Poor performance blamed on rising prices of raw materials and energy

Dow Chemical, the US’s largest chemical manufacturer, has blamed ’unrelenting’ raw material and energy price rises for its disastrous second quarter performance: the company’s net income fell by 19 per cent and share prices tumbled.

Since this time last year Dow’s net income fell from $1.27 billion to $1.02 billion. Share prices dropped by 10 per cent.

Geoffery Merszei, executive vice president and chief financial officer for Dow, said increases in feedstock and energy costs ’out-paced our ability to raise prices’. Merszei cited escalating costs of oil, naphtha and other feedstocks for the poor financial performance. ’Prices of some of our other raw materials, such as co-monomers for polyethylene, escalated by almost $250 million year-to-date from the same period last year,’ Merszei said. He also blamed market-driven limits on the price increases Dow could make, in particular for polyethylene, and a poor performance from the company’s agricultural sciences business.

Dow’s predicament is typical of the commodity chemicals market, according to the Chemical Industries Association’s economic advisor Alan Eastwood, and is a short-term problem linked to the recent sharp increase in oil prices. ’This is the sort of thing that always happens when you get sharp movements in input costs,’ he said.

It’s quite likely that many other companies in this sector will show a similar effect for this quarter. ’Everybody’s using the same raw materials, everybody’s paying global prices for them,’ Eastwood said. ’If Dow were caught out, so will their competitors.’

Ian Shott, technical vice president of the Institute of Chemical Engineers, says that Dow’s drop in income is a systematic problem for companies trapped in the middle of the market, supplying chemicals and chemical intermediates. Oil price rises can be ’a bit of a double whammy’ for these companies, Shott said, because they affect both the cost of raw materials and the processing costs. Yet these price hikes cannot be passed on to customers as quickly as the price of oil moves, he added, leaving companies facing a large deficit. 

Katharine Sanderson