Dow Chemical Co. (DOW:US), the largest U.S. chemical maker, and the Shenhua Group Corp. plan to conduct a two-year feasibility study on making plastics and chemicals from coal in China's Shaanxi province.
``Barring unforeseen circumstances, this is a project that will happen,'' Dow Chief Executive Officer Andrew Liveris said today in a telephone interview. ``This is a key part of our strategy to maintain our integration over time and move a large part of our footprint to low-cost in-market asset bases that provide us high cash flow on lower capital.''
Liveris is joining with companies outside the U.S. to use cheaper raw materials and sell in faster-growing markets. Dow's costs for energy and chemical ingredients surged to $22 billion last year from $8 billion three years ago. Midland, Michigan- based Dow is the world's biggest plastics producer, and state- owned Shenhua is China's largest coal-mining company.
Dow and Shenhua signed a cooperation agreement for a 50-50 joint venture project, which will convert coal to methanol for production of ethylene and propylene, key ingredients in many basic chemicals and plastics. The study will be followed by submission of a project application to the Chinese government, Dow said in a statement.
Production is slated to begin in 2013 or 2014, Liveris said. The complex would be on the scale of Dow's site in Plaquemine, Louisiana, and cost several billion dollars, he said, declining to be specific. About 5 percent to 10 percent of spending will occur in the next two years on engineering, water- supply studies and equipment purchases, he said.
Shares of Dow fell 27 cents to $45.52 in New York Stock Exchange composite trading. They have gained 11 percent from a year ago.
The Shaanxi site would have factories for making chlorine and caustic soda, known collectively as chlor-alkali, for production of various vinyl resins. Other products would include glycols, amines, solvents, surfactants, acrylic acid and propylene derivatives.
The project will help reduce China's reliance on imported oil, Shenhua Chairman Chen Biting said in the statement.
China accounted for $3.5 billion of Dow sales last year, including joint ventures, making the country the third-biggest market behind the U.S. and Germany, Liveris said. Total sales were $49.1 billion.
A two-year pre-feasibility study for the project won approval from China's National Resource Development Council, which Liveris called ``a very significant milestone.''
``The two partners are ready to commit substantial amounts of money to take it to the next level of approval,'' Liveris, 53, said.
Dow will contribute less than half the project cost, because it will get credit for production technology, marketing and operations expertise, the CEO said.
Dow has a similar cost-sharing arrangement for its 50-50 venture with Saudi Aramco, Liveris said. The companies on May 12 said they plan to open a chemicals complex in 2012 in Ras Tanura that will employ 4,000 people at more than 30 factories.
The cost of the Saudi project will be ``mammoth,'' Liveris said, declining to be specific. A public stock offering in Saudi Arabia will reduce capital costs, he said.
Liveris said he is discussing another Chinese project with China Petroleum & Chemical Corp. (600028), or Sinopec, that is about one year behind the Shenhua project. The complex would be integrated with a Sinopec refinery and include factories for making ethylene, propylene, aromatics and various other chemicals and plastics, he said.
Dow is the world's largest producer of ethylene, polyethylene, polystyrene, chlorine and caustic soda.
Dow last month announced a joint venture to make chemicals in Libya, adding to partnerships with state-owned companies in Kuwait, Malaysia and Oman. Liveris in April also announced a North American plastics venture with Chevron Phillips Chemical Co.
The Middle East ventures reduce Dow's capital costs while improving access to lower cost raw materials and rapidly growing markets in Asia, particularly China.
Dow is closing less-competitive assets in the U.S. and Europe as a greater portion of the world's basic chemicals and finished products are produced elsewhere, Liveris said.
``As we replace existing capacity in established markets, we are bringing things down which are no longer needed in those markets,'' Liveris said. ``Dow will keep shuttering those plants as they start to need reinvestment.''
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