Brahm

Exactly How Bad Will It Get?

Is it posible that the comments and analysis provided are unnecessarily harsh and somewhat off-track? December's very low plant operating or production levels may reflect DOW's compulsion to reduce product inventories. After all very high accumulating inventory levels in the face of rapidly falling raw material/energy prices is a drag on the performance of a pet-chemical company.

Dow Chemical's Next Move

It is a good time to begin moving actively on production and facilities in India. However, even with deliberate speed in mind, India is a tough place for setting up a manufacturing facility. At least five years away, and perhaps more, for chemicals production to begin if today is the start day for initiating land acquisition, plant plannning and construction. We should not underestimate the hurdles and foibles of the whole enterprise set-up process.

Buying Dow for a Better Deal than Warren Buffett Got

I am a long term (plus 10 years) investor in DOW, and consider my investment in it (appreciation + dividend of plus 4%) a good investment, since the risk has been low. Following the announcement of the acquisition of ROH, I added up more DOW to my current position. I intend to add more to the position next week.

I had been considering adding to my position in DOW, especially after the announcement of the foreign joint-ventures, for the last few weeks. The primary reasons have been the intended transformation of DOW to a specialty chemical company, the commodity chemicals joint-ventures with raw material suppliers abroad (Middle East, North Africa and Russia), and the partial spin-offs of some bulk chemical operations in the US through joint-ventures with parties in the Middle East, and the gradual evolution also of the company into a strong agricultural (and bio-food seed) player.

There is tremendous vision on the part of management to transform this company into new growth areas (specialty chemicals, bio-foods, and agricultural chemicals). Its traditional areas in commodity chemicals manufacuring also will grow significantly using the joint-ventures abroad. The benefits provided by joint-venture partners will be formidable in terms of raw material costs. As the costs of energy remain high or even increase, the benefits of the joint-venture with raw material suppliers will have very high pay-offs in future.

I expect earnings for DOW to increase significantly, probably more than double, in three to five years. I believe that as DOW gradually transforms itself it will merit a much higher P/E than it has had as a predominantly commodity chemicals company.

Who has the better deal? I believe short term it is Buffet. In the intertmediate term (3 to 5 years) it is shareholders, especially those who are significantly increasing their positions in DOW. Long term, it is almost even for both shareholders oand Buffet. However, we must remind ourselves that without Buffet or someone like him the deal would not have been easy to happen. Capital is hard to come by in the prevalent atmosphere.