Pat Dawson recently took over as business vice president for Dow Chemical Co.'s Polyurethanes and Systems business, having previously led the group's Oxide Derivatives business. He replied to UT questions about the challenges presented by his new role:Q. Has your previous experience as business manager for Dow's Oxide Derivatives business been of value in assessing and reorganising the PU & Systems business?Yes. I am excited about the change and the opportunity to join the Polyurethanes and Thermoset Systems (PU&TS) business. A key part of my experience in Oxides Derivatives was with the Union Carbide integration. One of the valuable experiences during that integration was learning that when you are merging different business cultures, you have to find common rally points about what creates value. This experience has been very applicable to my new role. In a way, you can think of Polyurethanes as an internal merger of three companies: Polyurethanes, Thermoset Systems and New Business Development. We've been working to better understand how each of these businesses create value, where we can improve and how we can bring these businesses together as one seamless global business unit. We're streamlining our organisation in a manner that leverages the talents of our employees and aligns the organisation with a common business strategy. A key focus is to optimise our products, assets and customer mix to create the most value for Dow throughout the chain. Q. What were the reasons for consolidating Dow's previously separate Polyurethanes and PU Systems business units?A. By combining our polyurethanes core business and new business development with our systems business, we believe our new streamlined global business unit, Polyurethanes and Thermoset Systems; will be even stronger and more efficient. We are better able to simplify decision-making and focus on our shared goal of serving our customers more efficiently and effectively. With the core PU business, (MDI, TDI and polyols) becoming more and more commoditised, the integration of Thermoset Systems allows us to better allocate product and resources to generate the greatest value for the business and to reduce the impact of cyclicality. By bringing these groups together, we are better able to align the organisation to a common strategy and to optimise our capabilities, including our global asset base, technologies, market access and overall business portfolio. Q. What other organisational or management changes have taken place since you took charge of the PU & Systems business? A. My transition into PU&TS has been part of a much larger restructuring that has been going on and is still underway at Dow. The new organization at Dow is streamlined with fewer global business units, less functional staff and more leveraging of service and support to the business. The new streamlined structure positions Dow for future success. Our focus now is on making everything in the company simpler. With this streamlined structure, corporate and business strategies can be implemented with more speed, focus, discipline and accountability for results and ultimately, higher profitability. Specifically, for the PU&TS business, we have announced our leadership team and continue to roll-out the remaining organisation. Q. Dow Chemical's top management has talked about changing its pricing policy to enable it to increase prices more frequently and to allow for changes in the price of oil. Has Dow Polyurethanes changed its pricing approach along these lines? A. Some of Dow's top leaders have been speaking about the need to move away from the 30-60 day price protection practices that have historically been in place in some of our commodity businesses such as polyethylene and polystyrene. Since the company has to immediately absorb the escalating costs associated with volatile oil and energy pricing, it is no longer sustainable to wait a month or two to try to implement price increases to help offset these high energy costs. Consistent with Dow, our Polyurethanes and Thermoset Systems business is looking at ways to give ourselves more flexibility on pricing. Q. If oil prices remain at current levels (i.e. around $40/barrel) this year, what impact will this have on MDI and TDI pricing for the rest of 2004?A. Certainly, the high cost of oil, its derivatives, along with the pricing of natural gas and key raw materials such as propylene and benzene have an enormous impact on the cost to manufacture polyols and isocyanates. The volatility of our raw material and energy costs continue to cause margin compression despite efforts to raise prices. We are currently offsetting less than 50 percent of these cost increases and this is not sustainable long-term. US Gulf Coast natural gas has continued its volatility and remains significantly higher than its historical average. Propylene monomer supply is extremely tight, and propylene prices have risen more than 45% in the past six months. We expect propylene pricing to continue to escalate. These factors will continue to have a significant impact on the cost to manufacture and distribute PO, polyols and isocyanates, and remains a challenge for Dow and our customers. These conditions along with other factors have caused Dow to take pricing actions in an effort to offset this impact. The critical issue is our customers' ability to pass along these raw material increases to their customers. If this does not happen then many of the PU raw material suppliers will not be able to justify capacity additions and this will continue to put upward pricing pressures on MDI, Polyols and TDI. Dow will look for opportunities for cheap de-bottlenecks of capacity where it makes economic sense along with streamlining our product and asset mix. And in some cases we will not be able to continue and supply customers where we cannot make acceptable margins.Q. Please describe the supply/demand outlook for MDI/TDI for the 20004/5 in the three main global regions. I understand that there is particular concern about MDI supply in Europe, but perhaps there are other such issues elsewhere. A. Overall, we are seeing an encouraging recovery in the polyurethanes industry as the economy continues to improve. Dow is seeing very tight supply and a more rapid recovery of demand, for MDI in particular. Although we are seeing slower TDI and polyols growth than in the past, there is upward movement of global demand for polyols as the economy improves across most parts of the globe. Polyols growth is slightly above GDP levels and supply continues to tighten in most markets. TDI is also improving, but, there is simply too much industry capacity and growth rates are GDP at best. Most of the growth in TDI is in the emerging geographies such as China, MEAF and Eastern Europe. In 2004, we expect that polyurethanes overall will grow at about 3-4 percent, in line with GDP. Polyols is expected to grow slightly above GDP and MDI is expected to exhibit higher growth at 5-6 percent Q. Dow has been described as "the sleeping giant" with regard to the production of urethane chemicals in Asia, particularly China. Is this a fair description and for how much longer will it remain the case?A. No. Actually our business exports a significant amount of product into Asia today and we've built a very respectable franchise in that region. We are exploring a number of options on how to build on this franchise in the future since we realize that there will be a point in time when we will need to have in-region assets beyond what we have today. We do have local polyols production in Thailand, Taiwan, China and Australia and are the leading polyols supplier in Asia today. Q. At present it seems that Dow's competitive position will be demised when rivals BASF, Bayer and Huntsman bring on major new capacity in China over the next three to five years. How will Dow deal with this imminent challenge?A. We acknowledge the challenge and that's why we continue to explore options about how we will continue to compete in this part of the world in the future. We want to be sure that we have a sustainable business model long-term for Asia and China specifically. Q. What is the next step forward in the development of Dow's recycling technology?A. Mobius and Dow continue to work together on our activities of reducing the overall cost of foam production by reprocessing post manufacturing scrap foam. 2004 has seen very steady progress on the equipment front. Several new licenses have been signed and further contracts for equipment and licenses are in advanced stages of negotiation and are expected to be signed before the end of the year. The geographic reach is also spreading. Activity is not only in the US and Europe; many new developments are focused on Asia and Latin America. In addition to our efforts with Mobius, the overall global drive to more "sustainable" products has been very positive for our Polyurethanes and Systems business. We remain very well poised to offer solutions in this arena for our customers. Changing environmental regulations have encouraged the trend of customers demanding solvent-free raw material solutions for producing coatings, adhesives, sealants and elastomers (CASE). We are starting to see strong acceptance of our polyurethane dispersions, particularly in the CASE segment. For example, the CASE industries are seeing increased pressure in the European Union and the Americas as regulators and interest groups call for limits in the emissions of VOC's in decorative paints, varnishes and vehicle refinishing products. We expect this will increase the adoption of our new Dispursa polyurethanes dispersion technology and waterborne Syntegra polyurethane dispersions, that allows for higher solid content while lowering solvent usage. Growing demand for low volatile organic compound (VOC) products continues to positively impact our business. Dow's low-volatile organic compound (VOC) emission Voranol Voractiv product line has captured the attention of leading suppliers to the automotive, bedding and furnishings industries. Dow anticipates that this trend will continue as suppliers around the world recognize the significant advantages they can realize by incorporating VORANOL VORACTIV into their product lines. Key benefits include: reduced amine emissions, enhanced product performance, improved logistics and economics. Q. Huntsman reports divisional earnings for its polyurethanes business and BayerMaterialScience will probably start to do so next year. Will Dow follow suit, and if not why not?A. This is unlikely. Dow conducts its worldwide operations through global businesses, which are aggregated into reportable operating segments based on the nature of the products and production processes, end-use markets, channels of distribution and regulatory environment. The Polyurethanes and Thermoset System business is listed in Dow's financial reporting under the Performance Plastics operating segment.ENDS"
