Market intelligence: Dow's carve-out plan enables it to focus on higher margin businesses

06 December 2013 09:47 Source:ICIS Chemical Business

The company’s plan to separate its chlorine related activities will enable it to prioritise resources on higher margin and growth businesses

Since acquiring Rohm and Haas and accelerating the drive towards higher added-value products, Dow Chemical’s 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.

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,” said Dow chairman and CEO Andrew Liveris. “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 chlor-alkali 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,” Liveris noted.

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. 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.

One UK-based distributor of Asia epoxy resins in late October estimated that global supply of epoxy resins stands at about 3.2m-3.3m tonnes/year, but demand only stands at 2.3m-2.4m tonnes/year. “The market probably needs to lose a global player,” it said, a view shared by several market sources. In Europe, there has been a flood of epoxy resins supply coming from South Korea and Taiwan. The US market has also seen increased imports form Asia. 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 in charge of feedstocks, performance plastics, Asia and Latin America for Dow.

“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.

Additional reporting by Joseph Chang in New York, Al Greenwood in Houston, and Iain Packham and Franco 
Capaldo in London

By Nigel Davis