Dow Chemical Company - Outlook

Outlook

Dow CEO Andrew N. Liveris called 2005 the company's "best year ever" with operating profits of $5.4 billion, a jump of 56.5% compared with the previous year. Net income rose more than 60% to $4.5 billion, on sales of $46.3 billion. 2006 looks as if it could be even better, with first-quarter net earnings of $1.2 billion. All this is occurring in the context of adverse operating conditions, caused by high energy and raw material costs, and the effects of two damaging hurricanes.

Liveris supports the vertically integrated approach used at Dow, which produces everything from basic chemical feedstocks to high value products such as pesticides and reverse osmosis membranes. These value-adding product chains, along with Dow's wide product range, help the company to weather the storms of the global economy. Despite this, high energy and feedstock costs may begin to take their toll, particularly if global demand begins to fall just as supply is rising.

Like many chemical companies, Dow is facing pressures of regulation in the US and Europe, particularly as the EU introduces its new REACH policy. Litigation costs in the US taken over by Dow as a result of its 2001 takeover of Union Carbide also remain a concern.

For these reasons, Dow is looking to the Middle East and Asia for new projects. In Kuwait, Dow is constructing (with PIC of Kuwait) a new world-scale ethane cracker for production of ethylene, along with an ethylene oxide/ethylene glycol plant and (for 2008) a facility for production of aromatic hydrocarbons. In Oman, the company is working with the Oman government to build a new world-scale polyethylene plant. In China, the company is collaborating with Shenhua Group (the country's largest coal mining company) to improve catalyst efficiency to allow viable conversion of coal to olefins. Dow is also seeking to expand its R&D presence in Asia, adding 600 jobs in Shanghai by the end of 2007, and the company may open up a large R&D center in India.

The joint ventures planned for Asia are typical of Dow's "asset-light" approach, which works by offering a combination of intellectual property and money in exchange for a share in a world-scale production facility. At the same time, Dow is considering selling a share of some of its existing assets in order to free up cash.

In June 2006, Liveris announced Dow's safety and environmental goals for 2015:

• 75% reduction in environmental, health and safety indicators from 2005. The company aims to have no fatalities, and a reduction in injuries, spillages and leaks.
• 25% increase in energy efficiency.
• 2.5% annual reduction in greenhouse gas emissions intensity.

Liveris expects these goals to be reached predominantly with fossil fuels, through energy conservation and reduction of energy intensity, as he does not expect alternative energy to play a major role for at least 10–20 years.