Dow Chemical Company (NYSE: DOW) manufactures chemicals, plastic materials, agricultural and services, and other specialized products and services. It delivers a range of products and services to customers in approximately 160 countries to growth sectors such as electronics, water, energy, coatings and agriculture. The Company operates 214 manufacturing sites in 37 countries. Dow operates in eight business segments: Electronic and Specialty materials, Coatings and Infrastructure, Health and Agricultural sciences, Performance systems, Performance products, Basic plastics, Basic chemicals, and Hydrocarbons and Energy. The Company is also engaged in the property and casualty insurance and reinsurance business primarily through its Liana Limited subsidiaries. Dow Chemical is composed of six operating units: performance plastics, performance chemicals, agricultural sciences, basic plastics, basic chemicals and hydrocarbons & energy.
Dow is not reliant on any single set of customers--with 37% of its revenue coming from the United States, 36% from Europe and 27% from the rest of the world, the company is instead unusually dependent on the strength of the global economy. Thus, Dow is not prone to wild fluctuations in value--its diversification makes it largely immune to local or even national slumps. For instance, reduced demand for Dow products due to a housing slump in the United States may be offset by an increased demand for Dow products in emerging markets worldwide.
The cyclical nature of the chemical industry can also hurt Dow, as long term economic slowdowns can often last several years. And although demand for Dow products is fairly predictable, the actual cost of production is prone to swings. This is because the primary chemicals that Dow uses are derived from oil, natural gas, and other petroleum products, making Dow especially vulnerable to the price variations of one of the most unpredictable and financially volatile commodities in the world.
Second Quarter 2010 Results
For the second quarter of 2010, Dow reported earnings of $0.50 per share, or $0.54 per share excluding certain items. This compares with a reported loss of $0.47 per share in the second quarter of 2009, or earnings of $0.05 per share excluding certain items and discontinued operations. Sequentially, earnings increased 22 percent from $0.41 per share.
Sales rose 20 percent versus the same period last year. Excluding acquisitions and divestitures, sales increased 26 percent, driven by price gains of 19 percent and volume growth of 7 percent. Sales were up in all operating segments and in all geographic areas, with particular strength in North America and Europe, Middle East and Africa (EMEA). Emerging geographies collectively posted volume gains nearly double that of the total Company.
At a Company level, EBITDA increased to $1.9 billion, up $327 million versus the same quarter last year. Improved demand and price gains overcame a $100 million increase in planned turnaround costs and a $1.6 billion increase in purchased feedstock and energy costs. In addition, unplanned outages impacted the Company’s ability to meet demand, particularly in the Coatings value chain, resulting in more than $300 million of lost sales.
Electronic Materials is a global supplier of materials for chemical mechanical planarization; materials used in the production of electronic displays; semiconductor design; materials used in the fabrication of printed circuit boards; and integrated metallization processes critical for interconnection, corrosion resistance, metal finishing and decorative applications. These enabling materials are found in applications such as consumer electronics, flat panel displays and telecommunications.
Specialty Materials consists of five global businesses: Dow Water and Process Solutions, Dow Home and Personal Care, Dow Microbial Control, Dow Wolff Cellulosics and Performance Materials.
Adhesives and Functional Polymers is a portfolio of businesses that primarily manufacture sticking and bonding solutions for a range of applications, including adhesive tapes and paper labels, flexible packaging and leather, textile and imaging.
Dow Building and Construction is comprised of two global businesses - Dow Building Solutions and Dow Construction Chemicals, which offers lines of industry insulation, housewrap, sealant and adhesive products and systems, as well as construction chemical solutions.
Dow Coating Materials is in the business of supplying coatings and raw materials for architectural paints and industrial coatings. The business also offers technologies used in industrial coatings, including packaging, pipelines, wood, automotive, marine, maintenance and protective industries.
Dow AgroSciences is engaged in providing agricultural and plant biotechnology products, pest management solutions and healthy oils. The business invents, develops, manufactures and markets products for use in agriculture, industrial and commercial pest management and food service. ggg
Dow Elastomers offers a range of performance elastomers and plastomers, specialty copolymers, synthetic rubber, specialty resins, and films and plastic additives.
The Formulated Systems business manufactures and markets custom formulated, rigid and semi-rigid, flexible, integral skin and microcellular polyurethane foams and systems and tailor-made epoxy solutions and systems. These products are used in a range of applications including appliances, athletic equipment, automotive, bedding, construction, decorative molding, furniture, shoe soles and wind turbines.
The Amines business is engaged in producing of ethanolamines, ethyleneamines and isopropanolamines used in a variety of applications, including gas treatment, heavy-duty liquid detergents, herbicide formulations for the agricultural industry and personal care products.
The Performance Fluids, Polyglycols and Surfactants business produces a line of lubricants, hydraulic fluids, aircraft deicing fluids and thermal fluids. Product applications include chemical processing, cleaning, heating, cooling, food and beverage processing, fuel additives, paints and coatings, pharmaceuticals and silicone surfactants.
The Polyethylene business supplies polyethylene-based solutions through sustainable product differentiation. Through the use of multiple catalyst and process technologies, the business offers customers a range of polyethylene resins.
The Polypropylene business, a global polypropylene supplier, provides a range of products and solutions.
The Styrenics business is engaged in the production of polystyrene resins.
The Chlor-Alkali/Chlor-Vinyl business focuses on the production of chlorine for consumption by downstream Dow derivatives, as well as production, marketing and supply of ethylene dichloride, vinyl chloride monomer and caustic soda. These products are used for applications such as alumina production, pulp and paper manufacturing, soaps and detergents and building and construction. Dow is the producer of both chlorine and caustic soda.
The Ethylene Oxide/Ethylene Glycol business is engaged in producing purified ethylene oxide, principally used in Dow’s downstream performance derivatives. Dow is also a supplier of ethylene glycol to MEGlobal, a 50:50 joint venture. Ethylene glycol is used in polyester fiber, polyethylene terephthalate (PET) for food and beverage container applications, polyester film, and aircraft and runway deicers.
The Hydrocarbons and Energy business encompasses the procurement of fuels, natural gas liquids and crude oil-based raw materials, as well as the supply of monomers, power and steam principally for use in Dow's global operations.
In May 2010, OMNOVA Solutions Inc. acquired The Dow Chemical Company's hollow sphere plastic pigment (HPP) product line and terminated the RohmNova paper coatings joint venture. In June 2010, the Company sold of its interest in Styron plastics division to Bain Capital Partners.
In January 2009, the Company announced that its thermoplastic polyurethane (TPU) business was acquired by Lubrizol Corporation. In April 2009, the Company completed the acquisition of Rohm and Haas Company. In September 2009, the Company completed the sale of its interests in Total Raffinaderij Nederland N.V. to Total S.A. In September 2009, Union Carbide Corporation, a wholly owned subsidiary of Dow, announced that it has completed the divestiture of its ownership in the OPTIMAL Group of Companies to Petroliam Nasional Berhad. In November 2009, Dow Corning, equally owned by the Company and Corning, Incorporated, announced that it acquired 100% interest in Globe Metais Industria e Comercio S.A., a silicon metal manufacturer in Para, Brazil, and a 49% interest in Globe Metallurgical Inc.’s silicon manufacturing operation in Alloy, West Virginia (United States), WVA Manufacturing LLC. In January 2010, the Company completed the sale of its acrylic acid and esters business, and its UCAR Emulsion Systems specialty latex business to Arkema SA. In October 2009, the Company completed the divestiture of its interest in Morton International, Inc. to K+S Aktiengesellschaft.
One of the most important concepts in the chemical industry, is that of the commodity margin. The commodity margin is simply the difference between the price a chemical is being sold for (demand) and the cost of producing that chemical (supply). Factors that can influence the demand for a chemical are:
Recently, bills have been passed in California that further encourage the recycling of plastic bags. This is harmful to the chemical industry because 38% of polyethylene resin demand comes from films and bags. About 70% of Dow's capacity in the basic plastics operating unit is polyethylene, so an increase in the rate of recycling of plastic bags can be very harmful to Dow.
Many of Dow's performance plastics are used as end products in both the automotive and housing industry. Because performance plastics are more value-added than basic plastics, slumps in the housing and automotive industry will have less an effect on commodity margins. However, performance plastics can still display commodity like behavior at times.
For decades, Silicon has been the main insulator used in semiconductor chips. Recently, IBM, Texas Instruments and Intel announced that they would be producing chips that use a substance called hafnium as an insulator. Dow, through its JV Dow Corning, produces Hi-K precursors, which can be used to produce insulators like hafnium.
Since 2001, the production of ethanol in the United States has more than doubled. This is helpful to Dow because Dow chemicals are a large component of the fertilizers used in the growth of corn. As well, herbicides derived from Dow products are used to control weeds in cornfields, which further increases demand for Dow products.
Most of the primary materials Dow produces are derived from either natural gas or oil. Ethylene and propylene are both derived directly from oil, so an increase the price of oil will decrease ethylene and propylene margins. Acetylene and methanol are derived from natural gas, so an increase in the price of natural gas will decrease margins for these two primary chemicals.
|R&D ($M)||R&D % Revenue||Revenue ($B)||Net income ($B)||EBIT margin|
|DuPont (2009) ||$1,378||5.3%||$26.1||$1.76||8.0%|
|BASF SE (BASFY) (2009) ||€1.4M||2.8%||€50.7||€1.4||7.25%|
|Bayer AG (BAYRY) (2009) ||€2746||8.80%||€31.2||€1.359||9.6%|
|Dow Chemical Company (DOW) (2009) ||$1,492||3.3%||$44.9||$0.676||4.5%|
|Monsanto Company (MON) (2010) ||$1,205||11.4%||$10.5||$1.1||15.3%|