In a major move intended to improve profitability, Dow Chemical Co. is closing all or part of three plants that make plastic resin and feedstocks in Canada and Italy.
The closings in Sarnia, Ontario; Fort Saskatchewan, Alberta; and Porto Marghera, Italy; will cost Dow between $550 million and $650 million in the third quarter of 2006, but are expected to yield annual cost savings of $160 million. The total number of jobs lost will be around 750.
Plastics processors will be affected most by the complete closing of the Sarnia site, which is a major producer of polystyrene and low density polyethylene. Ethylene supply issues centered around a pipeline to the site played a role in the decision to close Sarnia, officials with Midland, Mich.-based Dow said in an Aug. 31 news release.
In March, British Petroleum plc unexpectedly suspended shipments of ethylene through the pipeline for safety reasons, Dow officials said. Dow officials attempted to find an alternate ethylene supply source, but could not find one that met the company's needs.
LDPE production at the plant will end in the next few weeks, with PS production closing by the end of the year, officials said. Production of polyols and latex in Sarnia will conclude by the end of 2008.
The PS plant, with 300 million pounds of annual capacity, is one of Dow's largest but was in need of capital improvements to maintain standards, officials said.
Dow has been making PS in Sarnia since 1947. The closing will be the second to hit the North American PS market this year. Nova Chemicals Corp. closed a 300 million-pound-capacity plant in Chesapeake, Va., in June.
``The closing of the polystyrene plant in Sarnia reflects the competitive business climate that Dow expects to face in the industry over the long term,'' Davida Johnson, Dow vice president for global PS, said in the release.
At the LDPE plant, 220 million pounds of annual capacity will be lost. A spokesman described the plant as one of Dow's largest single-line LDPE sites.
Jobs cut in Sarnia will include 340 Dow employees and 40 contractor positions. Dow had stopped production of epoxy and vinyl ester resins in Sarnia in 2004 as part of a move that eliminated about 60 jobs.
Officials said the firm will attempt to supply PS customers from its six remaining North American PS plants and to supply LDPE customers with material from its Freeport, Texas, plant. But for both materials, they added that Dow ``may not be able to maintain the current level of supply to all customers.''
In Fort Saskatchewan, Dow will close plants making chlor-alkali and ethylene dichloride by the end of October. EDC is used to make PVC feedstock vinyl chloride monomer. A spokeswoman said the plant's EDC output is sold into markets in Asia.
Each of the plants is almost 30 years old and requires ``substantial capital costs'' to maintain long-term operations. The Fort Saskatchewan job cuts will cover 100 Dow employees and 70 contractor jobs. Some of the Dow workers could be reassigned elsewhere at the site, which will continue to make PE, ethylene and other products.
A plant making toluene diisocyanate, a polyurethane feedstock, will be closed rather than restarted in Porto Marghera. The plant was closed for planned maintenance in August, but now will be shuttered permanently because of weak TDI fundamentals, which Dow officials said are a result of excess global capacity.
In the news release, Andrew Liveris, Dow chairman and chief executive officer, said the closing announcement ``highlights a number of decisions made by Dow in support of [efficiency and cost-effectiveness] and demonstrates our resolve to actively manage the company's portfolio at all points in the cycle.''
The closings could affect North American markets in several ways, according to Robert Bauman, an industry analyst with Nexant Inc. in Houston.
``The impact won't be substantial in polyethylene, since [Sarnia] was a smaller, older plant,'' Bauman said in a phone interview. ``It could have more of an impact in polystyrene, which should have a good year next year. Polystyrene could get some incremental growth as polypropylene gets in short supply.''
Bauman added that Dow's customer policy on the closings boils down to the firm saying ``customers with contracts will be OK, but spot customers might lose out.'' Other petrochemical firms are likely to be in Dow's position in the near future, he said.
``We're seeing everybody looking at their assets now. They're positioning themselves to get rid of older capacity and streamline operations,'' Bauman said.
Dow's basic plastics unit - including PS, PE and PP - has struggled in the first half of 2006. The unit's pretax profit fell almost 30 percent to $969 million even as sales climbed more than 7 percent to $5.8 billion. Officials pinned the profit decline on feedstock and energy costs that rose faster than the company could increase selling prices for its products.
Companywide, Dow's profit dropped 15 percent to $2.2 billion, although sales were up 6 percent to $24.5 billion. Plastics-related sales - including the basic plastics and performance plastics units - accounted for about 52 percent of Dow's first-half sales.
On Wall Street, Dow's per-share stock price also has had a tough year. It started 2006 around $44 but dipped under $34 in late July, before bouncing back above $38 in early trading Aug. 31.
Dow already has made major cuts in recent years, including the elimination of almost 8,000 jobs in the 2003-05 time period. In the news release, Dow confirmed that it has closed 50 manufacturing sites worldwide since 2004. Those include the closings of a compounding plant in Bound Brook, N.J., and a PS plant in Barry, Wales.