Strong demand in packaging, transportation and construction are propelling growth for plastics and other performance materials at Dow, contributing to strong profitably, which is also getting a push from low oil prices.
“These three markets have carried the strength that we saw at the end of 2015 into the first month of 2016,” CEO Andrew Liveris said yesterday in an earnings conference call with the media and financial analysts. “The global economy continues to be volatile and we see that trend persisting for the near term. However, we also see strong demand from consumers in the U.S. as well is in China and that plays well through our consumer driven portfolio, technologies and narrow and deeper market focus.”
North America is expected to remain strong for Dow products. “Demand in Europe will continue to improve and Latin America will have mixed returns across the region. We also expect continued growth in China.”
While oil prices have dropped dramatically in the past few months, polyethylene prices have not dropped to a corresponding degree, helping fuel Dow’s profitability. The converse is also often true: When oil prices are rapidly rising, it can be hard for companies to raise plastic prices at the same rate. This is particularly true for product purchased on the spot market.
“We do believe low energy price, low oil prices are seeping into the economy and that’s creating a stimulus that actually is of the right kind and I think if that stimulus continues to be what it is short of major tectonic events geopolitically, I think the confidence in the real economy will emerge continually from the consumer.”
Liveris teased that PE tags may face pressure in 2016.
“We ended 2015 with record low inventories and very, very strong sales, record production out of our manufacturing assets and product continuing to shift to higher volumes. In 2016 most of the new capacity that’s talked about is scheduled to come on at the end of 2016 and our view is a lot of that’s going to slide maybe into the next year. Also bear in mind that you have a big turnaround season in the Q2 here in the Gulf Coast which we think will have an impact and we have Sadara coming up in the first quarter. So I think net-net, we’re poised to take advantage of that situation and when the new capacity does come in, in the second half we think the market will be geared to absorb it at a 2.5 percent GDP rate; supply and demand is imbalanced for 2016.”
In early December the first polyethylene units began production at Dow’s giant Sadara joint venture with Aramco in Al Jubail, Saudi Arabia, and first shipments have been received by customers. The complex will include 26 integrated world-scale manufacturing plants that will produce more than three million tons of products annually. Sadara will be a Fortune 500 company within the first year of full operation. Liveris said that additional polyolefin units will come on line on the Gulf Coast and in Saudi Arabia this year.
It appears, however, that global ethylene crackers will not come online as fast as had been first reported. “When the second wave comes is anybody’s guess at this point,” said newly appointed president James Fitterling. “Some people are saying 2018, I think it might even slide into 2019 or 2020.”
Dow’s volume in the last three months of 2015 increased 4 percent, the ninth consecutive quarter of year-over-year growth. This includes 5 percent growth in emerging regions led by greater China which was up 10 percent. Sales were negatively affected by currency impacts. Operating EBITDA, a key earnings metric, was $2.4 billion. Excluding the impact of divestitures, operating EBITDA rose more than $100 million versus the same quarter in 2014. Operating EBITDA margins expanded across all segments to 20.9 percent, the highest quarterly results since the first quarter of 2005. Dow attributed its growth in China to a shift in its sales to more advanced products and away from commodities, reflecting changes taking place in the Chinese economy.
Strength in plastics results globally were particularly attributed to strong sales for high-end packaging.
The Dow-DuPont merger was mentioned only briefly; the goal is to achieve a consolidation within 18 to24 months.
The following points were also made during the conference call:
- Dow Automotive Systems is making gains in electric vehicles, where the company’s content in North America per vehicle averages three times that of non-electric vehicles.
- Normally slow-growth polyurethanes experienced a double-digit sales growth, which Dow attributed to a more specialized systems sales approach. In addition, a new polyols facility in Thailand drove share gains and double-digit volume increases in Asia.
- Strong infrastructure and automotive demand, particularly for SUVs, boosted the elastomers business to a double-digit sales growth in the fourth quarter.
- Dow has brought online the world’s largest on-purpose propylene facility, which it said is making smooth and steady progress towards full rates.