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If I had a dollar for every time………

Aromatics, Business, China, Olefins, Polyolefins, Projects, Styrenics, Technology
By John Richardson on 19-Feb-2008

…….I had heard a company saying it was moving up the value chain (or rather a Euro or a British pound these days), I wouldn’t be writing this blog entry while smelling the wonderful aroma of pork sausages being cooked for my tea. Brown sauce and mash as well, of course.

Can Dow Chemical make a success of this often-mentioned strategy? See below for extended analysis.

If it cannot, the prospects for the US producer could be bleak in the long run12 February 2008 12:31 [Source: ICIS news]

SINGAPORE (ICIS news)–Dow Chemical is confronting the challenge of convincing the sceptics that it can successfully move down the value chain into specialty chemicals while also attempting to strengthen its position in commodities.

The US major has to also integrate the proposed Dow/PIC tie-up into already established joint ventures and the rest of its business.

A memorandum of understanding (MoU) for the $19bn olefins and polymers alliance was signed last December with completion scheduled for end-2008.

Dow has identified four specialty chemicals growth platforms: human health (food, nutrition and wellness); energy (alternative energy solutions and energy efficiency solutions); infrastructure and transportation (construction, water treatment and transportation); and electronics and communications (advanced materials).

The sceptics say that Dow lacks the R&D capabilities, the people and the branding to make a success of its specialty, or performance chemicals, ambitions.

Dow, unlike say DuPont, also doesn’t have the brand recognition necessary to sell to manufacturers and retailers, they add.

Brand recognition is somewhat less of a challenge when you are the world’s biggest polyethylene (PE) producer, as is the case with Dow.

Dow’s Asean, Australia and New Zealand president Noel Williams responded to these criticisms.

“To a limited extent they are true. We don’t have such a strong brand identity as you go downstream and it’s more difficult to innovate in the traditional chemistry space versus the 1950s, 1960s and 1970s,” he said. “That’s why we are looking at investing in the solution-space markets.”

Dow has chosen specialty growth platforms that fit well with its existing businesses, Williams adds.

Acquisitions in these areas have also been occurring for some time. For example, Dow purchased Zheijiang Omex Environmental Engineering Co in 2006, a Chinese producer of components for water purification.

But in five years’ time, Dow aims to achieve 70-80% of its sales from high value-added businesses. This means more acquisitions will be necessary.

“This could be either a step-out deal of a major specialty player, similar in scale to our purchase of Union Carbide, and/or it could be a number of smaller deals,” said Williams.

He was keen to stress Dow would not overpay for whatever it buys.

“We would rather buy back more shares than spend too much – we will be very prudent with our money.

“Valuations have been very high over the last few years. We want to buy the right assets at the right time.”

Completion of the joint venture would leave Dow with $9.5bn in pre-tax cash.

Williams said that it might not be just outright acquisitions of established players that Dow opts for; also under evaluation are collaborations on technology and acquiring start-up companies.

“We are looking at opportunities in Singapore, Australia and New Zealand,” he added.

China was also seen as a good source of potential acquisitions, Williams said.

As for the planned Dow/PIC deal, there has been a lot of speculation over what this might mean for petrochemical investments in China.

Dow abandoned plans to build a naphtha-based cracker in Tianjin with Sinopec earlier this decade.

Last year, the US major signed a cooperation agreement with Shenhua Energy to conduct a detailed feasibility study into a coal-to-chemicals complex in Shaanxi province. The complex could include olefins, chlor-alkali, caustic soda and acrylic acid production.

China is desperately short of crude oil and Dow – through its tie-up with PIC – might have access to crude.

Any foreigner wanting to take part in a naphtha cracker project in China can no longer only offer technology and construction and engineering skills, as the country has rapidly moved up the petrochemical learning curve.

Funding is also not a problem because China’s banking system is awash with capital.

Williams declined to comment on whether Dow might also consider building a naphtha cracker complex in China through Dow/PIC.

The only effect on Dow’s existing joint ventures from the Dow/PIC alliance is the potential transfer of sales activities.

The Dow/PIC alliance would include the manufacture and marketing of PE, ethlyeneamines, ethanolamines, polypropylene (PP) and polycarbonate (PC).

Marketing rights from existing joint venture production in these products could be transferred to Dow/PIC. This would follow what occurred when Dow established its two other global marketing and manufacturing joint ventures with PIC – MEGlobal and Equipolymers.

Other joint ventures include the Siam Cement/Dow tie-up in Thailand and the Optimal group of companies in Malaysia – Optimal Olefins, Optimal Glycols and Optimal Chemicals. These are joint ventures with Petronas.

Williams said that the new Siam Cement/Dow naphtha cracker complex in Mab Ta Phut, Thailand, was on track for start-up in the second half of 2010 and that “nearly all approvals” had been granted.

Only last October, there were reports that a proposed lawsuit would, if successful, turn the site into a pollution-control zone. This would prevent new petrochemical plants from being built.

But Williams said environmental concerns were being addressed and added piling work had already begun.

The 900,000 tonne/year cracker will be 85% dependent on imported feedstock.

But he stressed that naphtha would not necessarily be supplied by oil producer and refinery operator Kuwait Petroleum Co, PIC’s parent company.

He did say, though, that the Dow/PIC deal would strengthen the feedstock integration position in general.

Commenting on Optimal, Williams confirmed a widely understood problem in Malaysia: there is potentially plenty more ethane, but other sources of demand for gas are not growing rapidly enough to justify more ethane extraction.

There have been rumours, and even in one case a statement from Dow itself, about plans to expand the Optimal complex at Kerteh. These date back to as early as 2003.

Williams said that while no new plant expansions were currently being evaluated “we are always looking at opportunities with our partner, Petronas.”

One of the biggest tasks during the integration process could be relocating staff to a new Dow/PIC corporate headquarters in the US. The exact location of the new headquarters has yet to be decided.

Some 5,000 people would work for the joint venture. Most of the potential new recruits already work for Dow and are already based in the US.

Williams would not be drawn on whether the planned tie-up would result in restructuring in his region.

However, he conceded that the constant drift of demand growth to Asia-Pacific would result in a further shift in where people are employed.

Dow, which already has R&D satellite centres in Singapore and Japan in Asia, is building an R&D centre in Shanghai, due to be completed by the end of this year. It is also adding 500-600 employees in China each year.

Sales in Greater China grew 24% last year and rose by 8% in Asia-Pacific as a whole, whereas they declined 2% in the US. Two-thirds of Dow’s sales are now outside the US.

The next 12-18 months will be crucial as Dow tries to convince outsiders that it’s on the right track.

This is no easy task at a time when global economic growth is slowing down, affecting all sectors of the chemicals industry.

On the other hand, making acquisitions might be a great deal cheaper as valuations come down.

Dow had arguably no choice but to adopt its strategy as it has no crude oil, gas reserves or refining business of its own.

A large proportion of its assets are also still the US and Europe, despite heavy investments in the Middle East and Asia.

This is part of a special series of stories we are running ahead of the Asia Petrochemical Industry Conference (APIC) which takes place in Singapore on 27-28 May – Asia’s equivalent of NPRA and EPCA and therefore a key event for your calendar. The series will feature interviews with key industry figures and associations

By: John Richardson
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