Dow Targets High Pigment Prices With Resins
Sep10

Dow Targets High Pigment Prices With Resins

Today, a story I wrote on the on fortunes of the TiO2 market appears in the current edition of C&EN. TiO2 is the white pigment that gives paint its hiding power. If you ever labored applying coat after coat of white paint on a wall in vain trying to cover up a red finish that refuses to die with dignity, then the manufacturer of the paint you have chosen probably skimped on the TiO2. (It isn’t your fault. Actually, it is, you bought cheap paint.) I can’t think of a single commodity that is more important to the paint industry than TiO2. And the paint industry has recently been paying dearly for TiO2. Since the 1990s, the TiO2 industry has been plagued by too much manufacturing capacity. That changed when the Great Recession forced the sector to shut down excess output. With the recovery, the TiO2 industry is now seeing the greatest profitability in about 20 years. For the paint makers that consume the white pigment, runaway TiO2 prices have been painful. These companies are trying to mix in as little of it in their formulations as they can get away with. PPG has one of the more militant stances on this issue in the paint sector. The company wants to reduce TiO2 consumption by 10% by the end of next year. The company has gotten off to a good start, eliminating 2% by the end of the last quarter. There is a potential market here for chemical companies that I couldn’t really get into in the article in print. Last year, Dow Chemical launched its Evoque pre-composite polymer, meant to address the problem of TiO2 crowding in latex paints. TiO2 crowding is what it sounds like it is, but there is even more to it than that. David Fasano, a research scientist at Dow, explains that at very high loadings of TiO2 used in white and architectural latex paint—about 20%–TiO2 begins to interfere with its own ability to scatter light. This is because the TiO2 particle has a sphere of influence, called a scattering zone, that is twice the diameter of the TiO2 particle itself. As the particles come closer together, these zones overlap, diminishing the effectiveness of each other. (To understand this, I imagine an overhead projection of two dots on a screen. As the projector goes out of focus, halos form around the dots and expand until they overlap.) Evoque, an acrylic latex film-forming resin, binds to the TiO2 particles and holds them apart so they don’t get close enough to interfere with each other. Evoque can reduce the paint loading in white and pastel architectural...

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DuPont Revises 2011 Guidance

DuPont has reduced its 2011 earnings-per-share guidance by a dime, down to a range of $3.87 – $3.95. In the company’s press release CEO Ellen J. Kullman said something somewhat disconcerting: “We are seeing slower growth in certain segments during the fourth quarter, driven by economic uncertainty. This uncertainty is contributing to ongoing conservative cash flow management in some supply chains.” Inventory drawdowns are very normal this time of year. A bigger inventory reduction than expected can mean many things. For instance, it can mean that customers expect prices in the supply chain to decline. (The most benign option.) Customers can be cashing out their inventories in order to brace themselves for potential Armageddon. (This happened during the 2008 panic.) Or customers, not knowing what the future has in store, don’t want to tie up too much of their working capital in inventories. (Middle of the road, not necessarily bad. This seems to be Kullman’s view.) Also, keep in mind that DuPont has reset its 2011 guidance a bunch of times. Here are the changes: Oct. 25, 2011:      $3.97 – $4.05 July 28, 2011:     $3.90 – $4.05 Apr. 21, 2011:      $3.65 – $3.85 Jan. 25, 2011:     $3.45 – $3.75 Dec. 14, 2010:     $3.30 – $3.60 DuPont is still way ahead of where it was in April. Looking at the list reminds me of Dow Chemical, which rather famously doesn’t give earnings guidance. I do see the wisdom in such a policy. Real numbers come in every quarter. Analysts have their own set of fake numbers. Why have another fake number? (Companies tend to lowball these anyway to set the stage for an artificial earnings beat.) If I am ever at the helm of a public company*, I would adopt the no guidance policy. *It would be a breach of fiduciary duty for a board of directors to let such a thing...

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Oxiteno Considering Bio-based Ethylene Glycol

I just came back from Buenos Aires, where I attended the annual petrochemical meeting put on by APLA, Latin America’s main chemical trade group. The meeting is a great place to connect with chemical executives from the region. At the event, I ran into Pedro Wongtschowski, the CEO of Brazilian energy and chemical conglomerate Ultrapar. Oxiteno, the company’s chemical arm, makes ethylene oxide, ethylene glycol, ethoxylates, and specialty chemicals. I have long wondered if the company would get involved in bio-based ethylene glycol. Since 2009, Coca Cola has been using the “Plant Bottle”, in which bio-based ethylene glycol is substituted for petroleum-derived ethylene glycol in the polymer backbone. The bio-based glycol is made from bio-based ethylene, made via the dehydration of ethanol. Coca Cola has been sourcing the ethylene glycol from a firm in India and its sugar has come from Brazil. Obviously, the supply chain would be simplified considerably with a Brazilian glycol supplier. And Oxiteno, being the country’s main ethylene oxide/ethylene glycol maker, is in attractive position for such business. So I asked Wongtschowski about this. He told me that bio-based ethylene oxide and ethylene glycol has been under active consideration. The company seems to have some options in front of it, such as whether it would feed bio-based ethylene into an existing ethylene oxide plant or build a new plant. The company also seems to be deciding on whether to construct an ethanol dehydration plant itself or buy ethylene from Braskem, which has been making polyethylene from bio-based ethylene since 2010 and recently agreed to supply bio-based ethylene to Lanxess for EPDM production. “We are talking with Braskem to determine the most attractive option for all parties involved,” he...

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Cytec Examines “Options” For Coatings Resins
Oct25

Cytec Examines “Options” For Coatings Resins

Cytec Industries CEO Shane Fleming dropped an “O” bomb on Cytec’s coatings resins business during a conference call last week. “We are committed to maximizing value creation in this segment and will take the decisions necessary to do so,” he said. “We are currently reviewing all options for this business and we will provide a further update on our plans no later than our earnings guidance on our fourth quarter conference call.” “Reviewing options” always indicates that a company is entertaining the idea of selling a business. However, it doesn’t always mean that the company will end up selling the business. They often keep parts of the business and sell off and/or close other bits of it. The coatings resins business generated operating earnings of $68.2 million on $1.4 billion in sales last year. It makes resins for powder, radiation curable, and liquid coatings. It is Cytec’s largest segment by a mile, representing 52% of its 2010 revenues. Its profit margins, at just under 5%, are also the company’s thinnest, with Cytec earning a total operating profit margin of about 10%. During the conference call, Fleming said he expects the company to make $57 million to $60 million in operating income on about $1.6 billion in sales. Fleming did keep the door open to making the business work within Cytec, primarily through favoring specialty resins over more commoditized products. “We’ve got a portion of our coatings resins product line right now that’s just now meeting our return on capital,” he said. “That is out first goal. It’s to get the business to a point where it’s doing that.” For example, in the conference call, Cytec also disclosed it is closing a powder coatings resins plant in Suzano, Brazil, and took a $9 million charge in the third quarter for this shutdown. But Fleming said that separating the good parts from the bad parts might not be so easy. “You can identify the product areas where you’re covering the cost of capital and generating reasonable earnings,” he said. “But the pragmatic question is, can you pull those apart and operate them separately given the level of entanglement with the asset base?” Sounds like Cytec might punt that problem to the next owner. Cytec’s coatings resins business is a bit of a hot potato. It was originally part of Hoechst under the name Vianova Resins. Hoechst sold the business to Morgan Grenfell Development Capital in 1998 for $545 million. Solutia bought the business a year later for about $617 million. In early 2003, Solutia sold the business to Belgium’s UCB for $500 million. It had earned $22 million for Solutia on...

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Notes On Dow’s Investor Day

Yesterday Dow held its annual investor day. The main theme was that the pieces were in place for strong earnings growth. In an interview after his presentation, CEO Andrew Liveris complained that the company is still being pigeonholed unfairly as a commodity chemical company by Wall Street. The post-recession peak for Dow shares, early this past May, was more than $42. Now they are trading in the low 20s. I am writing a feature story on the event for C&EN. I do have a couple of observations that I wanted to share on the blog right away. Dow is walking back plans to divest high-density polyethylene. About a year ago, Liveris floated a trial balloon about the sale of HDPE. The distinction the company has been making has been between its “specialty” solution process polyolefins and “commodity” Unipol-based, gas-phase polyolefins. Liveris told me yesterday that Dow now plans to convert gas-phase plants into solution-based plants at “integrated” facilities. He specifically mentioned Alberta. I would gather that this means swapping out the reactors and leaving the rest of the plant infrastructure in place. Polyolefins licensing is a keeper for Dow. Polypropylene licensing was left out of the sale of the polypropylene business to Braskem. Dow really intends to keep this. The same goes for its stake in Univation, which licenses Unipol polyethylene. Howard Ungerleider, who leads the Performance Plastics division for Dow, told me the polypropylene licensing unit is a pretty big earner for Dow and has been gaining market share. Dow AgroSciences is a keeper, too. When Dow was going through a crisis in early 2009 related to its purchase of Rohm and Haas, Liveris indicated that he might sell this unit. I asked him if the company is still on the fence about this. He said that the company is “Not on the fence and fully on the farm.” Though the unit is small compared to competitors like Monsanto, Liveris said that the unit is “punching above its weight.” Dow’s acquisition strategy will be modest. The company is steadily digesting the debt related to Rohm and Haas. One might think that the company would be planning acquisitions again. Not so. Liveris says the company is only considering smaller acquisitions to round out his existing portfolio. He mentioned IBM, where Liveris incidentally is a director, as a model. Andrew Liveris is a Michigan Wolverine fan. I talked football with him while arranging my stationary on the conference table. He is very excited about the 5-0 start. I am too. I warned him, as a Michigan alum, not to put too much faith in a good Michigan start. (I was...

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Bad Day On Wall Street, Especially For Huntsman

The Dow Jones Industrial Average’s 513 point, 4.3% decline was bad yesterday. Huntsman Corp’s $5.58, 30.5% decline was even worse. (There is no typo in the preceding sentence.) Such declines among large chemical companies are pretty rare. In fact, they mostly happen to target companies of acquisition attempts that go up in smoke. Huntsman has actually had similar declines. One was in June 2008, when Hexion reneged on its acquisition offer, causing Huntsman stock to decline by 40%. And in December that same year, when the two companies settled their lawsuits against each other and Huntsman lost about half its value. Huntsman’s quarterly, adjusted per-share earnings were 48 cents, missing Wall Street analyst estimates by a penny. Huntsman actually earned 31 cents in the year-ago period. But this earnings season, other companies like Dow were blowing through estimates, making Huntsman an outlier. There were few of negatives in the quarter, Huntsman’s earnings were impacted by strong exposure to the Swiss franc. Its advanced materials business—which makes thermoset resins for composites-had difficulty passing along price increases. Its textile effects unit has been impacted by high cotton prices. From a Reuters report, there seemed to be an interesting exchange during the earnings call: Jeff Zekauskas, a JPMorgan analyst, was bothered because the company reported results only 90 minutes before the conference call, leaving him little time to wade through unusually complex financial tables. “It’s very difficult to reconcile all of the income statement numbers to the data that you provide,” Zekauskas told Huntsman executives on a conference call. Huntsman said he thinks his company gives the right amount of information. “We’re certainly going to be looking internally as to any changes we would make,” he said. “I think we give plenty of pages of financial information.” The report does make it seem like there was more of a testy exchange between Zekauskas and Huntsman than there indeed was. Here is what Zekauskas said, according to a Seeking Alpha transcript: So if I could just, make one comment. When you report your earnings, it’s about an hour and a half before your conference call and your financials are quite complex and it’s very difficult to reconcile all of the income statement numbers to the data that you provide. And so what you might consider is you might consider a more complete reconciliation so that the adjustments can be made more easily, and so it’s easier for people to focus on the fundamentals of what you reported rather than trying to reconcile the numbers, or it’s at least something to consider. This seems more of a critique about how Huntsman is presenting the...

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