The Urethane Blog

Urethane Highlights from Dow Investors’ Call

Jim Fitterling

Moving to the Industrial Intermediates & Infrastructure segment. Operating EBIT was $104 million, down from the year ago period due to weaker demand and margin compression. On a sequential basis, the segment grew operating EBIT by $324 million and expanded operating EBIT margins by more than 1,200 basis points driven by significant volume recovery in polyurethane applications as demand rose for durable goods and construction end markets.

The polyurethanes and construction chemicals business reported a net sales decline year-over-year, despite benefiting from demand growth in furniture, bedding and appliances. Compared to the prior quarter, the business delivered double-digit volume growth in nearly all regions with particular strength in consumer durables, construction and automotive and markets. As a result of rising demand, we increased operating rates by approximately 20% over the second quarter.

Howard Ungerleider

Now moving to Sadara on Slide 7. Consistent with the growth captured in our core packaging and polyurethane businesses from the ongoing economic recovery, Sadara is also benefiting from end market resilience and market supply tightness. As a result, the JV’s financial and operational performance continues to improve with an equity earnings uplift of approximately $100 million year-over-year. And Dow’s expected contribution for 2020 has now been reduced by 20% to no more than $400 million.

In addition, the structural changes that will be implemented to enhance Sadara’s long-term feedstock flexibility through additional ethane and an extension of natural gasoline lean allocation will improve its position on the global cost curve. Dow, Saudi Aramco and Sadara continue to make good progress toward debt reprofiling with the lenders. We remain on target to have an agreement to reprofile Sadara’s project financing debt by year-end.

Steve Byrne

Yes. Good morning. I wanted to drill in a little — more on this $300 million cost savings initiatives. How much of that would you say is actual headcount reduction versus workforce costs, like T&E and another bucket could be the asset rationalization? And what do you think the net benefit could be in 2021 in COGS and SG&A?

Jim Fitterling

Howard, do you want to take that and kind of unpack what the costs are?

Howard Ungerleider

Yes. Look, I would say from a hard dollar savings standpoint, you should expect about $150 million to drop to the bottom line in 2021. And then the balance of the $300 million, another $150 million in 2022. It includes a 6% reduction in our workforce costs. So that doesn’t mean 6% headcount. I mean, obviously we’re trying hard to trim the high-end of the pyramid. Obviously, we’re also looking at streamlining. When you think about it from a segment level perspective, it’s about a little bit more than a third in P&SP, and then the balance split between Industrial Intermediates & Performance Materials and Chemicals.

Kieran de Brun

I was just wondering, demand for polyurethane — good morning. Demand for polyurethane has clearly improved substantially in this quarter. I know it’s a little bit early, but can you discuss any preliminary demand trends you’re seeing in 4Q and maybe how you view 2021 versus 2019 demand levels, that would be helpful. Thank you.

Jim Fitterling

We saw double-digit volume growth quarter-over-quarter, and it primarily was driven by consumer durables, appliances, construction and automotive end markets. So they’re up. Although some of them are still below last year’s levels. Automotive, for example, is up, but it’s still below 2019 levels. I think it’s going to continue.

Appliances are still very, very strong and there’s a lot of backlog on appliances and the supply chains after what we went through in the second quarter and into the third quarter, the supply chains are tight in some areas. So you’re seeing a lot of backlogs and we’re catching up with that demand. So I think it’s going to continue through the fourth quarter for sure. And then we’ll keep an eye on how it goes beyond that.

China, I would say already in almost all markets has returned to pre-COVID levels. And so we may actually start to see overall growth in China, which would be good. I would say some markets in the rest of the world, like appliances, like packaging are at pre-COVID levels, but not all. In automotive, it’s still shallow to pre-COVID levels and probably will be for a couple of years, I expect.

Operator

And we’ll move on to Kevin McCarthy with Vertical Research Partners.

Kevin McCarthy

Good morning. Jim, just to continue the dialogue on polyurethanes, I was curious to hear your thoughts on the supply side. We’ve seen a number of force majeure declarations. Can you speak to where you think inventory levels are in MDI and Polyols as well as operating rates and prospective pricing outlook in the chain?

Jim Fitterling

Yes. Good morning, Kevin. Things are tight as a drum right now on MDI and propylene oxide. I’d say Polyols maybe a little bit better, but it’s propylene oxide that’s pretty tight right now. And I think that’s going to continue. Obviously, when you have an upset in isocyanates operation, you want to get it back as soon as you can, but it sometimes takes a while to get back up and get lined out. So I think things are going to be tied to the fourth quarter. Could extend into the first quarter. We are managing. We are working very closely with customers to try to keep them running and try to keep enough allocation to everybody, so that we can support them through. But it’s a lot of heavy lifting by the team right now.

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