Author: ToddSullivan

If Liveris says it will happen, it will.

Dow Chemical(DOW) announced on Monday it has completed the purchase German chemical maker Bayer AG’s (BAY) Wolff Walsrode cellulosics business for about $725 million including the assumption of debt and pension commitments. They also announced the launch of a new specialty business unit, Dow Wolff Cellulosics, a specialty business unit with over $1 billion in annual sales. It is a combination of the Wolff Walsrode business and Dow’s water-soluble polymers business.

The acquisition, which is expected to add to earnings within a year, is in-line with Midland, Michigan-based Dow’s strategy of growing its specialty chemicals business.

This is yet another move by CEO Andrew Liveis that is perfectly in keeping with his announced strategy for DOW. In April he said on CNBC to David Faber, “We have put the company back in charge of its own future which includes, acquisitions. Now, acquisitions of what companies or what businesses? You’ve read the strategy I am sure and you just implied it when you referred to GE plastics, we are looking for downstream businesses that provide earnings growth and earnings momentum that compliment our own businesses…..”

“…. I won’t comment on any specific deal (after being asked about his interest in GE Plastics) but with over 60 deals in the works, we are looking at everything. It is the deals we haven’t done that are the most instructive. This is a company that financial discipline and making sure that the deals we do do, fit our strategy and we are not just going to come around and buy whatever is available. Now, having said that, look at the profiles, look at the downstream businesses, we are not interested in more commodities, we are interested in technology rich downstream businesses.”

Liveris has also said the any acquisition Dow would make “must be immediately accredive to earnings” and this one again fits the bill perfectly.

Liveris has said he wants a coatings and a water business of $3 to $4 billions each. This only means one thing, more Dow acquisitions in the near future using it’s growing cash pile. How can I be so sure?

To date, everything Liveris has said has come to fruition, there is no reason to start doubting him now.

Two weeks ago I posted about an ethanol production breakthrough at Rice University and I promised more info when I got it. I recently spoke with Ramon Gonzalez, the William Akers Assistant Professor in Chemical and Biomolecular Engineering about his breakthrough.

Here is the math. We have a 100 mgpy biodiesel plant. In our production of the biodiesel, one of the by products is glycerin. Currently, most producers must pay to have it disposed of. Now, using Mr. Gonzalez’s methods, they can convert it to ethanol.

100 mgpy of biodiesel produces roughly 75 million pound of glycerin. That glycerin can be converted into ethanol at a cost that is 40% cheaper than the current corn to ethanol cost (about 40 to 45 cents a gallon). How much ethanol? 75 million pounds of glycerin would produce about 9.3 mpgy of ethanol. Now, the ethanol production from glycerin would produces as a by-product “performance acids” that can used in then production of fuel cells.

We now have a process that takes the cost of disposing glycerin and turns it into a profit of roughly $13 million dollars for the biodiesel producer. This profit, it should be noted does not take into account the ancillary sales of the other by-products.

Currently the technology is in the hands of Houston VC’s and a production facility is expect to be operational next year as “several” companies have contact Professor Gonzalez about using the process.

The U.S. biodiesel industry is expected to produce an estimated 1.4 billion pounds of glycerin valued at $289 million between 2006 and 2015, according to an economic study by John Urbanchuk, director of LECG Inc. According to projections gleaned from NBB estimates, the industry could produce as much as 200 million pounds this year alone.

This 200 million pounds would produce an additional 17 million gallons of ethanol this year, not a huge number, but it does make biodiesel production dramatically more profitable which will invariably lead to more producers entering the market.

Crude glycerin that once fetched between 20 and 25 cents per pound is now edging closer to 5 cents and lower. This is down from the high of $1.08 in 1996. The glut and pricing pressure have led Dow Chemical (DOW) to close it’s 150 million pound per year facility in Freeport, Texas.

Ethanol giant Archer Daniel’s (ADM) had previously put glycerin facility plans on hold at the turn of the century as prices collapsed. ADM will produce an estimated 250 mmgpy of biodiesel in the US by the end of 2008 which equates to 188 million pounds of glycerin. ADM could convert that to an additional 16 million gallons of ethanol and other by products for sale that it either now pays to dispose of or received very little n return for. This is only US production numbers, ADM is also Europe’s largest biodiesel producer.

Every time we get an alternative source of ethanol production, we widen the possibilities and lessen our dependence on oil. Good