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One to Watch: Dow Chemical Cuts Energy Costs by $9 Billion

Dow Chemical Co. (DOW) has cut its energy costs by an impressive $9 billion through green investments, which translates into $7 billion in net profit.

It’s been a long road--15 years of energy efficiency planning, to be exact—but it’s now paying off, and the company has the capacity to measure its savings and the figures to prove it.

More than anything, this shows how green investments can reduce costs and improve the bottom line exponentially, if you have enough patience.

Dow Chemical has spent around $2 billion since 1994, but this $2 billion turned into $9 billion in savings for a $7 billion profit. And the company is only getting started.

So far, Dow Chemical’s patience has resulted in new, energy efficient ways to produce chemicals and reduce waste water.

It takes an amazing amount of energy to produce Dow’s chemicals, and reducing energy costs has been a rather urgent goal for the company. Even more so now that the past quarter has seen its stock down 7%.

Despite its poor showing last quarter, though, we are optimistic for Dow Chemical.

We’re also talking about the world’s second-largest producer of ethylene—out paced only by Saudi Basic Industries. And in terms of diversification, Dow Chemical is hard to beat: It’s in to everything from automotive oil and gas to electronics and medical supplies, electronics and feedstock. When one sector slumps, another is bound to revive, and the company focuses on them all equally. 

But it’s Dow Chemical’s innovation that we like most—and specifically its energy savings efforts, which are unparalleled and will be a major strengthening force.

Green investments should also help Dow’s poor social responsibility reputation. While no one is going to forget the thousands killed in India in 1984--which has been brought to surface again thanks to the company’s sponsorship of the 2012 Summer Olympics in London—it may be able to gain some leverage by sticking to the green leadership path.

Europe is about one-third of Dow’s market and the crisis there has hit the company hard, but in the past it’s shown a remarkable ability for quick action and quick recovery.

One of its next moves will be the construction of what will be the largest petrochemical facility in the world, in cooperation with Saudi Aramco—Saudi Arabia’s state-owned oil company. The facility, which has a target launch date of 2016, will generate some $10 billion in annual revenues.

Dow Chemical is also planning an ethylene plant in Texas, with a target opening date of 2017. Low natural gas prices—should they continue—will be a booster for this plant, as ethylene comes from ethane, extracted from natural gas. Analysts predict the company will increase its ethylene production capacity 20% by 2017. Of course, this again will depend on ethylene prices, which can be highly volatile.

Right now, ethane prices are good, falling to their lowest since 2008, with a 2.3% drop this week. Overall, ethane prices have declined 68% this year, giving Dow Chemical a great competitive advantage as fracking continues to boost output from shale.

Cheap gas is behind Dow Chemical’s recent announcement that it will invest another $4 billion in US manufacturing.

This week the company announced it would expand its solar shingles market to Michigan, New York, Connecticut, Maryland, Massachusetts, Louisiana and Washington, D.C., and that it will use renewable energy to power three Dow Automotive Systems manufacturing plants in Michigan.

In agriculture, the company has made sound investments in global plant breeding programs, through its Dow AgroSciences subsidiary, which has enabled it to capture more of the North and South American corn seed market. The last four years have seen only gains in this market for Dow, which is pushing high-performance, yield-enhancing technology for corn hybrids.

So while Dow Chemical is having a bit a slump right now, and while we’re not willing to let it ride on its horrendous social responsibility track record, we prefer to be forward thinking and we like the company’s patient and unrelenting green quest, which will only continue to improve the bottom line and ensure it a place at the top of the pack. 

By. Oilprice.com Analysts

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