Posts Tagged → Liveris
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 there.) He said it was a new era with new head coach Brady Hoke. I hope Liveris is right. But I’ll believe it when we beat Ohio State.
Dow CEO Andrew N. Liveris appeared on a CNN special Sunday night hosted by Fareed Zakara titled “Restoring the American Dream, Getting Back to Work.” The segment with Liveris can be found here.
As previously noted by The Chemical Notebook, and in C&EN, Liveris wrote a book on rejuvenating American manufacturing called Make It In America: The Case for Re-Inventing the Economy” . (My review was blurbed in the editorial review section of the Amazon listing!)
I transcribed some of the interesting quotes from the CNN piece:
Zakaria: The manufacturing jobs of the future are high-tech and high paying, but isn’t it impossible to lure those jobs to America since our labor is more expensive than other countries’? Absolutely not, says Liveris, labor accounts for only 8% of his total costs.
Liveris: I do not make a decision on where to site my factories based on labor costs. I make it based on—totally–around the policies to encourage me to invest there and the human capital to support. And that’s why, at the end of the day, we still have a chance in this country.
It should be noted that chemical operations are capital intensive, not labor intensive. Here’s a link to some data from the Census Bureau’s 2002 Economic Survey. For chemicals, the value of shipments per paid employee is more than twice the average for the entire manufacturing sector. And the chemical industry’s average ratio of shipments to payrolls stood at 10.33. Only the petroleum and coal (35.00) and the beverage and tobacco (15.27) industries have higher ratios.
At chemical plants, you see a lot of plumbing and reaction vessels, but not many people. The human activity typically occurs a) in the control room, (b) at the loading and packaging area, and c) at the guard shack. So when Liveris says the cost of labor isn’t a big factor in his decision making, we can’t necessarily assume that this applies to other manufacturers, making other kinds of products.
Liveris made another point in the interview, one he makes often, which I think is very important to C&EN readers. This is that research and development will follow manufacturing overseas.
Liveris: When you make stuff, you don’t realize that when you move the making somewhere else, then the people who know how to make it have the intellectual knowhow to make the next one.
Zakaria: But now they are in China.
Liveris: They’re in China. So you have lost the supply chain as well, and your creativity has created huge jobs elsewhere of the continuous kind. It’s not just the job of the first Kindle, it is the job of the second, third, and fourth.
As he’s done in the past, the Dow CEO called for a national manufacturing strategy.
Liveris: I do think your notion of a modern day industrial policy, a national, advanced manufacturing policy to spur investments, not subsidies, not incentives, just to make it easier and more understandable would be a great start.
Singapore is the classic example of that, Lee Kuan Yew’s Singapore. They are already working on the next industries, in their case, biotech. Germany gets it. Germany, a high wage cost country, understands that I have got figure out what’s going to follow, when the Chinese finally copy my advanced engineering equipment, which they will do.
The “not subsidies, not incentives” part I found interesting. In his book, he had much to say about incentives and how the U.S. should offer incentives similar to the lush subsidies for industry offered in Asian countries. “The problem is that if we refuse to offer these kinds of incentive packages while other countries are aggressively outdoing one another, we put America at a clear competitive disadvantage,” he wrote.
He now seems to be downplaying this view. I do wonder if this interview was conducted after the Solyndra story broke.
Liveris closed with this.
I’m not afraid of a conversation that says working with government. It’s not big government or small government, it is smart collaborative government, which is, I think, the model that has made the United States great. It is the model that has created innovation of the great kind in the United States around crisis, World War I, World War II, NASA and a man on the moon. Do we have a crisis today? I would like to think that the answer to that is “Yes”.
These aren’t great examples, though they are often cited to make similar points. The manufacturing problem is indeed serious and could lead to a continued period of anemic job creation and stagnant wages. But it isn’t to be compared to World War II, when the U.S. faced an existential threat and the U.S. government spared no expense to defeat the Axis powers. The moon landing was a very important episode in the Cold War, and the government was willing to pay anything to send three men to the moon and bring them home safely before the Soviets did something similar.
I do think that the point of government collaboration is a valid one. I think a better example is the First Transcontinental Railroad. The Pacific Railroad Acts raised bonds at low interest rates for the Union Pacific and Central Pacific railroads and granted enormous parcels of land to these companies. (These also remind me of the kinds of incentives that Asian countries give to companies today.)
As you may have heard, Dow and Saudi Aramco are moving forward with their new, $20 billion project for the Kingdom of Saudi Arabia. If you haven’t heard, the news story I wrote yesterday has all the relevant details.
Here are a few more observations:
1) The joint venture will be called Sadara Chemical: “SA” stands for “Saudi Aramco”, “D” stands for “Dow”, “ARA” stands for “Arabia”. Dow CEO Andrew N. Liveris says “the word Sadara stands for progressive leadership, enhanced performance, and a status derived from quantifiable talent and proven mastery”. Um, OK.
2) The joint venture, ironically, is a major step forward in Dow’s transformation to more value-added chemicals. The idea here is similar to the one behind its major petrochemical investments in the U.S.: To back-integrate performance chemicals, such propylene derivatives and “solution polyethylene”. Also, there is a strong developing word orientation to the project. Dow projects that 70% of the output of this project will be marketed in Asia (~45%) and the Middle East (~25%). Dow operations downstream, such as a polyurethane systems house, at a newly established industrial park will be a large customer of the joint venture.
3) I don’t expect much creep upward in the cost of this project. The $20 billion figure is being billed as an upper limit. Engineering, procurement, and construction comprise $12 billion of the cost. Another $8 billion is financing, startup, and stuff. Liveris noted that about half of the costs of the major elements of the project, such as the ethylene cracker, are already locked in. That said, other projects in the Middle East over the last business cycle busted budgets considerably. My suspicion, however, is that Dow built that into the number it is putting out.
4) The venture is really ready to roll. “We have bulldozers moving to the site in two weeks,” Liveris said during a conference call. That said, I have heard chemical engineers chuckle at the notion of site preparation being a sign of progress.
5) This is one of Dow’s last major loose strategic ends. Dow has been kicking this project around since 2007. Originally it was supposed to go up in Ras Tanura, but the partners changed venue last year. Considering all Dow went through during the financial crisis, that is a very minor hiccup in such a major project. Many other companies might have just walked away.
6) Another Dow loose end involves PIC of Kuwait. Dow is seeking $2.5 billion in arbitration hearings from PIC because of the failure of the proposed K-Dow petrochemical joint venture back during the financial crisis. It was the government of Kuwait that scuttled the deal, not PIC. And given that PIC has been a good partner for Dow’s Equate joint ventures in Kuwait (as well as MEGlobal), I would imagine that Liveris is interested in finding a mutually beneficial, and I’m sure creative, solution to the problem. I personally think it involves the purchase of Dow assets, either through buying Dow out of existing joint venture(s) or by the formation of a new HDPE/PP joint venture around Dow’s existing assets.
7) SABIC has indicated an interest in building isocyanates and polyols plants in Saudi Arabia. I wonder if that will still happen now that an existing polyurethanes player is investing.
Dow CEO Andrew N. Liveris put out a press release on July 14 regarding the debt ceiling negotiations in Washington. Here it is in its entirety:
MIDLAND, Mich.–(BUSINESS WIRE)–Andrew N. Liveris, Dow’s chairman and CEO, stated today, with reference to the bi-partisan impasse on raising the debt ceiling:
“Business doesn’t have a seat at the table in these talks, but we sure have a stake in the outcome. All Americans do – we are all in this together. There’s huge opportunity for our nation if both parties reach a meaningful agreement, and huge consequences if they do not. We need a resolution as soon as possible and urge all involved in the negotiations to continue to work towards a solution that eliminates uncertainty and puts stability into our economy.”
Whenever anyone uses the phrase “We are all in this together”, you can rest assured that the speaker isn’t saying much and is relying on someone else to get down to the business of hammering out the particulars. This is surprising from someone who wrote an entire book about about corporate taxes, bureaucracy, many other topics directly related to what is being negotiated in Washington.
Liveris isn’t alone, GE’s came out with a dramatic pronouncements before the U.S. Chamber of Commerce last week where he didn’t say very much at all either. Via a WSJ Blog:
“I just think we need certainty about the debt ceiling and we need it now. That really can only happen here. Let’s do it now.”
Do what, Jeff?
But a little perspective might make for a more fair assessment of these two executives. Both are involved with the Obama Administration. Liveris last month was named co-chairman of President Obama’s Advanced Manufacturing Partnership. Immelt is the chairman of The President’s Council on Jobs and Competitiveness. It might be significant that Immelt and Liveris aren’t backing particular Obama proposals.
And probably more than anything else, these executives could be worried that the far-left and far-right activists in Congress will scuttle an agreement should it be made. If that sounds crazy, remember in September 2008 when the House of Representatives rejected TARP and the Dow Jones Industrial Average dropped 700 points?
So what Liveris and Immelt said is probably better than saying nothing at all.
According to a recent Citigroup filing with the Securities and Exchange Administration, Andrew N. Liveris will not stand for reelection to Citigroup’s board in April. No reasons for the move were given.
I do remember that back in 2010, when the Dow CEO last stood for reelection, he faced opposition from CalPERS. The nation’s largest public pension fund said it would cast “withhold” votes for Liveris, as well as former University of Pennsylvania head Judith Rodin, because they served on Citigroup’s audit and risk committee before the financial crisis. Moreover, the California fund said Liveris served on an “excessive number of company boards.” He is chairman of Dow and is also an IBM director.
“In part for their accountability in the financial crisis” was actual wording CalPERS used in the release. Would anybody have listened to Rodin and Liveris if they predicted the financial meltdown and warned the world about it? Probably not.
At that meeting, more than 17 billion shares voted for Liveris. About 700 million voted against him. He won handily, though only two other directors former Alcoa chairman Alain Belda and Citigroup chairman Richard Parsons received fewer votes.
Also worth noting is that by that meeting, he had already moved from the audit and risk management committee to the personnel and compensation committee and the public affairs committee. (I’m not terribly sure what that latter committee does, but I’m pretty sure that Liveris would be pretty good at it.)
Though Liveris’ tenure at Citigroup was somewhat controversial, there doesn’t seem to be enough evidence to suggest that the dust up with CalPERS is the reason he’s leaving the board.
Dow’s investor day during the first week of November yielded a wealth of C&EN stories for me. I wrote a Latest News and News of the Week on the company possibly splitting up its polyolefins enterprise. I alluded to its timing on its Chinese coal to chemicals project in another News of the Week piece. And the next issue of C&EN will have a feature story on its Rohm and Haas progress.
Here are some impressions and tidbits that won’t make it into the magazine but I still think are worth noting.
1) Dow CEO Andrew N. Liveris is not without his talents. CEOs of chemical companies often bring unique skills to their jobs. Jon M. Huntsman, for instance, is one of the industry’s best negotiators. Liveris is at his best when he is moving his lips. He is a salesman of first rank. When you ask him a tough question, he acts as if he woke up that morning hoping someone would ask him that.
2) Even Andrew Liveris can be stumped. A reporter from Michigan Public Radio asked him about hypocrisy of investing in solar cells and lithium batteries in the U.S. while pursuing coal-to-chemicals in China. Liveris wobbled to his feet muttering things about best practices, Responsible Care, and planting lots of elm trees.
3) Liveris isn’t excited about the pace of U.S. recovery. Coming as it did one the eve of election day, Liveris fielded questions about the economy and what he thought about policy. “I have done 22 overseas trips this year and I gotta tell you, including Europe, I’m excited when I go,” he said. “When I come back here, I feel depressed. The U.S. does feel very different. The U.S. is mired in uncertainty. The lack of clarity out of our political agenda is causing business to stay on the sideline.”
4) Liveris has been right about the polyethylene market cycle. “Industry pundit forecasts for 2011 are too barish,” he said. Supposedly, an onslaught of capacity in the Middle East was to bring a blow from the supply side to the ethylene chain. As it turns out, a strong global rebound in demand and problems bringing on the new capacity for various reasons—inability to coordinate with feedstocks, high construction costs, renewed embargo emphasis on Iran—are dampening the impact. Not to mention that North America is one of the cheaper marginal producers because of shale-based gas.
5) No word on costs for the Aramco project. I tried to get this out of him. Back when the massive complex was planned for Ras Tanura, pundit estimates were as high as $20 billion. The partners are moving the project to Al Jubail, where there is more existing infrastructure. At the conference, Liveris said the partners would wrap up engineering work next year. But while he would put the size of the project in the “double digit” billions, a more precise number will have to wait until the front end work is completed. Owing to the new venue and the mid-cycle nature of the project, I would expect the cost to be much less than the most grandiose estimates.
6) Dow’s Powerhouse shingles get UL certification. OK, the Underwriters Laboratories signing off on Dow’s CIGS photovoltaic panels might not seem earth shattering. But in the construction world, anything that allows them to be specified into building codes and the like is important. I toured the pilot facility making the cells in Midland. They do seem durable and easy to install. I also saw the panels installed on a house. They really are harder to notice than conventional silicon photovoltaics.
7) Less TiO2 in paints. Dow has new “polymer technology” that it says can reduce titanium dioxide in solvent-borne alkyd architectural paints by as much as 15%. The company already has opaque polymer technology in water-borne latex paints. The company says the technology results in lower volatile organic compounds and is cost effective. I suppose this is because fewer coats are needed due to the additional hiding power.
8) Dow expanding trimethyl gallium. The company is opening a plant for the LED precursor in Korea, part of plan to expand capacity of the stuff by 60 metric tons per year in that country and in the U.S. I chatted with chief technology officer Bill Banholzer. He explained to me that the program is an example of synergy between Dow and Rohm and Haas. Basically, Dow was able to scale up production beyond the near lab-scale that was normal under Rohm and Haas, yielding a 65% decrease in capital intensity.
The talk of the chemical town this week was Dow Chemical’s Q2 earnings. The company’s 54 cents per share—excluding unusual items—fell a little short of the 56 cents that Wall Street was hoping for.
Wall Street doesn’t like being disappointed, especially in a good earnings season when other chemical companies are overshooting forecasts. Investors chased Dow’s shares down Exchange Place and beat them up with tire thumpers. On August 3, the day of Dow’s announcement, shares closed down 11% versus August 2, to $25.50.
With the earnings, Dow officially admitted it is moving its project with Saudi Aramco from Ras Tanura to Al Jubail. Rumors saying as much have been around since early spring. Dow says it will wrap up front end engineering in 2011.
It seems like the company would rather use existing infrastructure in Al Jubail rather than start from scratch in Ras Tanura. I wonder if it is being scaled down with the change in venue. Back in 2007, estimates for the construction were running as high as $20 billion and Andrew Liveris was promising it would be the “The Freeport, Texas, of the emerging world.”
In the conference call, Liveris said propylene oxide and epichlorohydrin were part of the project slate. Dow was saying as much back in 2007. During the conference call he also mentioned acrylic acid. That might be a sign that its acquisition of Rohm and Haas is influencing the scope of the project.
One Liveris statement from the conference call worth parsing is this:
“We’ll get the Aramco project, the Jubail project, up and running in the mid-part of the decade, and the China project will come in the latter part of the decade.”
There is nothing surprising about the Aramco project timing. Four to five years after engineering is completed is a reasonable timeframe for a project of its magnitude in Saudi Arabia, which has a good track record for getting energy and chemical projects done.
Dow has been talking about the Aramco complex since about 2006. One can call a mulligan on the delays. A little birdie once told me that the Saudi’s weren’t particularly enthusiastic about Dow’s proposed—and subsequently failed—attempt to sell the half of its commodity chemicals business to the Kuwaitis. That might have slowed the project a little. And Rohm and Haas and the financial downturn certainly did as well. If Dow does get the project off in less than ten years after it first talked about the project publically, that would be a solid accomplishment.
The other part of Liveris’ remark was about its proposed coal-to-chemicals project with Shenhua in Shaanxi Province, China. He was basically telling analysts not to expect that project before 2020. It’s 2010. That’s a long time to have a project cryogenically frozen.
Goldman Sachs analyst Robert Koort headed to Dow Chemical’s headquarters in Midland, Michigan, to talk to top execs. He came back smitten, reiterating his buy rating on Dow’s stock.
Dow has been transforming itself from a commodity chemical to a specialty chemical company. The keystone was its purchase of Rohm and Haas last year. CEO Andrew Liveris has been hammering the transformation message to shareholders. He wants his company to be a high-growth, long-term investment, not a fast-money, cyclical play for speculators once or twice a decade.
He must have been pleased when he read this in Koort’s report to clients:
“We believe Dow shares remain somewhat stigmatized by its commodity chemical past as many investors fail to appreciate the transformation that has occurred, resulting in a much heavier weighting towards intermediate and specialty chemicals.”
Aw! It is the sort of thing that I would say to my wife over a flickering candle on a night out without the kids.
Koort theorizes that Dow’s transformation will be soon be vindicated by the much anticipated downturn in the ethylene chain caused by the deluge of new Middle Eastern capacity. When that happens, Koort says, Dow’s earnings from specialties will carry the day and investors will finally get the point.
Perhaps, but only if the downturn is very dramatic. It might not be. Koort said that executives hinted as much when they “laid out a case for better than expected results in the ethylene chain.”
Such a case can surely be made, at least from a Dow perspective. There is a slow, albeit timid, economic recovery underway that will absorb some new capacity. This recovery might be given plenty of time. All this capacity was originally supposed to start up years ago, but regional players have had difficulty ramping up the latest generation of plants. Who’s to say all this gets straightened out in the next couple of months?
As for Dow, it has a strong position in North America. There, shale gas has helped make regional industry more competitive globally. The Middle Eastern capacity will have a bigger impact on higher-cost naphtha based producers in Europe in Asia. (Dow does, however, have three ethylene crackers in Europe and a JV in Thailand).
Dow also makes ethylene and polyethylene in Bahia Blanca, Argentina. The country doesn’t offer the most secure natural gas feedstock supply in the world. But with Braskem soon to command a monopoly in Brazil, South American plastics converters will cherish Dow more than ever before.
Now I’m sounding romantic.
But indeed, there might be silver linings for Dow either way the downturn plays out.
Dow CEO Andrew N. Liveris has an Op-Ed out in the USA Today on a topic that is dear to my heart: reversing the decline in the American manufacturing sector.
This is a theme that Liveris often brings up in his speeches. “Manufacturing employs nearly 13 million people in the U.S. and 6 million in related fields. No other sector performs more R&D, drives more innovation, exports as much, or contributes more to our nation’s economy,” he wrote in the Op-Ed.
I couldn’t agree more. Whenever I see a factory razed and replaced with a Target store, I think of consumers’ money escaping the local economy and stopping briefly in Minneapolis en route to China. I could never accept the view that an economy based on consumerism and services is as strong as one based on manufacturing and production.
Luckily, people seem to care more about manufacturing now than they did a decade ago. “Without manufacturers, who’s going to use all the services?” I overheard someone say last month at Pittsburgh Chemical Day. At that event, Greg Babe, CEO of Bayer Corp., had a message similar to Liveris’ about American manufacturing in his keynote address.
My favorite of Liveris’ lines was this: “We should look beyond today’s recession and recognize that stimulus should favor investment over transfer payments.”
Liveris’ recommendations weren’t earth shattering, we have heard them all before. America needs better infrastructure, more R&D, better science and math education, a level playing field in international trade, an alternative energy strategy, fewer lawsuits, and lower corporate taxes.
But these are points good enough to mention another time, especially with the gravitas of the CEO of the Dow Chemical Company behind them.
I have one small amplification. Will someone please add economics to the often repeated litany of subjects in which American students need to be better versed? If Americans had a better understanding of economics, perhaps fewer of them would blow all their discretionary income on interest payments at Rent-A-Center, and instead, have the money to invest in American companies or even start their own businesses. Economics, on the other hand, is pretty popular among college students.
On the energy and R&D front, Liveris’ example of smart R&D spending was his Dow-Kokam battery joint venture, which got $161 million from DOE to build a plant in Michigan. Unless consumers actually buy hybrid and electric cars—in large numbers and at a profit to automakers–such government largess will eventually be judged as just another transfer payment.
On the other hand, no one will buy cars that don’t exist because there’s no local factory to build the batteries. Government money might be needed to get the supply chain going. This may turn out to be the smartest kind of spending in the stimulus package. The United States has a massive advantage on the world stage: a government that can raise money more cheaply than anyone else can. By selling bonds and deploying the capital in ways that make the U.S. economy more competitive, the U.S. is, in a roundabout way, taking capital from Saudi Arabia and China now and using it to beat Saudi Arabia and China later.
There’s nothing wrong with that.