Jamaican in Africa

Dow Chemical Says 'See You in Court' to Kuwait

You know, it would be easy to agree with you if I were to only look at the numbers, and I believe that DOW's position has been made stronger now that it has an alternative to Kuwait. Here is the problem, geopolitical considerations sometimes interfere with what would otherwise be good business decisions.
Let us look at three significant recent geoplitical facts:
The Israeli/Palestinian war.
The Russian decision to cut off of gas to Western Europe.
The anticipation that oil prices will rise.

Let us briefly look at these three factors, and notethat the condition on the ground is much more complex, but these provide an explanation into what many who pay attention to economic data might fail to realize.

1. The Israel/Palestinian conflict is part and parcel of what some people in the region see as an ongoing Arab-Israeli disagreement. Islamic parties are using this and other military operations to push Kuwait away from the west. As the government weakens, tribal alliegances and Islamic Parties strengthen. An ex Kuwaiti Oil Minister wrote an editorial (www.arabtimesonline.co...) highlighting the role of tribalism and religious parties in an era when the government has become weak. i Religion, tribalism and an age old conflict are competing with sound fiscal considerations and influencing government decisions in Kuwait.

2. As winter deepens, and energy supplies fall in Europe due to the disagreement between Russia and the Ukraine, European policy makers have been scrambling to find alternative energy suppliers for the anticipated fall in supplies of natural gas. Guess what is the best next available substitute for natural gas... you got it, oil. In the short run, oil cannot be easily substituted for natural gas, because plants will have to be modified, new infrastructure built etc... but it is providing an opportunity that OPEC is desperately seeking to increase the demand for oil even as industrial production and associated demand for energy falls.

3. The anticipation that oil prices will rise. Kuwait is in the enviable position of producing oil at about $20 per barrel, so even when oil fell to less that $40/ barrell Kuwait continued to make almost 100% profit on each barrel of oil it produced. Most forcasters believe that as the international economy recovers, that the demand for oil and other natural resources will increase, and it is likely that oil may command a price of between $60 and $70 per barrel in late 2009, providing a tremendous increase in revenue and financial resources at its government's disposal.
Add to that fact, that Kuwait is fiscally very conservative. Unlike other major oil producers like Iran and Venezuela, the Kuwaiti's typically do not have budget crisis, infact they frequently understand thier budgeted outlays by as much as 30% (www.ameinfo.com/32099....), so when other OPEC nations struggled to meet obligations, Kuwait had few concerns.

Kuwait can afford to pay the cost of breaking this agreement without significantly weakening itself financially in the short term, and it has many cards to play in this matter. I believe the Kuwaitis would be making a mistake in the long term to abandon this deal... but the fact is that they can afford to do it without too much pain in the short term, and too frequently we note that policy makers opt for short term satisfaction rather than exercising good judgement that would be helpful in the long term.
Can I predict the how likely DOW will be in convincing Kuwait to honor its obligation? No, but I would not hold my breath in anticipation that the Kuwaiti government will come to the table and try to revive the deal. My gut tells me that they are going to pay up and walk. This is just a gut feeling.

Four Reasons to Own Dow Chemical

You know while the company's leaders may become distracted from their core business preparing for the upcoming litigation, there is very little except for the politics that would make me hesitate to purchase DOW Chemical.
Lets start, it has a p/e ratio of 5.7 compare that to its competitors whose price compared to earnings is about 9. This means that it earns much much more than its competitors if the cost of aquisition is equaled.
Its business is manufacturing plastics, hydrocarbons for industry, epoxy resins, agricultural products and construction materials.
The world is in a recession, and the things the various economies will need to drag it out of the recession (food, industrial chemicals, building materials, plastics, fertilizers etc) are what DOW produces, and it derives greater revenue from the sale of these products than its competitors (see p/e ratio for DOW vs industry).
DOW is very well positioned to take advantage of its core business and expertise as the world economy comes out of the recession where basic comodity prices (raw materials DOW uses to manufacture its products) are at an all time low.
Up until now I have not owned any of it... but that may well change soon.

Kuwait and Dow Chemical Deal Will Get Done Despite Opposition

If this deal ever becomes a reality I would be surprised. People sometimes fail to realize how important religion is and how much it influences government policy. Right now the Islamic parties are holding the line, and stalemating every initiative that apprears pro-western. The Islamic parties are hoping to gain more influence through populist appeal and are using the Israeli/Hamas confrontation to consolidate their influence especially since the Kuwaiti executive has no real cabinet currently. The Prime Minister, who supports the deal wiht Dow Chemical has been weakened, and was recently forced to tender his resignation.
This deal is essentially a "proxy war" of sorts between pro-western forces and pro Islamic forces in Kuwait's government. Kuwait's economy has taken a beating as a result of the fall in oil prices, and the Islamic politicians are suggesting that the failure to prepare for the impact that the fall in oil prices is having on the economy is the pro-western Prime Minister's fault.
I would be very surprised if this deal succeeds.