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MAY 1, 2003 SPECIAL REPORT: ENVIROTECH Dow Reaches for a Greener Future [Page 2 of 2] For example, Dow produces latex at one of its New Jersey plants. One by-product is so-called white water, which contains an insoluble residue of oil-based latex. The latex adds a stickiness that can be used in road construction to control dust. Public Service Enterprise Group, an electric company participating in the New Jersey program, has expressed interest in taking Dow's sticky water to tame dust at its plants. Though still in its early days, environmentalists say the project shows promise. The U.S. Environmental Protection Agency is sponsoring a test of the concept, and Dow has already initiated a similar program on Texas' Gulf Coast. "Most companies have tunnel vision. They focus only on their reducing pollution or recycling their own products and technology," says Bob Shinn, New Jersey's former environment commissioner and currently president of S2 Concepts, an environmental consultancy. "This is [what] ties it all together." PLASTIC FROM CORN. As part of its strategy, Dow is also working to wean itself from products that rely on high-cost, environmentally objectionable petroleum and oil-based products. One of the most innovative comes from a joint venture, Cargill Dow, which has developed a family of polymers (a component of plastic) derived entirely from renewable resources. Plastics are traditionally made using petroleum or oil. Instead, Cargill Dow mills corn to separate starch from other raw materials. The starch is then processed into unrefined dextrose, which in turn is made into lactic acid via a fermentation process similar to that used to make beer or wine. By means of a sophisticated polymerization process, the acid is transformed into tiny plastic pellets, called polylactide polymer (PLA), that can be melted down to form fibers or plastic packaging. Cargill Dow's plant, which came online in April, 2002, expects to produce 200 million to 300 million pounds of PLA annually for use in making clothing, sheets, carpeting, plastic containers, and bottles. Will such efforts be enough to keep Dow's sales and profit growth on track? Almost certainly not: "The strategy is still in its infancy," says Bernstein's Copley. And the next 12 months promise to be challenging. In April, demand for plastics -- which were partially responsible for lifting Dow out of the red in the first quarter -- appears to have been weaker than expected. HEAVY DEBT LOAD. That's due at least in part to the SARS scare in Asia. The region (including Japan) accounts for about 30% of global plastics demand. With anecdotal evidence suggesting that shopping in cities such as Beijing and Hong Kong is down as much as 50%, analysts are worried that a collapse in retail sales today could result in a major decline in Dow's revenues over the next few months. Nor will long-range sustainable-development plans solve other fundamental problems that plague Dow. With $12.4 billion in debt, Dow's net debt-to-total-capitalization ratio is 57%, up from 33% in the second quarter of 2000. It plans to sell unspecified assets to trim this load, but analysts say it remains a buyer's market. And despite Dow's success in passing higher costs to consumers during the first quarter, prices on most commodity chemicals continue to erode. In 2002, Dow's raw-material costs declined $850 million, but prices fell twice that amount, or $1.7 billion, according to Banc of America's McCarthy. "With soaring feedstock [raw-material] costs in early 2003, Dow will be increasing prices because it needs to do so," McCarthy wrote in an Apr. 16 research report. "Real money won't be made until Dow can raise prices because it wants to, i.e. when supply becomes tight." That's unlikely to happen for at least 12 to 18 months. Which means for now, Dow's commitment to sustainable development will lauded by environmentalists -- but it may not yet be enough to win over investors.
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