Management Accounting

Costly Chemistry: Dow Hikes Prices 25 Percent

Second major rise by the company this month, added to other corporate reactions to costlier energy, adds to inflationary fears.
Stephen TaubJune 24, 2008

A broad price increase announced by Dow Chemical, raising the price of its products by as much as an additional 25 percent in July, is the latest pass-through blow to companies. Dow said the rises are an effort to offset “the continuing relentless rise” in the cost of energy and hydrocarbon feedstocks.

The latest price hikes come just weeks after Dow announced it would raise prices by 20 percent.

The Dow announcement comes on top of a series of actions by American companies reflecting changes in pricing structures from surging fuel prices — changes that, along with slowing sales, add up to significant inflationary pressures.

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In today’s announcement, Dow Chemical said it will implement a freight surcharge of $300 per shipment by truck and $600 per shipment by rail, effective August 1. The surcharge applies to North America customers buying chemicals, hydrocarbons and plastics where Dow absorbs the freight currently. Later this year a freight surcharge will be implemented in other geographic regions “as appropriate,” it added.

Dow said it is moving ahead, too, with plans to temporarily idle or reduce production at a number of manufacturing plants.

The chemical maker said it has reduced its ethylene oxide production worldwide by 25 percent, and idled 30 percent of its North America acrylic acid production. The company also will idle 40 percent of its European styrene production capacity, and has reduced its European polystyrene production rate by 15 percent. The company attributed these actions to the slowdown in the U.S. and European economies, and the recent surge in hydrocarbon feedstock costs.

In addition, the company said that in light of “a serious decline” in North American auto sales, Dow’s Automotive unit is announcing a series of cost reduction measures covering facilities, people and external spending. In addition, the business is in the process of divesting its paint shop sealer business and is implementing plant consolidations resulting in the closure of three production units.

Also, Dow Building Solutions temporarily idled 20 percent of its European capacity for producing Styrofoam insulation. Earlier this month, the company announced plans to idle three Dow Emulsion Polymers plants representing 25 percent of North America capacity and 10 percent of European capacity. These reductions were directly related to declines in the housing and consumer sectors, as well as rising costs, the company said in its announcement.

“The price increases we announced on May 28 helped, but they were not enough to fully cover the additional costs we are now facing,” said Andrew N. Liveris, Dow chairman and CEO.

He added that for the first half of 2008, the company’s feedstock and energy costs are up more than 40 percent compared with the same six months of last year. “Even since our last announcement, the cost of hydrocarbons has continued to rise, and that trajectory shows no sign of changing,” he said. “We must restore margins in our businesses, both through price increases and the reduction of operating costs at certain production facilities.”

Among other companies reacting to spiraling energy costs so far this week:

–United Airlines said Monday it plans to eliminate about 950 pilot jobs beginning this summer to offset rising fuel prices.

–General Motors announced additional production cuts and new incentives on many 2008 models. It is also raising 2009 prices 3.5 percent to offset price of steel and cost of other materials.

–UPS warned that earnings per diluted share for the second quarter will come in about 15 percent below expectations.

“Slow US economic growth and an unprecedented increase in the cost of fuel have resulted in lower-than-expected U.S. package volume and an accelerating contraction in the use of premium air products,” UPS said in its press release. It also said that the anemic U.S. economy is negatively impacting package volume into the U.S., hurting results for the International segment.