(Reuters) - Dow Chemical Co DOW.N Chief Executive Andrew Liveris defended on Wednesday his decision to slash spending on capital projects, saying the cuts will not deter the chemical maker from meeting aggressive earnings targets.
Dow, the largest U.S. chemical maker, has spent much of 2012 grappling with weak demand for ethylene, propylene and other chemicals used to make plastics. The company announced a first round of cost cuts in the spring, and on Tuesday unveiled a second round.
Executives said they will cut growth projects by $200 million this year, and reduce the capital expenditure budget by $100 million in 2012 and $700 million in 2013. The company had capital expenditures of $2.69 billion in 2011.
Dow is also laying off 2,400 workers, roughly 5 percent of its workforce, and closing 20 plants during the next two years. Half of the layoffs will be in the United States. The company also posted a better-than-expected quarterly profit on Tuesday, helped in part by cost cuts.
The news, inadvertently released two days earlier than Dow planned, helped Dow shares rise nearly 5 percent on Wednesday.
Reducing spending on growth projects saves cash in the short term but can limit options in the future if certain projects haven’t been properly funded. Liveris said Dow must “stop future growth projects that are no longer affordable in this environment.”
“We cannot keep funding a wide spectrum of opportunities in a world where markets are volatile and in many cases receding,” he said on a Wednesday conference call with investors. “I am acutely aware that we need to demonstrate Dow can deliver against targets.”
The company will focus on growth projects with “positive returns in the far-distant future”, Liveris said.
He cited the company’s investment to expand production of the key chemical ethylene on the U.S. Gulf Coast and build a new chemical plant in Saudi Arabia. Neither is expected to be online until later this decade.
Dow announced another expansion project Wednesday afternoon, saying it would build a “world-scale” synthetic rubber plant somewhere on the U.S. Gulf Coast and hopefully have it online by 2016. Synthetic rubber is commonly used to make rubber hoses.
The company declined to provide the rubber facility’s cost, precise location or production capacity.
Liveris said Wall Street can “rest assured” that despite cuts to capital spending, Dow will achieve its goal to have annual earnings before interest, taxes, depreciation and amortization (EBITDA) of $10 billion “in the next several years.”
He declined to be more specific on the timing.
In 2011, the Midland, Michigan-based company reported EBITDA of $7.79 billion.
Of the 2,400 global job cuts, 50 percent will be in the United States, 30 percent in Europe, 10 percent in Asia and 10 percent in Latin America.
Dow rival DuPont DD.N forecast a tough road ahead for its own business on Tuesday, slashing its forecasts and saying it will cut 1,500 jobs.
Dow shares rose 4.7 percent on Wednesday to close at $29.88. Their 52-week high is $36.08.
Reporting By Ernest Scheyder; Editing by Tim Dobbyn, John Wallace; and Peter Galloway