics production operations and its sale to private equity player Bain Capital.

For the commoditised chemicals downstream from chlorine (chlorine derivatives and epoxy resins) Dow would seek new owners, Liveris stressed, and the potential sale of the assets could be made within 12 to 18 months.

It is targeting capital investments more closely and the CEO stressed that it is not wise to invest in commoditising downstream businesses simply to remain competitive in the upstream. It is possible to run an integrated asset successfully but separate the downstream business, he said.

The company is narrowing its focus on fewer markets while investing heavily in advantaged shale gas feedstock positions in the US and in its Sadara joint venture with Saudi Aramco.

Dow’s 750,000 tonne/year propane dehydrogenation (PDH) plant is due on-line in the first half of 2017. Construction of its planned 1.5m tonne/year cracker in Freeport is expected to start in 2014.

The Gulf Coast expansions could produce incremental EBITDA of $2.5bn for the company in around 2016/17, Liveris said.

He is recently returned from Saudi Arabia. The Sadara project is 25% complete and due for start up in 2015. It could lift annual equity earnings for Dow by $500m/year, he said.

($1 = €0.74)

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By: Nigel Davis
+44 20 8652 3214



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