Michigan-based Dow reported on Oct. 21 a drop in sales revenue in plastics that are key for its packaging segment and this because of a polyethylene price contraction in the summer of 2022 that has led the company to apply some brakes on production.

Dow´s Aratu plant in Brazil. Image courtesy of Dow.

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Third quarter plastics and packaging sales fell 11% from April-June to $7.3 billion, “driven by lower polyethylene prices with reduced volumes as we decreased operating rates in response to continued global marine park cargo, logistics constraints, and lower demand in EMEA,” said Jim Fitterling, Dow´s CEO.

“Volume was down 4% versus the year-ago period, as declines in Europe, the Middle East, Africa, and India, or EMEA more than offset volume growth in the U.S. and Canada and Asia-Pacific,” he added, according to a transcript of the call by Motley Fool.

Plastics and packaging revenue still represented in July-September over half of Dow´s third quarter net sales. Total sales were just over $14 billion.

Local prices increased 3% year over year, Fitterling said. Compared with the previous quarter, plastic prices were down across all operating segments and regions he said.

Polyethylene is the most traded plastic resin commodity and Dow is a leading producer. Prices have seen weakness in 2022 in part as nearly four million tonnes of new supply are coming online in North America this year.

Inflation, geopolitical tensions

“In the fourth quarter, we expect to continue navigating high inflation, supply chain constraints, and the impact of geopolitical tensions” said Howard Ungerleider, Dow´s CFO.

The eurozone inflation reached 10% in September and it was driven by high energy and feedstock costs that have also impacted Dow, he said. Dow is reducing 15% of its European polyethylene capacity.

Demand is showing strength in the Americas. Consumer confidence rose in the U.S. in September for a third month and “looking forward, we're closely monitoring the impact of rising interest rates on demand,” he said.

“And in Latin America, we continue to see robust demand for flexible food packaging and consumer durables (…)” Ungerleider added.

Dow´s production capacity in Latin America includes the Aratu plant near Salvador de Bahia in Brazil and its Bahia Blanca plant in Argentina located about 360 miles to the southwest of Buenos Aires. Dow has had subsidiaries in both countries since the mid 1950s. 

Ongoing supply constraints

Dow will continue in the fourth quarter to “prioritize higher-margin functional polymers” while working to ease logistics constraints along the U.S. Gulf Coast, Ungerleider said

Dow is also reducing operating rates for polyurethanes and other assets in Europe where more cuts are planned next year. The resulting purchase reductions may save $1 billion, he said.

Polyethylene market prices have “started to stabilize at the beginning of the fourth quarter,” Fitterling said.

“Inventories came down on the Gulf Coast, stepped down from the high levels that they were in the third quarter, and so that's helping. And we've seen some better marine-packed cargo logistics,” he said.

“We started to see a little bit of improvement in the ethylene chain (…) oil inventories continue to be low and natural gas production continues to be higher. And so that's positively skewed,” he added.

High oil prices and low natural gas prices positions Dow´s large U.S. ethane-based production capacity as more competitive compared with production in areas that depend on naphtha, a crude oil product.

Ethane is fractioned from gas and natural gas is plentiful in the U.S. due to the development in recent decades of shale deposits.

Automotive recovery

Fitterling anticipates some automotive recovery in 2023. Demand for plastics and other petrochemicals used in automotive was hit in 2020 during the pandemic and supply-chain constraints and shipping delays later slowed new vehicle sales.

“Our outlook for automotive next year is 86 million light vehicles, up from an 80 million projection this year. I think that's good,” Fitterling said referring to 2023 projections.

“If you look at China, EVs are up 90% year over year, and automotive in China is up 25% year over year,” Fitterling said.

“EVs in the United States are also strong and I expect that to continue. That's good for us because two to three times more silicone materials in EVs, and similar amount of materials that we would have in an internal combustion engine,” he said.

Strong future demand

As for logistics improvements, ships must “arrive and get the product out” to alleviate polyethylene stocks accumulated at ports but that should occur soon enough so that Dow won´t need to cut production more, Fitterling said.

“I'd also say Latin American business is holding up relatively well (…) It's going to be worked out as we get better ship arrival times and better loading,” he added.

The U.S. government Bipartisan Infrastructure Bill will increase petrochemicals demand in coming years in North America, he added.

Coatings, pigments, lubricants, antifreeze, disinfectants, paints and multiple other petrochemicals like PVC are needed directly or indirectly for upgrading infrastructure like rail, bridges and roads, as well as for the water management projects included.

By Renzo Pipoli