Dow Dropping Basic Chemicals

Dow Chemical Co. (DOW - Analyst Report) recently agreed to sell its hollow sphere plastic pigment product line to Fairlawn, Ohio-based specialty chemicals maker Omnova Solutions Inc. Hollow plastic pigments are used by the paper and paperboard industry. Dow also plans to close two production units at a Texas as part of its restructuring initiatives. The deal is expected to close in the fourth quarter of 2009.

Volatile crude oil prices have significantly affected the basic chemicals market, forcing the second-largest chemical manufacturer in the world to divest its styrene monomer and ethylbenzene production at Freeport, Texas. This sale will reduce Dow’s exposure to a capital-intensive Basic portfolio. About 60 employees will be affected.

Midland, Michigan-based Dow Chemical aims to shift focus to specialty chemicals that are used in cosmetics and food additives, and work with partners to meet basic chemical needs. After the Rohm & Haas acquisition in the second quarter, Dow announced a restructuring plan, including complete integration of ethylene production with internal demand, reducing its ethylene requirement from the US Gulf Coast by about 30%.

Dow expects to improve its cost position by eliminating ethylene purchases from the merchant market. The company purchases about three billion pounds of ethylene from external sources annually.

Separately, Dow partnered with Alstom Power to develop a pilot plant to tap about 1,800 metric tons of carbon dioxide (CO2) annually from flue gas of a coal-fired boiler at its South Charleston, West Virginia facility. Alstom is a global leader in power generation and rail infrastructure. The pilot plant is expected to be operational by the third quarter.

In 2008, Dow and Alstom had agreed to develop an advanced amine technology for CO2 capture. Currently, they are focusing on building an advanced amine-based scrubbing technology for industries that produce exhaust or flue gases containing CO2 and high levels of oxygen.

The new process will significantly reduce the amount of energy required for CO2 separation and capture. The West Virginia pilot plant will validate this new technology. Dow aims to reduce greenhouse gas emissions that are responsible for global warming by exporting the technology to its power plants, where CO2 will be stored. We maintain our Neutral recommendation on Dow Chemical.

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