Market intelligence: Dow takes a surgical approach to its portfolio

27 September 2013 10:22  [Source: ICB]

Dow Chemical CEO Andrew Liveris said 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’s chlorine derivatives and epoxy businesses which have combined annual sales of $6bn.

The US-based company is not getting out of chlorine altogether, Liveris stressed – Dow is deeply rooted in chlorine chemistry and needs chlorine for its added-value businesses.

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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 margins 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.

THE APPROACH

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 the Credit Suisse Chemical and Agricultural Science Conference on 17 September.

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 to.

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.

Dow also makes epoxy resins and other epoxy products in Germany, the US, Brazil, South Korea and China. James Fitterling, Dow’s executive vice president of feedstocks and performance plastics, Asia and Latin America, said the company is looking at ethylene dichloride (EDC), vinyl chloride monomer (VCM) and global chlorinated organics “from a strategic standpoint”.

Fitterling spoke on 12 September at the UBS Best of Americas investors conference in London, UK.

“We are confident that there are many interested parties out there that would like to take advantage of our low-cost [electrochemical unit] position on the Gulf Coast as well as our integration with ethylene,” he said. “They may find an advantage to being a part of an integrated complex as we go down that path.”

MODELS FOR CARVE-OUTS

One model for a carve-out could be the 2010 chlor-alkali joint venture with Japan-based Mitsui which was created around the construction of an 800,000 tonne/year membrane plant in Freeport, Texas, US.

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 by-product 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 
12-18 months.

TARGETED CAPEX

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 in Al-Jubail, Saudi Arabia with Saudi Aramco.

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

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

  • Additional reporting by Jeremy Pafford in Houston

By: Nigel Davis
+44 20 8652 3214



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