Loeb To Dow: You’re No LyondellBasell

In an investor letter, Daniel Loeb, who heads the hedge fund Third Point, a major Dow Chemical shareholder, gave his constructive critique of Dow’s strategy. Dow, he says, should be earning $2.5 billion more than it currently does. The letter was by no means scathing. He praised Dow’s share buyback program. He acknowledged that Dow has pledged more transparency, but he wants to see more. Specifically, he wants Dow to disclose its transfer pricing methodology between its petrochemical units and its downstream derivatives businesses. Without this, it is impossible to tell whether the Eeedstocks and Energy segment is subsidizing the Performance Plastics segment. In other words, where is the company really adding value? And overall, Loeb says, Dow isn’t adding enough value. And whom does he compare Dow to? LyondellBasell: “Dow has ~30% more North American ethylene capacity, triple the Middle Eastern ethylene capacity, and more North American derivatives capacity than Lyondell, yet the two companies generate the same amount of EBITDA in their respective petrochemical businesses,” Loeb wrote. (Both first have about $6 billion.) Loeb also analyzed Dow’s capacity against industry average margins and probable feedstock slates to get at the $2.5 billion figure. (LyondellBasell was close to being right where it should be.) Loeb isn’t a big fan of Dow’s strategy of integrating its petrochemicals might with downstream derivatives. This means Dow needs more people, administrative expenses, R&D, facilities, etc. “Dow’s headcount is ~2.5 times more than Lyondell’s, which is not a reflection on poor efficiency, but rather that Dow is engaged in numerous downstream derivatives that Lyondell is not,” he wrote. He wasn’t finished. “Given Dow’s decision to exit chlor-alkali, it appears that Dow believes that its Ag Chemicals and Ag Biology businesses do not derive value-add differentiation from chlorine integration. We take this one step further and question whether Dow’s specialty segments need ethylene or propylene integration.” Loeb makes some good arguments. The transfer pricing point to me is most intriguing. I wonder if the company squanders value by dipping into its presumed feedstock subsidies by underselling rivals. The ability to do that would strike me as a temptation that’s hard to resist. I also wonder if a possible solution is for Dow to throw its U.S. crackers into an master limited partnership, like Westlake is doing. Problem solved.    ...

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Notes On Dow’s Brazilian Biopolymers Project

As you may have heard, Mitsui and Co. has signed on to an integrated joint venture with Dow to make biopolymers in Brazil. Here are a few observations: 1) What Dow is talking about here is the project it has been planning since 2007 to build a 350,000-metric-ton-per-year linear low-density polyethylene plant that is integrated all the way back to the sugarcane field. Dow originally partnered with Brazilian sugar cane processor Crystalsev, but that company pulled out when its parent, Santelisa was purchased by Louis Dreyfus around the end of 2009. However, this remained an active project within Dow, which proceeded for a couple of years on its own. 2) Dow isn’t coming out and saying it is building a 350,000 MTPY LLDPE plant. The exact size depends on engineering, though Luis Cirihal, Dow’s director of renewable alternatives and business development for Latin America (Dow likes long titles), assures me that it would be “world-scale”, which means about 350,000 metric tons. 3) Dow really won’t come out and say it is an LLDPE plant, exactly, either. The company rather euphemistically is referring to it as a “differentiated polymers” or a “performance polymers” plant. This is a new habit for the company. What I think the company means is that the plant uses its solution process, which is a platform for not only LLDPE, but also for plastomers and elastomers and the like. Dow’s terminology is meant to exclude the old Union Carbide gas-phase Unipol process. 4) A little more on this. Dow has indicated in the past that it is seeking to divest polypropylene and high-density polyethylene. Obviously a HDPE plant can swing to LLDPE. So what I think that Dow means is that it intends to keep the solution process and divest the Unipol process assets. This might not be an absolute. In any case, I have heard from a couple of people who would know about such things that Dow has only been actively marketing the polypropylene business anyway. This would make sense because shale is likely making HDPE a profitable business at the moment. 5) Dow is growing 17,000 hectares of sugarcane in Minas Gerais, Brazil. (This marks the first time a company from Michigan has EVER established a plantation in Brazil to find an alternative source of raw materials for a polymer. Maybe it doesn’t.) 6) Back to the Brazilian project. Later this year, the JV will begin construction of a 240-million-liter-per-year ethanol plant that will be finished in Q2 2013. 7) Financial details are sketchy. Mitsui says it invested $200 million in the JV thus far. I take it Dow has invested that much,...

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Dow Promoting Incineration

Dow Chemical is recycling plastic the old fashioned way, they are burning it. The company wrapped up a trial at its Midland, Michigan, headquarters facility where it incinerated 578 lbs of linear low-density polyethylene film waste from its nearby extrusion laboratories. The company was able to recover 96% of the energy from the plastic, an equivalent, it says, of about 11.1 million Btu of natural gas. Dow is suggesting that incinerating plastic is a viable alternative to the landfill for those plastics that aren’t commercially recycled. It also asserts that waste-to-energy technology is an underused scheme in the U.S. compared to Europe, where the practice is fairly common. I couldn’t agree more. I grew up in Staten Island where hostility to landfills is pretty well entrenched. For decades, half the borough smelled like sour milk. We are letting a lot of good energy and land go to waste by burying trash. You may be wondering about greenhouse gas emissions. I asked Dow about that. “Polyethylene and natural gas have similar fuel values and emit a similar amount of CO2 when burned,” I was told. True? Well, fair enough. I did my own calculations. I came up with 75 kg of carbon dioxide per kilogram of polyethylene burned. The value for natural gas is about 54 kg. That’s a 39% difference. However, the value for polyethylene matches crude oil and middle distillates almost exactly and is less than petroleum coke. (Granted, this isn’t something I do every day. So my calculation for polyethylene might have erred...

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The Middle East Revolts And Chemicals

Here’s an interesting question: How might the political turmoil in the Middle East affect the global petrochemical industry? Let’s look at the potential areas of impact: Directly, the countries that have seen the most serious challenges to their ruling regimes—Egypt, Libya, Algeria, Tunisia, Yemen, And Bahrain—don’t have very large petrochemical industries, at least not in the sense that they are major producers of olefins and derivatives. However, they do have significant production of methane derivatives like nitrogen fertilizers and methanol. (Dow did once sign a preliminary agreement to modernize and expand a small Libyan petrochemical complex in 2007. But I haven’t heard company officials mention that project in a couple of years.) The countries that do have large petrochemical industries—Saudi Arabia, Kuwait, the UAE, and Qatar—haven’t seen as much unrest, though they haven’t been completely immune to political protests. If these countries do see serious challenges to the regimes, then there could be a disruption in chemical operations. Iran, which has had significant protests, is a separate question. Politics have already impacted its petrochemical industry in the form of sanctions over its nuclear program. This has been making it harder for Iranian firms to export chemicals. Geographically, the countries that are major petrochemical producers sit on the Persian Gulf. In addition, Saudi Arabia has the major Red Sea port of Yanbu, which is also a major petrochemical center. The countries with the turmoil are mostly in North Africa. Most petrochemical exports are headed in the opposite direction, towards Asia. However, Oman, which sets right near the Strait of Hormuz, is experiencing major protests. Moreover, any disruption to the Suez Canal would also disrupt petrochemical exports to Europe. But if there was such a disruption, the world would have more important fish to fry than a few containers of polyethylene. Oil prices always have the ability to disrupt the chemical industry. Brent crude prices have climbed since the turmoil began and have since hit $100 per barrel. That said, prices began the year in the mid 90s. The turmoil seems to be exacerbating an existing run up in prices. This will tend to make the natural gas based North American industry even more competitive versus the naphtha cracking rest of the world. (It should be noted that Algeria is also a major player in the international natural gas market, and has pipelines that connect it directly with Europe.) Finanlly, never underestimate the power of high oil prices to sabotage the economy. The last time oil prices climbed into the 90s was in the fourth quarter of 2007, when the recession...

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Celanese Moves Forward Somewhat On Ethanol

Celanese and the White House have made announcements regarding ethanol capacity Celanese is planning to build in China using its new technology. I’ve written about this on the blog before. The latest news on the topic is a little baffling, hopefully I’m sorting all that out in this post. Here’s an excerpt from Celanese’s announcement: DALLAS, Texas; NANJING and ZHUHAI, China (January 19, 2011) – Celanese Corporation (NYSE: CE), a global technology and specialty materials company, today announced that its wholly owned subsidiary, Celanese Far East Limited, has signed letters of intent to construct and operate industrial ethanol production facilities in Nanjing, China, at the Nanjing Chemical Industrial Park and in Zhuhai, China, at the Gaolan Port Economic Zone. Pending project approvals, Celanese could begin industrial ethanol production within the next 30 months with an initial nameplate capacity of 400,000 tons per year per plant with an initial investment of approximately USD$300 million per plant. The company is pursuing approval at two locations to ensure its ability to effectively grow with future demand. Earlier, Celanese had been saying that it was planning to build one or two 400,000 plants for $300 million apiece. It then would then have the choice of doubling capacity at one plant at a cost of less than the original investment. Or, it could build both plants and then expand both of them. It would seem from this release that it was moving forward with both of them. Not so. As the last sentence above alludes, with the interpretational help of a Celanese spokesman, one or two plants is still the plan. The MOU’s with the industrial parks still leaves open that possibility. In other words, Celanese can move forward at either Nanjing or Zhuhai or at both locations. It turns out the Chinese projects are among those deals being highlighted to coincide with Chinese president Hu Jintao’s visit. Here’s an excerpt from the White House press release: Celanese — Wison Group Memorandum of Understanding for Ethanol Production: Celanese Far East Co., a subsidiary of Celanese Corporation headquartered in Dallas, Texas (Celanese), and Wison Group Holding Limited (Wison), will conclude a Memorandum of Understanding for the construction and operation of an industrial ethanol production facility in China.  Wison plans to invest in a coal gasification unit based on clean coal technology to produce synthesis gas per Celanese specs, and Celanese plans to invest approximately $650 million in an Ethanol Complex using the output from Wison as feed stock, and Celanese proprietary technology, to produce ethanol for industrial use, and potentially for fuel ethanol. This transaction is valued at approximately $815 million, with $50-80 million in...

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Celanese Says It Is The Amazon Of Ethanol
Dec17

Celanese Says It Is The Amazon Of Ethanol

Yesterday, Celanese hosted a conference call with analysts about its new ethanol technology. On the call were CEO Dave Weidman, CFO Steven Sterin, and senior operations VP Jim Alder. About a month ago, the company unveiled plans to build one, and possibly two, 400,000-ton-per-year ethanol plants in China based on coal and using its new conversion technology. It is also planning a smaller, 40,000-ton plant in Clear Lake, Texas, based on natural gas. The conference call didn’t shed a whole lot of light on what the technology is all about. It is pretty obvious that the process is based on gasification. Officials said that the plant can use any hydrocarbon feedstock, including biomass. Another clue is that Alder said that the technology “integrates elements of Celanese acetyls technology.” What could this mean? Well, acetic acid, also known as ethanoic acid, has two carbons like ethanol. In other words, it is ethanol plus a carbonyl group. Celanese and other companies make it via the carbonylation of methanol using carbon monoxide. Alder also mentioned that by the time the Clear Lake plant comes onstream in 2012, the company will have some 3,000 patents worldwide covering the technology, many of which are patents covering its existing acetyl chemistry. Company officials also stressed that the technology is highly selective for ethanol, a point of contrast, they said, between Celanese’s technology and existing processes to get to alcohols via gasification, such as Sasol’s. The economics, Weidman said, were “very favorable compared to fermentation.” Another advantage is that the technology is very scalable, officials stressed. Celanese can expand a 400,000 plant to 1 million tons at a fraction of the initial cost of building the plant. This seems to explain why Celanese said might build one–or two–plants in China. The options the company is looking at are either building a second plant, presumably at a different location, or expanding its first unit. Either way, Celanese wants to quickly ramp up the technology to about a million tons. To say that Celanese is excited about the technology is an understatement. I have never once heard a chemical company gloat about a technology more than Celanese has about this ethanol process. “This technology breakthrough is a new platform for earnings growth with the potential to reshape Celanese,” Weidman said. Weidman said that if Celanese had an operational million ton plant today, it would generate nearly a billion dollars in revenue and ethanol would be the Celanese business with the greatest profit margins. A cash cow is born, lay down some straw and gather the children. Officials did get a little carried away. One of the principals, I...

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