Dow Reaches Back

For the past several years, Dow Chemical has been aggressively pursuing a strategy that favors value-added products over commodity chemicals. But the company is now undertaking a plan to expand its production of two of the most basic chemicals—ethylene and propylene—by more than 3 million metric tons per year.

For Dow, the move is no contradiction. Products that Dow intends to invest in over the long haul—such as low-density polyethylene, plastomers, epichlorohydrin, and acrylic acid—need ethylene and propylene as raw materials, as do the high-density polyethylene, polypropylene, ethylene glycol, and styrene it has been casting aside.

“We have long said that any specialty chemical company must have both technology differentiation downstream as well as asset integration upstream for cost competitiveness,” Dow Chief Executive Officer Andrew N. Liveris told analysts during a conference call late last month. “The specialty chemical graveyard is littered with companies that didn’t understand the strategic importance of integration.”

Integration is particularly important now that the breakthrough development of natural gas from shale has brought the U.S. newfound competitiveness in petrochemicals. This is a big theme for Dow’s ethylene plans, which call for 2.3 million metric tons of new production.

The company plans to restart an ethane-based ethylene cracker in Hahnville, La., that it idled in 2009. Dow will also increase the feedstock flexibility of its crackers in Plaquemine, La., and Freeport, Texas, so they can process more ethane. The linchpin of the company’s plans is a new world-scale ethylene cracker on the U.S. Gulf Coast.

Dow is trying to secure enough ethane for all the expansions. The company inked an agreement with the natural gas firm Range Resources for ethane from Pennsylvania’s Marcellus Shale. And it is mulling over a joint venture to extract its own ethane from natural gas.

Dow has also slated two propane dehydrogenation plants, which would be among only a few such plants in the U.S. They will start up in 2015 and 2018 and be able to make a combined 900,000 metric tons per year of propylene.

James R. Fitterling, Dow’s president of corporate development and hydrocarbons, says it is too early to disclose estimates on the costs of all the projects. However, each requires some capital spending. For example, even though the Hahnville cracker will have been shuttered for only a few years when it reopens in 2012, Dow needs to bring it up to “newer operating standards” so it can remain open another 20 to 25 years.

Over the past five years Dow has already spent $500 million to add flexibility to its Gulf Coast cracker fleet. Part of that program was a modification of a plant in Freeport that made it the second lowest cost cracker in the Americas, Fitterling says.

Although Dow is preaching back-integration now, the company let itself become a large buyer of ethylene on the merchant market in the early 2000s. It has since closed the gap somewhat through plant closures and divestitures of commodity chemical businesses.

Dow’s cracker projects will bring the firm closer to balance, but it will buy some ethylene, carefully avoiding a surplus, Fitterling says. “We don’t intend to build ethylene to play in the merchant market.”

According to John Stekla, director of ethylene studies at the Houston-based consulting firm Chemical Market Associates Inc. (CMAI), Dow needs about 1.7 million metric tons of new ethylene capacity to fully back-integrate. Yet Dow’s plans exceed that by 600,000 metric tons.

What explains the difference is that some of the capacity is meant to meet projected growth in derivatives. Liveris told analysts that the firm’s output of ethylene derivatives will climb by about 200,000 metric tons per year through 2017, when the new cracker starts up.

Dow will eventually unveil plans for new derivatives plants, Fitterling promises. “As we get closer to that 2017 time frame, maybe a couple of years in advance of that, we’ll start to talk about what derivative capacity comes on,” he says.

The situation with propylene is similar. The acquisition of Rohm and Haas, with its large acrylic acid business, boosted Dow’s propylene requirements. The investment project will lower its U.S. propylene purchases from about 50% of what it consumes today to less than 10%.

Dow isn’t alone in planning new ethylene capacity. Chevron Phillips Chemical announced a world-scale cracker that would start up by 2017 with a capacity of 1.1 million metric tons. LyondellBasell Industries, Nova Chemicals, Westlake Chemical, and Formosa Plastics all have been public with incremental expansion aspirations of their own.

By 2017, the market will be able to absorb the ethylene that has already been announced, and then some, CMAI’s Stekla predicts. “I think there is probably room for one more Gulf Coast cracker, and there is probably room for a Northeast cracker as well,” he says.

But market balance also depends on how big the crackers will be. Four of them built to maximum scale would add about 5 million metric tons, or 20% of North American capacity. “That is a huge flood of new capacity,” Stekla says.