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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The Enterprise Ethane Terminal Is Quite Large (UPDATED)

As you may have heard, Enterprise Products Partners plans to build an ethane export terminal in Texas. It will have a capacity of 240,000 barrels of ethane per day. Let’s convert that number from the oil perspective into the petrochemical one. According to John Stekla, formally the olefins guru at IHS and now with Williams Cos., 1 million metric tons of ethylene production consumes about 63,000 barrels per day of ethane. So that means that the Williams facility, IF it ran at full capacity would export enough ethane to feed 3.8 million metric tons of ethylene production. That is more than two new world scale ethylene plants. You may be wondering why I have CAPITALIZED, italicized, and bolded the word if in the preceding paragraph. Dow CEO Andrew N. Liveris, at least, is criticizing the project and doesn’t seem to think it would run at full capacity. Dow reflexively complains about every development that could mean petrochemical feedstocks leaving the U.S. They have been fighting hard to block Department of Energy approval of LNG export facilities to non Free Trade Agreement countries. Bloomberg reporter Jack Kaskey knows all this and asked Liveris for his take on the ethane export terminal. Upon hearing an utterance that ends in a question mark, Liveris started talking. “It’s high risk, because the oil-gas arbitrage that we have baked into our assumptions for our investments is half of what it is today.” In other words, oil prices will decline relative to gas prices, which would make the export terminal less attractive. “There is nothing that we see as concerning about that announcement,” he added. (Every time “concerning” is said when “disconcerting” is meant, a kitten falls down a well.) Chemical Notebooks take: If the arbitrage is so fleeting, why is Dow building so much ethylene and propylene capacity on the premise of an enduring advantage? Moreover, if Enterprise truly intends to build the terminal then Enterprise believes that the project will earn its cost of capital. For that matter, companies such as Ineos seem to think that importing ethane from the U.S. also earns the cost of capital of building receiving facilities. What we have here is a mere difference of opinion. Either that, or Liveris isn’t being serious in his assessment or Enterprise isn’t really considering building the terminal. I would add that the premise of the investment is a big glut of ethane. The petrochemical industry isn’t building capacity fast enough to soak it all up. The Enterprise project is timed for 2016, a little in advance of the flood of new ethane capacity. It could be that Enterprise needs to export...

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Updated: Louisiana Still Backs Project Planned By Russia’s EuroChem

Back in July 2013, the Russian fertilizer maker EuroChem, in a joint press release with Louisiana governor Bobby Jindal, announced it was planning to build a $1.5 billion ammonia and urea complex in Louisiana. At the time, the announcement was just one in a long line of chemical and fertilizer projects meant to take advantage of shale. The project seemed plausible enough. There have been plenty of foreign companies planning large U.S. projects–for example, South Africa’s Sasol, which is working on an ethylene cracker and gas-to-liquids plants in Louisiana. At the time of the announcement, EuroChem had just completed its purchase of BASF’s European fertilizer business. Certainly, like Braskem and SABIC before it, EuroChem is one of those companies outgrowing the cradle of its home market. Louisiana offered good incentives to EuroChem. It sold a tract in Iberville Parish to the company for $12 million. In the original announcement, the state also said it would give EuroChem an $8 million grant as well as other incentives. So what has happened since the announcement? Russia has annexed Crimea. And Vladimir Putin appears ready and willing to salami slice more of Ukraine. (We’ll see if the agreement between Russia and the U.S. to deescalate matters will, in the long run, be a turning point or merely an intermission.) Will the State of Louisiana still support the project under such circumstances? Would EuroChem still want to go through with it? Sasol, we should remember, divested from a complex in Iran when protests over it seemed to jeopardize its Louisiana projects. It isn’t outrageous to suppose that the EuroChem plant might be one of Russia’s costs of taking over parts of a sovereign nation. I put the question to both the State of Louisiana and EuroChem. EuroChem didn’t get back to me. I am not surprised. Louisiana Economic Development, the state agency that promotes investment, did comment with a quote attributable to Stephen Moret, Secretary of Economic Development, State of Louisiana: “LED remains in full support of the project.” Not exactly William Henry Harrison’s inauguration speech, but it gets the job done. It might also be the smartest answer. Foreign policy is the responsibility of the Federal government, not a state’s. And should a state decide to pull support for an investment because it didn’t like the foreign policy of a company’s home country, it would send the message that the state conducts its business arbitrarily. That could have a chilling effect on investments from China, Saudi Arabia, and any other country that could one day butt heads with the U.S. government or run afoul of American populist sentiment. UPDATE: Eurochem has responded,...

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Coke Committed To PlantBottle Despite JBF’s Bio-based Ethylene Glycol Cancellation
Apr07

Coke Committed To PlantBottle Despite JBF’s Bio-based Ethylene Glycol Cancellation

Here’s something that wasn’t very well publicized: JBF Industries has cancelled its project to build a bio-based ethylene glycol plant in Brazil. The company, and Indian polyethylene terephthalate producer, disclosed that it was putting the project “on hold” as part of its earnings back in August. This is a far cry from the original announcement in September 2012, which took the form of a joint press release between JBF and Coca-Cola. JBF would have built a 500,000-metric-ton plant that would have derived ethylene glycol from cheap Brazilian ethanol. Coke would have used the glycol as part of its PlantBottle program, which incorporates bio-based glycol instead of synthetic glycol in the PET resins used in its soft drink bottles. The Chemical Notebook learned about the JBF cancellation development at IHS’s recent Latin American Petrochemical Networking Meeting.  Otávio Carvalho, principal of the consulting group MaxiQuim, listed the cancellation in a presentation slide. I asked Coca-Cola whether the cancellation had broader implications for the PlantBottle program. The company denied that it did. Coke blamed the cancelled project on “unexpected construction costs an a challenging economic environment”. The company said further that it is in discussions with other firms on a new glycol project. The talks may proceed for several months. Coke doesn’t expect such a plant to come onstream before 2016, which would amount to a delay of about a year versus JBF’s plans. Coke also said that it is still working with Virent, Gevo, and Avantium, on a route to a bio-based alternative to terephthalic acid. The JBF project always seemed like a stretch. This is an Indian PET company, albeit with a good track record of building projects overseas, constructing a glycol plant in Brazil, a bio-based glycol plant at that. Braskem, Oxiteno, or Dow would have seemed like more likely candidates. I suspect a few such firms did sniff out the project two years ago and decided that the setup Coke had in mind wouldn’t earn the cost of capital. (Actually, I know that one of the companies did exactly that at the time.)  ...

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Momentive On The Verge Of Bankruptcy

Momentive Performance Materials is threatening bankruptcy. Moments ago the company filed an NT 10-K with the Securities and Exchange Commission. It is what a company files when it can’t file its 10-K annual report on time. The company says  it is in negotiations with creditors and notes that a Chapter 11 filing is a strong possibility. Momentive Performance Materials is the former GE Silicones business, which the private equity firm Apollo Management bought for $3.8 billion in 2006. Momentive’s filing reads: The management of Momentive Performance Materials Inc. (the “Company”), a wholly owned subsidiary of Momentive Performance Materials Holdings LLC, has determined that the Company is unable to file its Annual Report on Form 10-K for the period ended December 31, 2013 on March 31, 2014, without unreasonable effort or expense because, for the following reasons, management needs additional time to analyze and finalize the Company’s financial statements. The Company is currently in active discussions with various stakeholders regarding alternatives to modify its capital structure and reduce the Company’s leverage. The Company has been required to devote key personnel and administrative resources, including the personnel and resources of its accounting and financial reporting organization, to matters relating to these discussions. The Company believes these discussions will be concluded shortly. As part of this process, a filing under Chapter 11 of the U.S. Bankruptcy Code may provide the most expeditious manner in which to effect a plan of reorganization that may be proposed by the Company. However, there can be no assurance that an agreement can be reached with the Company’s stakeholders or that any transaction with the Company’s stakeholders will be consummated. Although the Company is currently in compliance with the indentures governing its outstanding notes and its credit agreements, the Company has concluded there is substantial doubt about its ability to continue as a going concern for the next twelve months and expects that the audit report by its independent public accounting firm, with respect to the financial statements to be included in the Annual Report on Form 10-K, will contain an explanatory paragraph expressing substantial doubt about the Company’s ability to continue as a going concern. The going concern issue has generated substantial additional disclosures and has required the Company to change certain assumptions related to balance sheet classifications, certain debt-related deferred costs and income taxes. For these reasons, the Company has not been able to file its Annual Report on Form 10-K for the year ended December 31, 2013 within the prescribed time period. Management is diligently working to close its books and records and to complete preparation of the financial statements as soon as practicable....

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Siluria Is Looking Pretty Sharp
Mar31

Siluria Is Looking Pretty Sharp

For the first time, IHS put on a Technology Seminar as part of its World Petrochemical Conference activities last week. Don Bari and Jeff Plotkin, both formerly with Nexant, organized the gathering. At more than 100, the attendance was pretty good, especially for an inaugural event that is part of a larger conference. The first speaker was Guido Radaelli, vice president of engineering at Siluria Technologies, which is working on the oxidative coupling of methane (OCM) into ethylene. The term Holy Grail is thrown about often in the chemical industry. But it is no exaggeration for this technology. If perfected, such a technology would bestride the chemical world like a colossus. One leg would be that methane is a cheaper and more plentiful raw material than ethane. The other leg would be the considerable energy savings over ethane steam cracking because methane conversion would be exothermic. With such rewards, many have tried before and failed,notably Arco and Union Carbide, which  both had serious programs along these lines in the 80s. Things are going fairly well for Siluria. The company is partnering with Braskem to build a demonstration plant in Texas. It also unveiled an ethlylene-to-liquids technology that would convert ethylene into aromatics and transportation fuels. They’ll need some pretty cheap ethylene to make that work. Which brings us back to Siluria’s progress on OCM. Radaelli said that the company has made more headway than any company ever has in methane conversion into ethylene. The activity of the catalyst is higher, he said. The operating conditions are “many hundreds of degrees lower”. (I think this is one of the main factors that killed previous efforts.) The Siluria catalysts last years, not days, unlike previous efforts. Conversion and selectivity are thus far the same as they had been in the past. I was a little surprised to find out what actually happens in the process, as there is some ethane cracking occurring. It is powered by the heat of the conversion of methane into ethylene. I have included Siluria’s slide of the block diagram as well as one describing feedstock use. Radaelli claims economic advantages over (conventional?) steam cracking. He said that, hypothetically, if a company were to build a 1,000,000 metric ton ethylene cracker and a 1,000,00 metric ton plant using Siluria’s technology, Siluria’s technology would have been more profitable to run in each of the four years beginning in 2009. Similarly, if a company would have built a 75,000-metric-ton plant using the Siluria technology in 2014, it would have by now saved more than $100 million in ethylene purchases. (The stand alone back-integration scenario seems to be a target...

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