How Dow's New Texas Polyethylene Plant Will Help

Dow Chemical Company's Performance Plastics division, which is worth 36% of the company’s value according to Trefis estimates, has been doing well lately. The segment saw revenue growth of 20% with an impressive 15% jump in average prices in the recently reported quarter. Prices increased in response to higher feedstock and energy costs, without having any adverse impact on volume growth. The segment is likely to get another boost as Dow has completed the construction of its Texas polyethylene plant as a part of its Gulf coast investment program to use low-cost U.S. shale gas feedstock. The plant will produce Dow’s ELITE enhanced polyethylene resins for use in packaging. The costs might be sizable in the short term, but we can expect long term margin sustenance and revenue enhancement.

Judging by the recent increase in volumes despite higher prices, there is healthy demand for performance plastics. Therefore, as the facility becomes fully operational in Q4 2017, we expect it to fulfill some of the growing demand and lead to an uptick in revenue for the company. The real benefit, however, lies in the potential of Dow Chemical’s Gulf Coast push to increase margins in the long run. The EBITDA margin of Dow’s Performance Plastics division has almost doubled to 28.8% since 2012. However, we remain conservative in our forecast and believe that Dow will be able to sustain margins of around 25% over the long run, considering strong competition. However, if Dow’s Gulf Coast expansion helps it sustain margins of around 30%, it will imply a 15% upside to our current price estimate for Dow.