Monday, July 23, 2007

Dow Chemical Enters Bio-plastics In Yet Another JV

Just in case anyone thought DOW Chemical CEO Andrew Liveris might rest after the flurry of deals he has announced to date this year, think again. Dow (DOW), the world's largest producer of polyethylene, and Crystalsev, one of Brazil's largest ethanol players announced plans for a world-scale facility to manufacture polyethylene from sugar cane. Polyethylene is the most widely used of all plastics and can be found in all manner of everyday products, from food packaging, milk jugs and plastic containers to pipes and liners.

Under the terms, Dow and Crystalsev will form a joint venture in Brazil to design and build the first integrated facility of its scale in the world. It is expected to start production in 2011 and will have a capacity of 350,000 metric tons. The venture will combine Dow's leading position in polyethylene with Crystalsev's know-how and experience in ethanol to meet the needs of Dow's customers in Brazil and what will likely be international interest. "Meet the needs of Dow's customers in Brazil." This is huge. Rather than producing plastic from petroleum and shipping it to Brazil like it does now, Dow will produce it there for pennies and sell it locally to the same people.

Crystalsev is a 100% Brazilian group that commercializes products made from sugar cane through three areas: providing of services to mills; commercialization of sugar and alcohol; and trading - purchase, resale and management of assets. The Group produces 1.8 million tons of sugar, which corresponds to 8% of all sugar manufactured in Brazil, and employs 30,000 people. Crystalsev operates in several regions in the country through 13 companies that, together, form the second major producer of sugar cane in Brazil.

The new facility will use ethanol derived from sugar cane, an renewable feedstock, to produce ethylene, the raw material required to make polyethylene. Ethylene is traditionally produced using either naphtha or natural gas liquids, both of which are petroleum products. It is estimated that the new process will produce significantly less CO2 compared to the traditional polyethylene manufacturing process.

Now, this brings up a few questions. Since Dow will be using ethanol, will they eventually branch into ethanol production in Brazil? Will they export some of the ethanol when the market dictates to the US duty free? ADM is actively looking for a Brazilian partner for ethanol production, will this joint venture possibly lead to a ADM, Dow venture? The possibilities here are endless.

Let's look at future earnings. The end of this decade should bring in significant, prolonged earnings from the Saudi joint venture, the China project, this Brazilian one and the Lybian venture announced earlier. All these have been announced in just the past 4 months and they will not only bring in additional earnings, they will do so while dramatically decreasing and stabilizing input costs, currently Dow largest wild-card in relation to earnings. In his last letter to shareholders Liveris claimed 2007 would "be a significant year" in the history of Dow.

So far, so good and we are only 1/2 way through.

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