Dow Chemical (
) recently restarted its St. Charles Olefins 2 plant in
Louisiana after four years to accelerate investment in the U.S.
Gulf Coast region. The company expects this move, which comes on
the back of lower gas prices in the region, to help lower
costs and strengthen its competitiveness.
The applications of hydraulic fracturing technology
and horizontal drilling of shale rock formations have
helped unlock the previously inaccessible sources of shale gas,
which has caused a glut of gas supplies. This has led to a
significant reduction in the prices of some essential chemical
inputs, particularly ethane. Dow plans to invest $4
billion into the U.S. Gulf Coast to increase ethylene and propylene
capacity through 2017.
The Louisiana plant produces ethylene (the simplest olefin or
alkene) by cracking ethane that is used as feedstock for almost all
of the company's operating segments. It is used to make elastomers
like EPDM, which is most commonly used in door seals and window
seals in vehicles. Ethylene is also used as a primary feedstock in
the production of polyethylene (commonly known as polythene).
Polyethylene has a variety of uses in electrical and
telecommunication, hygiene and medical, and performance packaging
segments like insulation of power cables and packaging of food
articles for preservation. Ethylene oxide (also derived from
ethylene by oxidation) is used in the agro-science segment, and so
the extension of backward integration in producing ethylene helps
Dow drive better margins on its products.
The performance plastics and materials segment uses most of the
ethylene produced by the company. This makes the segment the
foremost beneficiary of increased production of ethylene. The wide
range of product applications in this segment from packaging
adhesives, disposable diaper components, sporting goods and
housewares to automotive interiors and exteriors, carpeting,
home furnishings and personal care products contribute to the huge
$450 billion plus and growing market size. This division makes up
more than 55% of our price estimate for Dow's stock.
We have currently factored in fairly stable EBITDA margins in
this segment because of lower gas prices being offset by lower
margins on naphtha-based plants in Europe and soft pricing due to
weak demand going forward. However, with huge expansion plans in
the U.S. Gulf Coast region, the company expects to drive EBITDA
higher by around $2 billion per year by 2017. This could
potentially imply upside to our current price estimate for Dow.
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