The Dow Chemical Company (NYSE:DOW) is scheduled to announce its first quarter earnings on April 25. We expect the company to post strong revenue growth in its agricultural products business led by robust industry fundamentals and its successful corn traits. We also expect to see the positive impact of the company’s extensive backward integration and increasing investments in the U.S. Gulf Coast on its profitability.
Agricultural Science Products To Show Volume Growth
The agricultural science products division is a research intensive and high growth division in the chemical industry. Big players like DuPont (NYSE:DD) and Monsanto (NYSE:MON) are increasing their investments in R&D to outpace industry growth through innovative products. We see huge growth potential in the agricultural science business with the growing adoption of genetically modified seeds for higher yields and better traits. To back this trend, the rising population and declining availability of arable land point towards higher demand for more sustainable technological solutions for the agriculture sector.
In 2010, Dow launched SmartStax, a brand of genetically modified seed made in collaboration with Monsanto. The technology takes advantage of multiple modes of insect protection and herbicide tolerance by stacking multiple traits together. The product contributed significantly towards increasing volumes by 27% y-o-y in 2011 for Dow Chemicals’ seeds, traits and the oil business. Its success in 2012 was reflected in more than double technology sales as compared to 2011 driven by the introduction of POWERCORE (an extension of the SmartStax family that contains five traits, two herbicide-tolerant genes plus three genes resistant to pests) in Latin America and REFUGE ADVANCED (a blend of 95% SmartStax corn seed and 5% refuge (non-Bt) seed that farmers can plant across their entire fields) in North America. Dow was able to further up its market share in the American corn seed market with these products in 2012, and we expect the positive trend to continue through 2013. 
Recently Dow and Monsanto signed a cross licensing deal to share traits for the next generation SmartStax product. The deal allows Monsanto to use Dow’s highly anticipated Enlist herbicide tolerance technology on a non-exclusive basis, while Monsanto will license to Dow on a non-exclusive basis its third generation rootworm technology, Corn Rootworm III, which is currently under development.
For More On Dow-Monsanto Cross Licensing Deal, Read: Dow And Monsanto Deal Sets The Stage For Next Generation Of GM Seeds
Performance Plastics Business To Drive Better Margins
Chemicals such as ethylene, chlorine and propylene are Dow’s foundation of value-adding chemical chains and key enablers of its downstream businesses. They serve as raw materials for the production of a variety of products that support a wide range of industries including appliance, automotive, agriculture, building and construction, oil and gas, packaging, paints, personal care, etc. Dow’s strategy has been to integrate extensively into these basic chemicals, which provide both supply certainty as well as cost advantage to its downstream businesses.
Ethylene, one of the most important building blocks of the plastics industry, is most commonly derived from steam cracking of either naphtha or ethane. Naphtha is derived from crude oil (naphtha constitutes around 15-30% of crude oil by weight), while ethane is the second-largest component of natural gas after methane. With the shale gas supply boost in the U.S. Gulf Coast region resulting in a cheap source of ethane, there has been a divergence in operating margins between ethane and naphtha based ethylene plants in the U.S.
Hence, Dow is focusing on realizing better margins on its plastics business by increasing its ethylene capacity in the U.S. Last year, it restarted its St. Charles Olefins 2 plant in Louisiana in a bid to lower its operating costs by reducing the amount of ethylene purchased. We expect to see an uptick in performance plastics margins due to this feedstock advantage in the company’s first quarter results.
For More On Dow’s Louisiana Plant Restart, Read: Dow Restarts Louisiana Plant Amid Gulf Coast Expansion
Apart from this, Dow has an extensive plan to leverage this feedstock advantage in the U.S. and is working on a number of projects listed below.
- Improving ethane feedstock flexibility and increasing ethylene supply at its Louisiana operations site in Plaquemine, La. by 2015. 
- Construction of a new on-purpose propylene production facility at Dow Texas operations – slated for production start-up in 2015. 
- Construction of a new, world-scale (1.5 million metric ton-per-year) ethylene facility at Dow Texas operations. 
We expect the company’s performance plastics and materials segment to benefit in terms of robust EBITDA growth from these strategic initiatives in the long run. We currently have a $33 price estimate for Dow, which we will update based on the first quarter earnings results.Notes:
- Dow AgroSciences Advances Corn Seed Performance in the Americas, Dow AgroSciences [↩]
- Dow Progresses its U.S. Gulf Coast Investments, Develops Plans for Performance Plastics Facilities, www.dow.com [↩] [↩]
- Dow’s World-Scale Propylene Production Unit Investment Receives Initial Board Authorization, www.businesswire.com [↩]