Investors expecting dour third quarter earnings from Dow Chemical Co. one day after the company reported plans to cut approximately 2,400 jobs were given a bit of a surprise Wednesday as the chemical giant reported better-than expected earnings, thanks in part to abundant and low-priced natural gas.
The Midland, MI-based company posted 3Q2012 net income of $487 million, or 42 cents per share, down 39% from $815 million, or 69 cents in 3Q2011. Despite the decline, Dow’s earnings still beat the Street’s estimates, and sales volumes were up 2% over 3Q2011 on an adjusted basis. However, the company reported sales of $13.6 billion, down 10%, or 7% on an adjusted sales basis from the previous year’s quarter.
Dow reported that prices declined on average by 9% for the quarter, and purchased feedstock and energy costs decreased by $1.2 billion versus the same quarter last year. Price declined in all geographic areas, led by Europe (down 12%), Greater China (down 11%), and North America (down 8%) on an adjusted basis.
“Our low-cost feedstock advantage enabled us to deliver volume growth — despite weakening demand,” said CEO Andrew N. Liveris. “And we have delivered improvements in operating cash flow through our disciplined approach. The purposeful actions we announced earlier this year are gaining momentum, and will be bolstered by our new, streamlined operating model.”
The petrochemical industry consumes energy as a raw material and uses energy for fuel and power. Abundant U.S. shale gas resources — and ethane produced from gas liquids — have given domestic petrochemical producers a competitive advantage over many global competitors that rely on naphtha, a more expensive, oil-based feedstock. One year ago Liveris expounded on the windfall, noting that plentiful U.S. shale gas has given the chemical sector a cheap feedstock that may be second only to the Middle East in terms of pricing (see Shale Daily, Oct. 7, 2011).
However, chemical manufacturers are quick to point out that strategies aimed at balancing the natural gas supply and demand equation could jeopardize the manufacturing competitive edge that is just now coming back to America, thanks in part to lower feedstock prices. Speaking on the sidelines of a conference in September, Brian Ames, vice president of Dow’s olefins, aromatics and alternative technologies business, said he was most worried about the United States choosing to constrain gas supply while stimulating demand. “That’s what we saw happen in the decade beginning in the 1990s.” The tightening gas market drove manufacturing overseas to where feedstocks were cheaper, he told NGI‘s Shale Daily (see Shale Daily, Sept. 25).
Ames added at the time that he was not a fan of stimulating the migration of power generation from coal to natural gas. “What we’ve seen in the past is the government encouraged switching from coal to gas while they limited supply in regions of the country, and that caused the market to get very tight and that became very difficult for manufacturers…”
As for exporting liquefied natural gas (LNG) outside of the United States, he was a little more reserved. “For Dow, of course, we’re completely aligned with free trade and global trade and all the things we do already with our products,” Ames said. “And in the case of LNG, I think we just need to be a little bit careful here because we’re using natural gas in the U.S. for many things, and the growth in U.S. gas demand is growing…It is growing and it is significant, but it takes time for these issues to kind of get into place.
“If we start stimulating a new demand, like exports to other areas, it has the potential to actually increase use beyond what we’re capable of really supplying, and it has the potential to raise prices, create the volatility again and then take away the opportunity for U.S. manufacturing.”
On Tuesday, two days before unveiling the quarterly earnings report, Dow announced a restructuring program designed to “accelerate cost reduction actions” and advance the next stage of its transformation in the midst of persistently slow macroeconomic growth. As a result, the company eliminated approximately 2,400 positions, or 5% of the global workforce. The restructuring will include the shutdown of about 20 manufacturing facilities, which is expected to result in $500 million of annual operating cost savings by the end of 2014. In addition, Dow will further reduce capital spending and investments for targeted growth programs that are “no longer a priority in this environment.” These measures are expected to deliver an additional $500 million cash impact, the company said.
“The reality is we are operating in a slow-growth environment in the near-term and, while these actions are difficult, they demonstrate our resolve to tightly manage operations — particularly in Europe — and mitigate the impact of current market dynamics,” Liveris said.
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