Phoenix, AZ - March 15, 2005
Phil Cook, senior vice president for Performance Chemicals and Thermosets, The Dow Chemical Company, addressed the spring meeting of the National Paint and Coatings Association (NPCA) on March 14-15 at The Pointe Hilton Resort at Tapatio Cliffs in Phoenix.
In a presentation titled, "New Dynamics of Supply and Demand," Cook outlined dramatic economic forces affecting the entire supply chain of the paint and coatings industry - from the oil and gas used as raw materials, to the retailers selling paint to consumers.
Addressing an audience of CEOs and senior executives from the architectural and industrial coatings industry, as well as raw material suppliers, Cook noted that for the past several years, chemical and coatings companies have been "caught in a severe margin squeeze between two powerful forces -- 'big oil' and 'big boxes.' When you compare profitability and market cap from 1993 with today, you can see that the oil producers and large retailers have grown dramatically. At the same time, our profitability and market cap - those chemical companies that supply the ingredients and paint and many coatings producers - have not seen much improvement in margins or market cap," he said.
In addition to margin squeeze, the coatings industry also is facing tightening supply and growing demand. "With capacity rationalization and under-investment in the chemical industry over the past 10 years, the supply of coatings raw materials has not kept pace with demand growth. All industry indicators and consultants point to tighter supply and demand for 2005 and beyond in the coatings industry," said Cook.
Natural Gas Prices Driven Higher by U.S. Policy
Cook discussed the price of natural gas, a key feedstock for coatings ingredients, as well as a primary source of energy for manufacturers. "North American natural gas prices are much higher than other industrial nations around the world," said Cook. "Unfortunately, the U.S. government's energy policy encourages consumption of natural gas over other energy sources. But at the same time, U.S. policy has restricted access to huge domestic gas reserves. Without the creation of a sound national energy policy, especially related to natural gas, we don't see any relief in sight for these high gas prices."
Cook pointed out the many coatings raw materials that are produced from oil and gas feedstocks - such as epoxy, vinyl, polyurethanes, latex, amines, acrylates, solvents, biocides and surfactants. "Oil and gas prices and U.S. energy policy matter a great deal to all of us in the coatings industry."
In order to address this issue, Cook noted, The Consumers Alliance for Affordable Natural Gas (CAANG) was formed recently to encourage U.S. policymakers to develop a sound energy policy that will maintain the competitiveness of the U.S. chemicals and derivatives industries. "Many policymakers still don't realize that high energy costs are now trickling through the entire U.S. economy," said Cook. "I encourage NPCA and its members to consider joining the CAANG in our call for a U.S. energy policy that will get natural gas supply/demand back into balance and slow the migration of manufacturing overseas."
Supply/Demand for Raw Materials Tightens
Based on estimates from consultants and industry analysts, Cook reviewed supply/demand balances and industry operating rates for various building blocks and raw materials - chlorine, ethylene, propylene, benzene, styrene, cumene, ethylene oxide, propylene oxide, and acrylic acid.
"Across the board, operating rates are increasing and supply/demand is getting tighter," Cook said. "This has a direct effect on pricing and product availability. Product prices are affected when any part of the value chain becomes constricted. In fact, when intermediates go short, downstream derivatives compete on margin delivered for the limited supply."
"At the same time," Cook noted, "high and volatile hydrocarbons costs are driving producers to invest more overseas. In Dow, we're taking additional steps to remain competitive in the face of U.S. hydrocarbons costs. For example, last year we formed the joint venture MEGlobal with PIC of Kuwait for MEG and DEG, as well as our Olefins II venture. And in Oman, we formed a joint venture to design, build and operate a gas gathering and separation unit with pipelines to a coastal petrochemicals site."
Cook also described Dow's feasibility study with Shenhua Group, the largest coal producer in China, to explore a coal-to-olefins project.
"We also announced plans to bring in more competitively priced natural gas from South America, Africa and the Middle East to our Gulf Coast facilities via a new LNG marine terminal in Freeport, Texas," Cook explained.
Cook concluded by encouraging each company to thoroughly investigate and understand the supply/demand situation for each of their key raw materials. In addition to using suppliers to obtain such information, Cook also referenced four independent consulting groups from which independent data can be obtained. "An understanding of the supply/demand situation for raw materials will be critical for continued business success in the coating industry, as persistently high and volatile hydrocarbon and energy costs are pushed down the chain and as supply constrictions allow producers to recover long depressed margins."
About Dow
Dow is a leader in science and technology, providing innovative chemical, plastic and agricultural products and services to many essential consumer markets. With annual sales of $40 billion, Dow serves customers in 175 countries and a wide range of markets that are vital to human progress: food, transportation, health and medicine, personal and home care, and building and construction, among others. Committed to the principles of sustainable development, Dow and its 43,000 employees seek to balance economic, environmental and social responsibilities. References to "Dow" or the "Company" mean The Dow Chemical Company and its consolidated subsidiaries unless otherwise expressly noted.
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