The release:
The Dow Chemical Company (NYSE: DOW) announced today that on June 30, its Board of Directors approved a restructuring plan which calls for the shutdown of a number of manufacturing assets, including ethylene and ethylene-derivative assets in the Company’s basics portfolio.
Consistent with the Company’s $1.3 billion synergy commitment related to the acquisition of Rohm and Haas Company, the restructuring plan includes a charge for the elimination of approximately 2,500 positions, which has been previously announced.
Dow will also recognize an impairment charge due to an expected loss on the divestiture of certain acrylic monomer and specialty latex assets, which is required for United States Federal Trade Commission approval of the Rohm and Haas acquisition.
“Consistent with Dow’s practice of active portfolio management, we continue to take quick and aggressive action to right-size our manufacturing footprint, particularly in our basics portfolio,” said Andrew N. Liveris, Dow chairman and chief executive officer. “These actions are also aligned with our strategic transformation, which focuses on preferentially investing for growth in our performance and advanced materials portfolios. In addition, we are making excellent progress on
achieving $1.3 billion in cost synergies from the acquisition, and today’s steps demonstrate our speed and determination to deliver these savings.”
Specific sites in the Company’s Basics portfolio that will be impacted include:
Ethylene Production
• An ethylene cracker in Hahnville, Louisiana
Ethylene Derivatives
• An ethylene oxide/ethylene glycol production unit in Hahnville, Louisiana
• An ethylene dichloride and vinyl chloride monomer facility in Plaquemine, LouisianaThese shutdowns are in addition to numerous other ethylene-derivative closures that have occurred as part of a restructuring program announced in the fourth quarter of 2008, specifically:
• A production unit in Seadrift, Texas, for the manufacture of NORDEL™ hydrocarbon rubber ceased production in the first quarter of 2009
• A low density polyethylene unit in Freeport, Texas, ceased production in the first quarter of 2009
• A production unit in Plaquemine, Louisiana, for the manufacture of TYRIN™ chlorinated polyethylene ceased production in the first quarter of 2009
• A styrene monomer production unit in Freeport, Texas, ceased production in the fourth quarter of 2008These shutdowns, when taken in total, will reduce the Company’s ethylene demand by approximately 30 percent on the U.S. Gulf Coast. As a result, Dow expects to eliminate its purchases of ethylene from the merchant market (approximately three billion pounds annually), improving the Company’s cost position while fully integrating ethylene production with internal demand in order to better meet customer need
What does it all mean? Dow is essentially exiting the ethylene market save for what it need for internal uses. It is a good move in that domestic ethylene production cannot compete with what is currently being produced in Asia in term of cost. With the upcoming glut of the product expected on the market, Dow would be selling product at or near a loss as prices plummet while still importing it for marginally profitable businesses. Dow will eliminate its purchases of ethylene from the merchant market, roughly 3 billion lbs/year, due to the shutdowns, matching its ethylene production with internal demand.
The really good news here is the reduction in necessary capital expenditures for marginal businesses.
Some analyst comments:
P.J. Juvekar of Citi said, “Today’s announcement underlines DOW’s leadership in cutting production to better align supply and demand; the company showed similar leadership in the last trough in 2002. We view the news as incrementally positive for the oversupplied commodity chemicals space.”
David Begleiter of Deutsche Bank said the news “… reflects Dow’s focus on executing its transformation strategy of growing its performance products and specialty materials portfolio (while downsizing its basic chemicals business) in order to deliver more consistent earnings growth.
The move is not big news, just affirmation that the company is still moving forward on its goal, successfully.
Disclosure (“none” means no position):Long Dow