Focus - The Dow Chemical Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Chemicals
Chemicals sales were $3.4 billion in 2002, compared with $3.6 billion
in 2001 and $4.1 billion in 2000. Prices decreased 11 percent
versus 2001, primarily due to decreases in organic intermediates,
solvents and monomers (“OISM”), caustic soda, and
chloromethanes, somewhat offset by higher vinyl chloride
monomer (“VCM”) and ethylene dichloride (“EDC”) prices.
Volume was up 6 percent from 2001, with increases in ethylene
glycol (“EG”), chlorinated organics and VCM. In 2001, prices
declined 5 percent and volumes declined 9 percent versus 2000.
EBIT was a loss of $78 million in 2002, down from income of
$111 million in 2001, principally due to declining prices that were
only partially offset by lower feedstock and energy costs. EBIT was
also impacted by costs related to the start-up of new VCM facilities
in Freeport, Texas, and chlor-alkali facilities in Stade, Germany; and
a $13 million charge for the write-down of assets related to the
shutdown of a chlor-alkali facility in Fort Saskatchewan, Alberta,
Canada. EBIT in 2001 was down from $422 million in 2000, principally
due to declining prices and volumes.
Chemicals—Sales (in millions)
98 $3,646
99
$3,603
00
$4,109
01
$3,552
02
$3,361
Chemicals—EBIT (in millions)
98 $76
99
$292
00
$422
01
$111
02
$(78)
VCM pricing in the fourth quarter of 2002 increased over
60 percent from the trough-level prices of the fourth quarter of
2001, due to favorable polyvinyl chloride (“PVC”) supply/demand
balances in North America and Europe. Industry demand for PVC,
the largest end-use product for VCM, was 6 percent higher in
North America in 2002 versus 2001. During the first half of 2002,
caustic soda pricing continued the decline that began in the second
half of 2001. Prices began to improve in the second half of 2002.
Caustic soda volume in 2002 was up 4 percent compared with
2001. Additional chlor-alkali capacity was brought on-line in 2002 in
Stade, Germany, while older capacity in Plaquemine, Louisiana,
and Fort Saskatchewan, Alberta, Canada, was idled. Late in 2002,
the Company made the decision to permanently shut down the
chlor-alkali facility at Fort Saskatchewan in early 2003, resulting in
a charge of $13 million for the write-down of the assets. A VCM
manufacturing unit in Freeport, Texas, was restarted after a 40
percent expansion project.
EG prices were down in 2002, compared with 2001, while
volume was up. During 2002, a plant in Louisiana was idled for the
full year, and a plant in Prentiss, Alberta, Canada, was idled for two
months due to slow demand. In the second half of 2002, demand
began to recover and some upward price movement was achieved.
OISM prices declined in 2002 while volume increased. OISM
continued to operate in a highly competitive market. Industry oversupply
of oxo alcohols weakened prices in 2002. Global demand
for vinyl acetate monomers remained weak.
> 26 The Dow Chemical Company
Chemicals Outlook for 2003
Caustic soda pricing is expected to continue improving as a result
of global production shutdowns within the industry, improvement
in underlying demand and higher energy costs. Global chlor-alkali
industry operating rates are expected to significantly improve due
to recent plant shutdowns combined with no planned capacity
expansions through 2005. However, increased energy costs, and
the resulting compressed margins, are expected in early 2003.
PVC demand is expected to improve slightly in 2003, reflecting
the anticipated gradual economic recovery in North America and
Europe. VCM prices are expected to recover in the first half of
2003 with increased activity in the construction industry, the
largest end-user of PVC.
Both price and volume for EG are expected to improve in 2003,
as the supply/demand balance begins to tighten. Polyethylene
terephthalate (“PET”) and polyester, two major end-uses of EG,
are expected to recover to historical market growth rates after two
years of growth significantly below the trend line. New EG capacity
was started up in 2002 by OPTIMAL Glycols (Malaysia) Sdn Bhd,
Union Carbide’s joint venture in Malaysia. No significant industry
capacity for ethylene oxide or ethylene glycol is expected to be
added until late 2004.
OISM volume is expected to slowly trend upward during 2003,
as some improvement in global market conditions is anticipated.
Prices are also expected to rise in the first half of 2003, driven by
higher hydrocarbon and energy costs. Equity earnings are expected
to improve in 2003 following the start-up of new butanol and butyl
acetate capacity in 2002 by Union Carbide’s joint venture in Malaysia.
Hydrocarbons and Energy
Hydrocarbons and Energy sales were $2.4 billion in 2002, compared
with $2.5 billion in 2001 and $2.6 billion in 2000. Prices decreased
7 percent while volume grew 4 percent versus last year. In 2001,
this segment experienced a 14 percent decrease in prices and a
10 percent increase in volume versus 2000.
The Hydrocarbons and Energy business transfers materials to
Dow’s derivative businesses at cost. EBIT was income of $96 million
in 2002 versus a loss of $22 million in 2001 and income of
$136 million in 2000. EBIT in 2002 included a gain of $63 million on
the sale of the Company’s share in the Oasis Pipe Line Company,
and a loss of $44 million reflecting the impairment of the ethylene
production facility in Texas City, Texas, which will be shut down in
the first half of 2003. EBIT in 2000 included a gain of $98 million
on the sale of the Cochin pipeline system (see Note C to the
Consolidated Financial Statements).
Hydrocarbons and Energy—Sales (in millions)
98 $1,499
99
$1,731
00
$2,626
01
$2,511
02
$2,435