Dow Chemical quarterly profit hurt by costs

By Euan Rocha

NEW YORK (Reuters) - Dow Chemical Co (DOW.N) posted second-quarter earnings that fell short of market expectations as its price increases did not completely offset a sharp spike in energy and raw material costs.

The largest U.S. chemical maker also cautioned that the U.S. economy will continue to weaken through the rest of 2008, while the outlook for the global economy remains uncertain given high crude oil prices.

"Dow is continuing to battle with raw (material) costs. Despite across-the-board double-digit price increases, it is still seeing margin compression," said Morningstar analyst Den Johnson.

Net income of $762 million, or 81 cents a share, was down from a year-ago profit of $1.04 billion, or $1.07 a share, and below Wall Street's expectations of 85 cents a share.

Quarterly revenue rose 23.5 percent to $16.38 billion, driven by price increases and strong volume growth in overseas markets. Analysts on average had forecast revenue of $14.90 billion, according to Reuters Estimates.

"There is no question that our emerging geographies strategy has served us well, typical of many international corporations. But, the U.S. demand destruction is still yet to really be felt around the world," said Chief Executive Andrew Liveris, in an interview with Reuters.

Dow shares were down 1.9 percent at $33.60 in midday trade on the New York Stock Exchange.

COSTS WEIGH

Dow said its feedstock and energy costs in the quarter surged 42 percent, or $2.4 billion to just below $8 billion, the largest year-over-year increase in the company's history.

Liveris said the full impact of the price increases it has implemented will only be reflected in the third quarter and warned that if cost escalation pressures do not abate the company might be forced to implement more price increases.

In June, Dow said it would boost prices as much as 25 percent, institute freight surcharges and cut output of some products because of soaring energy prices. In May, Dow had announced price increases of up to 20 percent on all products.

The Midland, Michigan-based company makes thousands of products ranging from plastic wraps to car parts and insecticides.

Liveris has steered Dow from being primarily a commodity chemical company toward a more specialty chemical maker, in a bid to reduce earnings cyclicality and improve profit margins.

Earlier this month, Dow said it would acquire specialty chemical maker Rohm and Haas Co ROH.N for $15.3 billion in a move to broaden its product offerings in higher-margin markets such as paints, coatings and electronic materials.

In a move to reduce earnings cyclicality, Dow in 2007 announced it would sell a large portion of its basic plastics assets into a joint venture with Kuwait Petroleum Corp. This deal is expected to close later this year.