Dow Chemical CEO Delivers a 'Transformational Year', Plans to Invest in China

There has been a ton of speculation as to what Dow Chemical (DOW) was going to do with the $9.5 billion it is getting from Kuwait in the recent JV agreement.

Some background:

On 12/7 I wrote:

How about using the very same strategy they have been using for the past year? Selling chunk of this business to outsiders and placing them into the Joint Venture (JV) category. This would provide Dow billions of dollars instantly to be deployed in buying some specialty chemical makers without impairing the balance sheet.

One week later Dow announced it has sold 5 of those very commodity businesses into a new JV with Kuwait and would receive $9.5 billion for them AND still receive a 50/50 split of the businesses results.

Where is the money going?

Dow Chemical plans to invest $5 billion in China in the coming 10 years, said CEO Andrew N. Liveris in Shanghai yesterday. The $5 billion fund budget will not cover a potential coal-to-chemical project in central China's Shaanxi Province, where the chemical giant is conducting a feasibility with Shenhua Group Corp, the world’s second largest coal producer, added Liveris.

Now that is has signed the agreement with KPC (Kuwait Petroleum Corp.) Dow is in talks with Sinopec (SHI) to take over a stake in the refiner's $5 billion joint venture oil refinery and petrochemical project with Kuwait Petroleum Corp in East China's Guangdong province.

China welcomes chemical producers from Kuwait and Saudi Arabia because they are able to provide crude oil to the country's large petrochemical projects, said Wang Jin, an analyst at Orient Securities recently.

Dow is on a path to be the world's dominant petrochemical producer. Early this year CEO Andrew Liveris called 2007 "a transformational year", and that is what he has delivered.

Comments

[swimjames]

Yesterday (12/20/07) the rumour went around that one of the specialty companies that Dow is looking to acquire with its Kuwaiti filled coffer is Johnson-Matthey. Why? Does it have anything to do with rhenium? The answers are: 1) It’s a good fit and a good idea, and; 2) Yes, but that’s not the whole story.

Producers of oil, like the Kuwait State Oil Company, lament on their way to the bank, that their precious resource in really wasted by being burned inefficiently to produce energy to carry one person or a six-pack of Coca Cola (this is the Kuwaitis talking remember) in a three tonne vehicle over a distance that a person could easily walk. They would feel a lot better, and make a lot more money yet, if that oil could all have the value added to it by producing plastics and pharmaceuticals.

Suddenly several political and economic agendas have coalesced to make their dream possible:

The Chinese and Indian markets for plastics and pharmaceuticals have exploded and demand for these high value added oil based consumer products is skyrocketing in places that have no domestic supply of oil.
Middle East oil producers have no ax to grind with either China or India and are acceptable politically to both.
China and, more and more, India have enormous amounts of capital to be invested and to be spent to acquire, more and more, domestic goods for consumer economies rather than surplus aircraft carriers and planes for them from bankrupt or downsizing militaries of former empires.
American technology, the best in the world, and unbelievably undervalued by ignorant American politicians and businessmen is on the market.
The environmental activism of the industrial world may well reduce that world’s gasoline consumption significantly from now on, and, in fact, reduced dependence on imported oil anyway is now an official American policy.
The ideal situation for both the Kuwait State Oil Company and The Dow Chemical Company is that both put into a deal their core competency and that the outcome is synergistic. In fact that is exactly what has happened.

If the BRIC economies adopt gasoline and diesel fuelled small cars with pollution control by catalytic converter they will need the technology to make the correct types of fuel hydrocarbons from their own oil, in the case of Russia and, apparently, Brazil, one day soon, and from imported oil in the case of India and China. The Dow Kuwait company will be able to sell that technology to Russia and Brazil and to utilize it in Kuwait to give Kuwait an enormous competitive advantage. Further the Dow-Johnson-Matthey subsidiary will be able to sell the Dow Kuwait Plastics (and future fine chemicals) operations the platinum, palladium, rhodium and rhenium it needs to make its proprietary cracking and reforming catalysts as well as fine chemical processing catalysts.

And, if the BRIC economies need automotive emission catalyst technology and raw materials it is likely that they will simply choose to deal with Dow-Johnson-Matthey Kuwait as a, to them, one stop shop. It will be interesting to see how Dow’s shopping spree for high tech specialty chemical companies meshes with the future demands from the BRIC economies.

To me the most interesting outcome of the above non obvious connections between Johnson-Matthey and the copper producers, Dow Chemical and Johnson-Matthey and the Dow Chemical-Kuwait State Oil Company is how they are building a foundation for a minor metals market that is not just a temporary sideshow for those who came to commodities too late for the big fast run-up party. I am certain that Dow-Johnson-Matthey-Ku... will be the world’s major player in non automotive and perhaps even automotive uses of platinum, palladium and rhodium, and the world’s major player in the rhenium market.

The Dow Chemical Company has a great track record in chemical and metallurgical (magnesium) innovation. If its management gets control of product development for the automotive emission control industry, the fuel cell industry, and the adding of value to petroleum products through the Kuwait State Oil and the Johnson-Matthey merger and acquisition it could turn all of those industries on their global heads.

One last connection: I once met the man who put Dow on its current path, the former Chairman, Mr. William Stavropoulos, along with the late Detroit Tiger great, Earl Wilson. Earl had played with Carl Yastrzemski for Boston in the 1960s. Bill Stavropoulos told us that he had played college baseball at Princeton and thought of going pro until he played against Carl Yastrzemski and realized that he should continue his studies in chemical engineering instead. When it comes to pass in the next generation that the Dow Chemical Company becomes the world’s largest and most profitable of its type, I wonder if they will remember their debt to Yaz.

If the mergers and acquisitions mentioned above go through, the play in rhenium may well turn out to be Dow Chemical, but even, if not, be aware that much of the future of the rhenium market depends on the health and growth of the Dow Chemical Company.