INSIGHT: Dow sets out plans for its complex chlorine carve-out

03 December 2013 17:34  [Source: ICIS news]

(Clarification: Recasts third paragraph defining size of carve out)

By Nigel Davis

LONDON (ICIS)--Since acquiring Rohm and Haas and accelerating the drive towards higher added-value products, Dow Chemicals’ basic chemicals needs have changed.

And so has its tolerance for businesses which continue to demand investment while yielding a relatively lower level rate of return and, in the case of epoxy resins, are facing overcapacity (in Asia).

The move to carve out assets which currently account for almost $5bn in annual sales and 15% of its net property, or replacement asset base value, has to be seen in this light. 

Dow currently has considerable demands on its capital: The giant Sadara project in Saudi Arabia, which was described at the very beginning as a potential game-changer for Dow; and the big commitments to ethylene and propylene on the US Gulf coast.

The company will need to be running well on all cylinders as management pushes harder to generate better profits.

“Today’s announcement represents a continuation of the shift of our company toward downstream high-margin products and technologies that customers value, and generate consistently higher returns than cyclical commodity products,” Dow CEO, Andrew Liveris, said in a statement on Monday.

“We are committed to prioritise our resources such that we maximise total shareholder return.”

In prioritising its resources Dow is prepared to step away from assets it has run for years and businesses which have been at its heart (it has been producing chlorine for more than 100 years).

The company still needs some of the basic raw materials they produce, so any deals that might be done on the businesses being carved out would have to include long-term supply agreements.

The chloralkali and other assets sell into markets that Dow has left. “We are therefore right-sizing our upstream integration to match the downstream focus that we started a decade ago,” Liveris said. The company’s chlorine needs have dropped by 3.2m tonnes since 2005.

“Separating these business units will allow us to further optimise the way they can be operated; and we believe different owners will be able to extract maximum value from these highly competitive assets and their related markets.”

Separation is the first step, striking the right deal for the businesses will come later.

Liveris gave some indication of what he sees happening over the course of time with some of the assets. Dow’s chlor-alkali plants would be attractive to companies developing their polyvinyl chloride (PVC) operations, particularly those from the developing world, and big investors in US shale, he suggested.

Fitting that bill at first glance are China’s Sinopec and India’s Reliance Industries.

“These assets are perfectly positioned for anyone who wants to shut down some assets or potentially go for the growth side of it, because there are a lot of companies – including the customers of these assets – that are investing in chlor-alkali in the US because of low-cost energy,” he said in a conference call with financial analysts.

Companies already building chlor-alkali capacity in the US include US-based Westlake Chemical, Japan’s Shintech and Japan’s Mitsui through a joint venture with Dow, ICIS reported on Monday. Dow wants to close its 70-years old, 816,000 tonne/year chlor-alkali plant in Freeport, Texas, but its local requirements will largely be replaced when the new, similarly sized, Mitsui-Dow joint venture comes on-stream.

Dow’s carve out hits a sweet spot for US petrochemicals as the abundance of shale gas and natural gas liquids (NGLs) helps push down the costs of production of both ethylene and electricity.

The Dow carve out includes its US chlor-alkali operations, chlorinated organic chemicals in Europe – made in Stade, Germany, global epoxy resins and associated brine and energy activities.

The carve-outs won’t be easy and Dow is putting some experienced individuals in charge of the separating businesses.

Similar in size in some respects to the styrenics separation and eventual disposal as Styron, they will involve 40 plants at 11 sites and almost 2,000 employees.

Overseeing what Dow calls the separation and transaction activities will be a senior member of the company’s leadership team, Jim Fitterling. He is currently in charge of feedstocks, performance plastics, Asia and Latin America for Dow, and has played a key role, Dow says, in developing and executing the strategy to invest in the more market driven portfolio and “technology-enabled” businesses.

“Due to the highly integrated nature of the chlorine value chain, we are conscious not to leave any stranded costs or create negative synergies,” he said.

“Further, we anticipate that any related transaction or transactions will include supply and purchase agreements between these units and the company to support downstream products aligned with Dow’s strategic market focus.”

Executives have been charged with running the businesses profitably “in anticipation of transaction”. Pat Dawson will be president of the epoxy carve-out, Clive Grannum, president of chlorinated organics, and Jim Varilek, president of the separated chlor-alkali and vinyls North America operations.

($1 = €0.74)

By: Nigel Davis
+44 20 8652 3214

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