Polyurethanes, packaging demand helps Dow post double-digit sales growth

Dow, one of the world’s biggest petrochemical companies, saw during the first quarter strong demand for most products particularly those for packaging materials like polyethylene as well as for polyurethanes used in cushioning for auto seats or bedding.

Dow’s manufacturing site in Freeport, Texas. Image courtesy of Dow.

The packaging and specialty plastics business achieved double-digit year-over-year sales gains driven by local price momentum in all regions, according to information released by the company along with its first quarter 2021 earnings.

“Versus the year-ago period, local price gains were led by improvement in industrial and consumer packaging and flexible food and beverage packaging applications,” said Jim Fitterling, the company’s chief executive chairman.

The year 2021 is “kind of a year that feels like 13 months of demand and 11 months of supply,” he said, according to a Motley Fool transcript.

Strong polyurethane demand

Moving to the industrial intermediates and infrastructure segment, operating EBITDA (earnings before interest, taxes, depreciation and amortization) was $326 million, an increase of $151 million from a year earlier due in part “to strong supply and demand fundamentals in polyurethanes and construction chemicals,” Fitterling said.

“The polyurethanes and construction chemicals business achieved a double-digit net sales increase compared to the year-ago period, led by local price momentum,” he said.

As for supply, an extreme winter weather event that extended to the south of the U.S. in mid-February tightened product availability.

“Demand growth in consumer durables and appliances and industrial end markets was more than offset by volume limitations on the U.S. Gulf Coast and other third-party supply constraints related to the storm. These pricing and volume dynamics also drove sequential sales growth,” he added.

Inventories to remain low in Q2

Howard Ungerleider, Dow’s president and CFO, said that robust demand, tight supply, low inventories and increased raw material costs “are providing support for prices across many of our value chains.”

Management expects “the constrained industry inventory levels to continue in the second quarter, preventing inventory builds until later this year as we focus on clearing the growing backlog of customer orders,” he said.

“All combined, for the second quarter we expect approximately $750 million to $800 million in higher earnings versus the prior quarter from a combination of earnings momentum in our key chains and lower sequential costs from Winter Storm Uri,” Ungerleider said.

The second quarter should result in a strong performance. However, the company anticipates up to $250 million in higher cost from turnarounds.

“I don't think we'll be building inventory until maybe possibly the end of fourth quarter. That all depends on whether we have a slow fourth quarter,” he said.

“But there's upside in automotive, there's upside in travel, there's upside in construction and home, there's backlog in appliances and long lead times,” he added.

Higher turnaround costs

Plastic converters may be challenged in efforts to build inventories throughout 2021.

“We do have some turnarounds, as Howard mentioned. So we have a Louisiana cracker that's down,” Fitterling said.

Polyethylene margins reflect improved ethylene spreads driven by low ethane and natural gas costs. Meantime, “oil has recovered from kind of an unreal scenario a year ago today,” he added.

“And that's raised, obviously, the naphtha pricing and that's raised the floor around the world,” he said.

Resin manufactured in the U.S. Gulf Coast uses natural gas-derived ethane as feedstock whereas other regions like the Middle East and Europe use naphtha, derived from crude oil. Naphtha prices plunged in April 2020 and temporarily eliminated a cost advantage that ethane-based U.S. producers have had for most of the past decade.

Growth in plastics and packaging

“The other thing that's happened though is we had growth in plastics and packaging (...) And so most people were expecting businesses to be down during that time,” Fitterling said during the earnings call.

“And I think they underestimated how much growth is there. We are seeing growth over 2020 in plastics. We would have seen it the first quarter without the winter storm. And so we're going to see that continue to grow,” he said.

Dow’s products for packaging have already seen price increases in recent months.

“So I think we've got continued outlook for high earnings through the year on plastics,” Fitterling said.

This thanks to demand derived from “a combination of some backlog that got created from the winter storm and just the normal demand by the year-over-year improvements we see in construction, we see in automotive, we see consumer durables, we see in electronics,” he said.

By Renzo Pipoli