Dow Anticipates Tight Global Supply for PO/PG in 2005

Dow Anticipates Tight Global Supply for PO/PG in 2005
Dow Executive Says Strong Demand and High Propylene Monomer Prices Continue to Challenge

Midland, MI - April 04, 2005

The following is a Q&A with Earl Shipp, global business vice president for Dow Oxides & Glycols, discussing the current industry situation and market environment for Propylene Oxide (PO) and Propylene Glycol (PG).

Propylene Oxide
What is Dow's outlook for PO in 2005?
The PO markets are expected to grow at 4 percent per year, in accordance with world GDP. Based on industry sources, Dow expects global PO demand to remain strong, resulting in a tighter supply/demand ratio. While the year-to-year growth rates could vary somewhat, the balanced demand for all PO derivative products, including PG, support a 4 percent global number.

Widely accepted indicators point to energy and raw material costs remaining high in 2005. Additional price increases should be expected as margin improvement continues to be a focus in 2005. To date, industry margins are still below those reached during the last cycle peak.

What is the current supply/demand situation for PO?
Current global industry demand for PO is approximately 14 billion pounds per year. Based on industry sources, overall industry production capability is about 15 billion pounds.

Currently, the supply/demand ratio is tight and looks to remain that way moving beyond 2005.

Several major PO facilities are expected to have maintenance shutdowns during the year and the shutdown activities will absorb excess industry capacity.

With the current state of high propylene costs, PO producers likely will produce just enough to meet demand and maintain minimum inventory levels, meaning supply for PO will remain tight. This could create short-term supply challenges in the event of unforeseen problems.

What is driving demand for PO at the moment?
PO is used to produce commercial and industrial products including polyether polyols, propylene glycols and propylene glycol ethers. However, the polyurethane industry drives PO demand. Over 60 percent of the PO produced in the world is used in urethane polyether polyols, with PG being the second largest consumer (19 percent). Other uses include polyglycols (6 percent), glycol ethers (5 percent), and miscellaneous applications (8 percent).

What effect do the significantly high feedstock and natural gas costs have on PO pricing?
Rising gas, raw material and energy costs continue to put pressure on PO prices industry-wide. Although natural gas prices have eased since historic highs three years ago, they are still significantly high, along with crude oil prices. These high costs have made price increases necessary to achieve sustainable margins. The feedstock impact will vary depending upon the process used to make PO, as well as the production location.

What is Dow's competitive position in the marketplace?
With more than 4 billion pounds of capacity, Dow is the world's largest single producer of propylene oxide. Dow owns its entire global production grid and can service customers with local and global requirements.

Has Dow added any PO capacity recently?
In 2004, Dow increased the nameplate capacity of its Stade, Germany, PO plant to 1.3 billion pounds per annum, a more than 7 percent increase. Dow was able to achieve this increase through economies of scale, Six Sigma, and process technology improvements, without large capital expenditures.

As raw material and energy costs remain a challenge in the industry, optimizing its assets and setting new standards for efficiency in production are high priorities for Dow.

What is the expected impact of the Hydrogen Peroxide to Propylene Oxide (HPPO) technology?
In 3Q 2004, Dow and BASF Aktiengesellschaft announced that they would proceed with plans to commercialize HPPO technology with a new plant at BASF's site in Antwerp, Belgium. Construction is scheduled to start in 2006, and the plant is expected to come on stream in 2008. The HPPO technology to be used at the new plant is advantaged in that production plants using this process are expected to have a smaller footprint, need less infrastructure and require a significantly lower investment compared with conventional PO production processes.

Has Dow announced any price increases recently?
Effective October 1, 2004, Dow increased prices for propylene oxide by $.05/lb in North America and Latin America. On January 1, 2005, Dow increased prices for propylene oxide by $.10/lb., and on March 1, 2005, Dow increased prices for propylene oxide by $.10/lb.

Propylene Glycol
What is Dow's outlook for PG in 2005?
Overall, Dow forecasts 2005 growth to be consistent with global GDP, which is in line with our long-term demand growth expectations.

Dow expects that energy and raw material costs will maintain their historical highs and will continue putting pressure on pricing in 2005.

What is the current supply/demand situation for PG?
In 2004, global demand for all propylene glycols was 3.1 billion pounds. Based on industry sources, overall industry production capability is about 3.2 billion pounds. The current global supply for PG is tight throughout the industry and demand remains high on a global basis. This is partly due to demand competition for PO supply with polyurethane producers.

What is driving demand for PG at the moment?
A number of factors drive demand for PG. Typically, PG trends align with the economy; as the economy improves, so does demand for PG. Personal care, food, pharmaceutical and unsaturated polyester resin (UPR) applications have continued at their normal, constant growth rates in spite of economic slowdowns. In addition, factors such as cold weather influence seasonal demand for PG in aircraft deicing fluid (ADF)-type applications.

What effect do the significantly high feedstock and natural gas costs have on PG pricing?
Significantly high propylene and natural gas costs have made price increases necessary to achieve sustainable margins. However, Dow's price increases have not been able to completely offset these costs. Managing the impact of propylene volatility and natural gas prices remains a challenge for Dow and the customers who rely on these products.

These trends also are causing an increase in prices for other PO derivative products that PG must compete with for raw material.

What is Dow's competitive position in the market?
Dow's current global capacity for propylene glycols is approximately 1.2 billion pounds per year, making Dow the largest PG producer in the world. Additionally, Dow operates PG production facilities in all geographic regions.

Has Dow announced any price increases recently?

Effective October 1, 2004, Dow increased prices for propylene glycols by $.05/lb in North America and Latin America.
Effective November 15, 2004, Dow increased prices for propylene glycols by $.05/lb in North America and Latin America.
Effective December 1, 2004, Dow increased prices for propylene glycols by $.10/lb in North America and Latin America.
Effective January 1, 2005, Dow increased prices for propylene glycols by $.10/lb in North America and Latin America.
Effective March 1, 2005, Dow increased prices for propylene glycols by $.05/lb in North America and Latin America.

Current pricing reflects a combination of raw material prices and competition for PO molecules with urethane polyols. While prices increased significantly in 2004, they have not reached the levels of the last industry cycle peak.

Dow, with a global capacity of more than one billion pounds, is the industry leader in the manufacture of propylene glycol. With a global capacity of more than four billion pounds, Dow is the industry leader in the manufacture of propylene oxide. Dow has production facilities in Texas, Louisiana, Germany and Brazil.

Dow offers propylene oxide, monopropylene glycol (MPG), dipropylene glycol (DPG) and tripropylene glycol (TPG) globally. For more information about Dow Oxides and Glycols, visit the www.dowpo.com and www.dowpg.com websites.

About The Dow Chemical Company
Dow is a leader in science and technology, providing innovative chemical, plastic and agricultural products and services to many essential consumer markets. With annual sales of $40 billion, Dow serves customers in 175 countries and a wide range of markets that are vital to human progress: food, transportation, health and medicine, personal and home care, and building and construction, among others. Committed to the principles of sustainable development, Dow and its 43,000 employees seek to balance economic, environmental and social responsibilities. References to "Dow" or the "Company" mean The Dow Chemical Company and its consolidated subsidiaries unless otherwise expressly noted.

For Editorial Information:

Amy Ahlich
The Dow Chemical Company
(989) 636-3587

Josiah McClellan
Gibbs & Soell, Inc.
(212) 697-2600


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Based on industry sources, Dow expects global PO demand to remain strong, resulting in a tighter supply/demand ratio. While the year-to-year growth rates could vary somewhat, the balanced demand for all PO derivative products, including PG, support a 4 percent global number. Widely accepted indicators point to energy and raw material costs remaining high in 2005. Additional price increases should be expected as margin improvement continues to be a focus in 2005. To date, industry margins are still below those reached during the last cycle peak. What is the current supply/demand situation for PO? Current global industry demand for PO is approximately 14 billion pounds per year. Based on industry sources, overall industry production capability is about 15 billion pounds. Currently, the supply/demand ratio is tight and looks to remain that way moving beyond 2005. Several major PO facilities are expected to have maintenance shutdowns during the year and the shutdown activities will absorb excess industry capacity. With the current state of high propylene costs, PO producers likely will produce just enough to meet demand and maintain minimum inventory levels, meaning supply for PO will remain tight. This could create short-term supply challenges in the event of unforeseen problems. What is driving demand for PO at the moment? PO is used to produce commercial and industrial products including polyether polyols, propylene glycols and propylene glycol ethers. However, the polyurethane industry drives PO demand. Over 60 percent of the PO produced in the world is used in urethane polyether polyols, with PG being the second largest consumer (19 percent). Other uses include polyglycols (6 percent), glycol ethers (5 percent), and miscellaneous applications (8 percent). What effect do the significantly high feedstock and natural gas costs have on PO pricing? Rising gas, raw material and energy costs continue to put pressure on PO prices industry-wide. Although natural gas prices have eased since historic highs three years ago, they are still significantly high, along with crude oil prices. These high costs have made price increases necessary to achieve sustainable margins. The feedstock impact will vary depending upon the process used to make PO, as well as the production location. What is Dow's competitive position in the marketplace? With more than 4 billion pounds of capacity, Dow is the world's largest single producer of propylene oxide. Dow owns its entire global production grid and can service customers with local and global requirements. Has Dow added any PO capacity recently? In 2004, Dow increased the nameplate capacity of its Stade, Germany, PO plant to 1.3 billion pounds per annum, a more than 7 percent increase. Dow was able to achieve this increase through economies of scale, Six Sigma, and process technology improvements, without large capital expenditures. As raw material and energy costs remain a challenge in the industry, optimizing its assets and setting new standards for efficiency in production are high priorities for Dow. What is the expected impact of the Hydrogen Peroxide to Propylene Oxide (HPPO) technology? In 3Q 2004, Dow and BASF Aktiengesellschaft announced that they would proceed with plans to commercialize HPPO technology with a new plant at BASF's site in Antwerp, Belgium. Construction is scheduled to start in 2006, and the plant is expected to come on stream in 2008. The HPPO technology to be used at the new plant is advantaged in that production plants using this process are expected to have a smaller footprint, need less infrastructure and require a significantly lower investment compared with conventional PO production processes. Has Dow announced any price increases recently? Effective October 1, 2004, Dow increased prices for propylene oxide by $.05/lb in North America and Latin America. On January 1, 2005, Dow increased prices for propylene oxide by $.10/lb., and on March 1, 2005, Dow increased prices for propylene oxide by $.10/lb. Propylene Glycol What is Dow's outlook for PG in 2005? Overall, Dow forecasts 2005 growth to be consistent with global GDP, which is in line with our long-term demand growth expectations. Dow expects that energy and raw material costs will maintain their historical highs and will continue putting pressure on pricing in 2005. What is the current supply/demand situation for PG? In 2004, global demand for all propylene glycols was 3.1 billion pounds. Based on industry sources, overall industry production capability is about 3.2 billion pounds. The current global supply for PG is tight throughout the industry and demand remains high on a global basis. This is partly due to demand competition for PO supply with polyurethane producers. What is driving demand for PG at the moment? A number of factors drive demand for PG. Typically, PG trends align with the economy; as the economy improves, so does demand for PG. Personal care, food, pharmaceutical and unsaturated polyester resin (UPR) applications have continued at their normal, constant growth rates in spite of economic slowdowns. In addition, factors such as cold weather influence seasonal demand for PG in aircraft deicing fluid (ADF)-type applications. What effect do the significantly high feedstock and natural gas costs have on PG pricing? Significantly high propylene and natural gas costs have made price increases necessary to achieve sustainable margins. However, Dow's price increases have not been able to completely offset these costs. Managing the impact of propylene volatility and natural gas prices remains a challenge for Dow and the customers who rely on these products. These trends also are causing an increase in prices for other PO derivative products that PG must compete with for raw material. What is Dow's competitive position in the market? Dow's current global capacity for propylene glycols is approximately 1.2 billion pounds per year, making Dow the largest PG producer in the world. Additionally, Dow operates PG production facilities in all geographic regions. Has Dow announced any price increases recently? Effective October 1, 2004, Dow increased prices for propylene glycols by $.05/lb in North America and Latin America. Effective November 15, 2004, Dow increased prices for propylene glycols by $.05/lb in North America and Latin America. Effective December 1, 2004, Dow increased prices for propylene glycols by $.10/lb in North America and Latin America. Effective January 1, 2005, Dow increased prices for propylene glycols by $.10/lb in North America and Latin America. Effective March 1, 2005, Dow increased prices for propylene glycols by $.05/lb in North America and Latin America. Current pricing reflects a combination of raw material prices and competition for PO molecules with urethane polyols. While prices increased significantly in 2004, they have not reached the levels of the last industry cycle peak. Dow, with a global capacity of more than one billion pounds, is the industry leader in the manufacture of propylene glycol. With a global capacity of more than four billion pounds, Dow is the industry leader in the manufacture of propylene oxide. Dow has production facilities in Texas, Louisiana, Germany and Brazil. Dow offers propylene oxide, monopropylene glycol (MPG), dipropylene glycol (DPG) and tripropylene glycol (TPG) globally. For more information about Dow Oxides and Glycols, visit the www.dowpo.com and www.dowpg.com websites. About The Dow Chemical Company Dow is a leader in science and technology, providing innovative chemical, plastic and agricultural products and services to many essential consumer markets. With annual sales of $40 billion, Dow serves customers in 175 countries and a wide range of markets that are vital to human progress: food, transportation, health and medicine, personal and home care, and building and construction, among others. Committed to the principles of sustainable development, Dow and its 43,000 employees seek to balance economic, environmental and social responsibilities. References to "Dow" or the "Company" mean The Dow Chemical Company and its consolidated subsidiaries unless otherwise expressly noted. For Editorial Information: Amy Ahlich The Dow Chemical Company (989) 636-3587 Josiah McClellan Gibbs & Soell, Inc. (212) 697-2600
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