Dow sees momentum in PE, PU driving earnings gains in Q1, 2021

Author: Joseph Chang


NEW YORK (ICIS)--US-based Dow expects continued momentum in polyethylene (PE) and polyurethanes (PU) driving further earnings growth in Q1 and 2021 following a strong Q4 that soundly beat Wall Street consensus estimates.

“Demand still continues to look good into the first quarter, inventory levels are still low [and] operating rates are good. In the US Gulf Coast, our operating rates were in the mid-90s% in the fourth quarter. So we’re going to see… good margins in the PE business,” said Jim Fitterling, CEO of Dow, on the company’s Q4 earnings conference call.

PE margins in Q4 were up about 7 cents/lb in the US, 13 cents/lb in Europe and 10 cents/lb in Asia, he noted.

The upswing in China coal prices of about $200/tonne in Q4 from a cold winter and less imports from Australia amid a dispute, along with low PE inventories, helped underpin rising PE prices, he said.

Dow sees the Packaging & Specialty Plastics (P&SP) segment continuing to drive sales growth with Q1 2021 revenues expected to be up 2-5% on a sequential basis versus Q4 2020 with PE pricing strength supported by tight supply.

A heavy turnaround schedule for ethylene and PE in early 2021 following constraints in such activity in 2020 because of coronavirus restrictions, should be another tailwind.

“You’re going to have on a planned basis, almost the same amount of capacity offline as you did last year before you even get into any unplanned events. Those things to me mean a pretty strong start to 2021,” said Fitterling.

Dow itself plans about $400m in higher turnaround spending in 2021 versus 2021 - $300m in the core business and $100m in joint ventures, with the bulk coming in the first three quarters of the year, said Howard Ungerleider, Dow’s CFO.

The PU-heavy Industrial Intermediates & Infrastructure (II&I) segment is expected to see 0-2% sequential sales growth in Q1, and the Performance Materials & Coatings (PM&C) segment 0-3% gains.

“Automotive, furniture and bedding, appliance and construction are very solid right now… We see the trajectory in isocyanates and polyols in the second half [of 2020] continuing to move up in the first quarter due to supply limitations. It’s hard to keep things on the shelf like mattresses and furniture while we have these strong housing drivers,” said Fitterling.

“We are seeing the automotive sector coming back - we saw it big in electric vehicles (EVs) which set records in 2020 and I think we’re going to crush those in 2021,” he added.

Even as certain capital intensive businesses such as large-scale industrial construction has yet to fully recover, strong trends in US housing starts - which are at their highest level since 2006 - should continue to drive demand for PU and other Dow products, he noted.

“The first half looks solid, and I believe that as we get more people vaccinated around the world, we’re going to see more economies open up and things get to more normal types of activities,” said Fitterling.

The strong sequential sales outlook for Q1 and expectations for further improvement in 2021 versus 2020 are all the more impressive coming off solid Q4 results.

Dow’s Q4 2020 adjusted earnings per share of $0.81 handily beat Wall Street consensus estimates of $0.67. Operating earnings before interest and tax (EBIT) was up 2% year on-year to $1.05bn on 5% higher sales of $10.71bn.

Volumes were up 1% year on year, reaching pre-pandemic levels in all segments, while local prices rose 2% and currency provided a 2% tailwind.

The P&SP segment was the standout, with year-on-year sales up 6% to $5.1bn and volumes up 2%. On a sequential basis, sales were up 12% on 4% higher volumes. Operating EBIT of $780m was up 20% year on year and 21% sequentially.

Longer term, Dow sees earnings acceleration from digital investments along with global megatrends in clean energy, recycled plastics, EVs and 5G broadband networks.

Focus article by Joseph Chang