Dow Chemical Co said on July 01, it will close three Louisiana plants as part of a shift away from basic chemicals toward the lucrative business of speciality chemicals. The shuttering comes as part of a massive plan to cut costs after Dow bought rival Rohm & Haas in April for more than $16 billion, a deal that added massive amounts of debt to its balance sheet.
Dow expects to take a $700 million second-quarter charge as part of announcement, but expects to cut costs by about $100 million a year. The approximately 100 people who work at the plants will be offered jobs elsewhere, Dow said.
The plants make ethylene, a building block for basic chemicals like plastic and packaging. The basic chemicals market is heavily affected by price fluctuations in crude, and products are usually made and sold in large batches and at razor-thin profits. Dow is essentially saying it won't buy ethylene from other suppliers anymore. It had bought about 3 billion pounds a year.
Speciality chemicals - which are used in products like cosmetics and food additives - tend to be made in smaller batches, and are more profitable. Rohm & Haas was a big player in the speciality chemicals market and Dow paid top dollar to get it. The bid was also made just as the global economy slumped and demand for chemicals evaporated. Midland, Michigan-based Dow was forced to slash costs and sell assets to pay off its whopping debt load and meet its goal of saving $1.3 billion.
It is that volatility that Andrew Liveris, Dow's CEO, wants to ease and he will rely heavily on speciality chemicals to deliver revenue going forward. With the Rohm buyout, Dow's sales are roughly 60 percent speciality chemicals and 40 percent basic chemicals, compared with a previous 52 percent and 48 percent, respectively.
The Middle East has taking a larger share of the basic chemicals market, partly because there are vast supplies of crude nearby. Dow has significant operations in the region. The company is building a petrochemical plant in Saudi Arabia with a state-owned oil company.
Meanwhile, Dow also said that, as part of a previously announced layoff of about 10,000 workers, it would take a charge for 2,500 layoffs. The move is essentially an accounting measure meant to spread out expensive charges.
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