The highlight of the day is the very strong results from Dow and the even more positive outlook. While we see risks to the supportive supply/demand balances for some products in the second half of the year, especially the 4th quarter, there is no denying that all of the lights on the road ahead currently look green and we certainly would not criticize Dow for the outlook, even if it must rank as one of the most positive that we have seen (see table below), maybe the most credible positive outlook from any company in our careers (we have seen plenty over the years that have been complete nonsense). Dow is very well placed with its products portfolio to exploit both the current shortages and the expected post-COVID growth and it is important to note that the 1Q results were delivered in a quarter where there were still many COVID-driven demand constraints. We would stick by the advice that we gave earlier in the week, which is to keep the capital powder dry – and Dow seems to be doing this – reducing liabilities and not committing to share buyback beyond preventing dilution.
Source: Dow
However, our key takeaway from the call was the absolute lack of imagination from what is now largely a passive sell-side, who collectively managed to miss the key question of the day. All of the questions were focused on modeling for the current quarter and the rest of the year (early indicators suggest that estimates will not rise enough for 2Q) and this is because the current business model demands that the sell-side publishes an update note in the next 24 hours in which they change estimates, target prices, and possibly recommendations – things they will likely not touch again until next quarter unless Dow issues interim guidance. No one is being paid to take risks or ask the hard questions anymore, and in our view, it is a shame. Today the hard question was as big of a “lay-up” as you could hope for – “what do the Biden 2030 US emission reduction targets mean for Dow”? We have great respect for the Dow management team, and we know that they had an answer ready for that question – but no one asked. Dow has over 18 million tons of CO2 emissions on the Gulf Coast according to EPA data for 2019, and if one of the Biden moves was to tax that carbon (very unlikely, because of insufficient support in congress, but possible) Dow would have a direct hit to net income which could be substantial. We do not think that the Administration’s emission goals are realistic (it is more of a PR exercise ahead of today’s conference), but they are an aggressive stretch goal and it does not mean that the administration will not try to implement policy to encourage reduction – either incentives or taxes. Dow, LyondellBasell, and the rest of the petrochemical and industrial gas producers are meaningful CO2 emitters. If the path forward is to increase incentives rather than taxes, you would see higher capital spending from Dow and others but with a net-income offset. The same would be true for taxes on carbon, but taxes could eat into earnings initially.
