Dow Chemicals (NYSE:DOW), the specialty chemical manufacturer, is closing its four plants manufacturing Styrofoam, a popular insulation material used in home and commercial construction. This is due to the continuing drop in demand for construction products from debt ridden Europe. The closure will be permanent for plants in Illinois, Hungary and Portugal while the plant in Netherlands will be temporarily closed. About 900 workers will be laid off and the company will record an expense of $350 million in one time charge for plant closure and lay offs. Out of this, $110 million is expected to go to the laid off employees. These closures are believed to be part of a larger cost cutting program which seeks to slash costs up to $250 million annually to counter the weakness in global economy. Dow will also be closing a Brazilian plant which manufactures toluene diisocyanate, a chemical needed in making polyurethane.
Dow Chemicals competes with companies like PPG Industries (NYSE:PPG), 3M (NYSE: MMM) and Dupont(NYSE: DD). We currently have a Trefis price estimate of $39 for Dow Chemical’s Stock, which is 10% above the current market price.
Performance chemicals and materials is one of the most important divisions of Dow, accounting for nearly 40% of the stock value. Trefis’s forecast for the global specialty chemicals market stands at $516 billion for 2012 and Dow is expected to capture around 6% share of this market. However, with the closing of these plants, we feel Dow’s share may fall slightly below than the projected ~6%.
This move, however, will improve the company’s profitability which was being hit due to bad economic situation in Europe and the poor market conditions of specific countries being hit by this economic downturn. The Brazilian operations were also loss making, resulting in the the company registering a $264 million tax charge due to weak demand in the last quarter of 2011.
According to Trefis estimates, Dow’s performance chemicals margins (adjusted for pension and other items) are expected to be around 12.4% in 2012 and are expected to show a slight decline going forward. We feel these closures might push the margins up slightly and then descend as per the forecasts.