Dow Chemical Case
Dow Chemical Case
Question 1 Polyethylene is the world’s most widely used plastic. Polyethylene plastic’s principal application was in packaging, from trash bags to milk jugs. It was widely used in the manufacture of everything from trash bags, picnic cutlery and garbage pails, to plastic toys. Polyethylene also replaced glass, wood, and metal in certain applications. There were three types of polyethylene, Low-density polyethylene, High density polyethylene and Low linear density polyethylene. Polyethylene produced from ethylene. Ethylene is produced from oil or natural gas. Ethylene plants separated either naphtha molecules (derived from crude oil) or ethane molecules (derived from natural gas). The ethylene derived from this process was used to produce polyethylene. The critical success factors in this business were capital intensive and economies of scale. Polyethylene was a global commodity product and pricing worldwide typically fell into a narrow band. The demand for polyethylene was large because it was the world’s most widely used plastic and polyethylene customers were typically small and medium-sized plastic processing companies.
The big Risks in the industry: * The raw material risk - Cracking naphtha (the raw material derived from crude oil) required much more energy, manufacturing intensity, and equipment than cracking ethane (derived from natural gas). Supply of primary materials and electricity are crucial to success of polyethylene production. * Cost risk - large plant sizes and the need for economies of scale rendered the ethylene industry highly capital intensive. A plant for cracking ethane was estimated to hundreds of millions and the cost for a plant for cracking naphtha is double. Capacity additions or reductions could significantly affect balance of supply and demand, influencing capacity utilization rates, prices, and profit margins. * Ethylene profitability was tightly links to its global operating rate. The
Question 1 Polyethylene is the world’s most widely used plastic. Polyethylene plastic’s principal application was in packaging, from trash bags to milk jugs. It was widely used in the manufacture of everything from trash bags, picnic cutlery and garbage pails, to plastic toys. Polyethylene also replaced glass, wood, and metal in certain applications. There were three types of polyethylene, Low-density polyethylene, High density polyethylene and Low linear density polyethylene. Polyethylene produced from ethylene. Ethylene is produced from oil or natural gas. Ethylene plants separated either naphtha molecules (derived from crude oil) or ethane molecules (derived from natural gas). The ethylene derived from this process was used to produce polyethylene. The critical success factors in this business were capital intensive and economies of scale. Polyethylene was a global commodity product and pricing worldwide typically fell into a narrow band. The demand for polyethylene was large because it was the world’s most widely used plastic and polyethylene customers were typically small and medium-sized plastic processing companies.
The big Risks in the industry: * The raw material risk - Cracking naphtha (the raw material derived from crude oil) required much more energy, manufacturing intensity, and equipment than cracking ethane (derived from natural gas). Supply of primary materials and electricity are crucial to success of polyethylene production. * Cost risk - large plant sizes and the need for economies of scale rendered the ethylene industry highly capital intensive. A plant for cracking ethane was estimated to hundreds of millions and the cost for a plant for cracking naphtha is double. Capacity additions or reductions could significantly affect balance of supply and demand, influencing capacity utilization rates, prices, and profit margins. * Ethylene profitability was tightly links to its global operating rate. The