Good day and welcome to the Dow Second Quarter 2019 Earnings Call. At any time during today's presentation. Also, today's call is being recorded. I would now like to turn the call over to Mr. Neil Charray.
Please go ahead, sir.
Good morning, everyone. Thank you for joining us to discuss the second quarter financial results for Dow. We're making this call available via webcast we have prepared slides to supplement our comments during this conference call. They are posted on the Investor Relations section of Dow's website and through the link to our webcast. Speaking on the call today are Jim Fitterling, Dow's Chief Executive Officer and Howard Underleiter, President and Chief Financial Officer.
Please read the forward looking statement disclaimer contained in the earnings news release and slides. During our call, we will make forward looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward looking statements. Dow's Form 10 as well as our Forms 10Q10K include detailed discussions of principal risks and uncertainties, which may cause such differences. Unless otherwise specified, all historical financial measures presented today are on a pro form a basis and all financials where applicable exclude significant items.
We'll also refer to non GAAP measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in the Dow earnings release, in the slides that supplement our comments today and on the Dow website. On Slide 2, you'll see our agenda for the call. Jim will start with an overview of Dow's 2nd quarter performance and highlights. Howard will then move into a financial overview of the quarter and will also provide some comments on modeling guidance.
Jim will then cover the results for each of our operating segments and we'll close with a discussion on our forward looking views. Following that, there will be plenty of time for your questions. With that, I'll turn the call over to Jim.
Thanks, Neil, and thanks, everyone, for joining us this morning. Starting on Slide 3, Our performance in the second quarter reflected the benefits of Dow's streamlined and more focused portfolio and our discipline operational and financial management. It was a quarter that proved to be more challenging than many of us in the industry expected, and you've heard this from many of our peers in the past few weeks. In spite of this, the Dow team was able to deliver top and bottom line results that were in sequentially when adjusting for our previously communicated higher plan turnaround spending in the quarter. Our second quarter results were enabled by proactive and deliberate action.
First, we captured demand growth in select consumer markets where the conditions have remained strong. For example, we grew volume And in our polyurethane systems business, we grew our volume year over year for the 24th consecutive quarter. 2nd, we made full expand operating EBITDA margin in the PNSP segment as we utilized our ethane flexibility in the U. S. And our LPG capabilities in Europe.
3rd, we continued to drive expense management in addition to reduced discretionary spending, we delivered more than $175,000,000 of savings from cost synergies and stranded cost removal. You can combined SG And A And R&D. We've now delivered more than $1,100,000,000 of cumulative cost synergy saving since merger closed and remain well on track to deliver the $600,000,000 of synergy and stranded cost savings that we targeted this year. 4th, we quickly put in place actions to further tighten our capital spending in the quarter not only was the 2nd quarter CapEx spending below last year, but our first half spending was below trend relative to our full year target. We are taking additional actions to reduce CapEx.
Which I'll cover later in flow from operating activities and improved our cash conversion in the quarter. Part of our improvement was driven by a decrease in integration and separation cost outlays, which this cash spending by $200,000,000 to $400,000,000 versus 2018. Taken together, this was a solid result by the Dow team, and it underscores our ability to adapt as market conditions evolve. Going forward we will continue to take prudent actions to manage near term macroeconomic challenges, while preserving our long term competitive advantages. I'll share more about our plans in my closing remarks.
I'll now turn it over to Howard to discuss our overall financial performance and modeling guidance.
Thanks, Jim. Turning to Slide 4, net sales were $11,000,000,000, in line with our guidance. Pricing in polyethylene, thaloxanes and isocyanates, as well as lower sales of hydrocarbon co products due to lighter feed slates in both the U. S. And Europe.
Volume declined 3% year over year, driven primarily by lower hydrocarbon co product sales due to higher internal ethylene consumption from the startup of new downstream assets and our cracker feedstock selection. Notable volume highlight is our growth in the Packaging And Specialty Plastics business, which was up 3 year over year. Local price was down the euro. Equity losses were $15,000,000, primarily driven by margin compression in MEG and polyethylene at the Kuwait joint ventures, as well as margin compression in isocyanates at Sadara. Operating EBIT for the quarter was $1,100,000,000 and EPS was $0.86, in line with consensus estimates.
The key earnings tailwinds in the quarter were volume gains and packaging applications, CU systems and isocyanates, contributions from new capacity on the U. S. Gulf Coast and savings from cost synergies and stranded costs removal. These gains were more than offset by margin compression in key value chains, which impacted both our core business metrics, we generated nearly $1,000,000,000 of cash flow from operating activities in the quarter, an increase of $200,000,000 cash flow from operations conversions, which rose to more than 50%. And finally, we returned $800,000,000 to our owners in the quarter, including $500,000,000 of paid dividends and $300,000,000 of share repurchases.
As you may recall, we set a target of $500,000,000 of share repurchases for the year and we remain on pace to achieve that. Now let's look at our principal joint ventures on Slide 5. Equity losses for the quarter were $15,000,000, primarily driven by margin compression in energy and polyethyleneutic weight joint ventures, reduced cracker and polyethylene margins that are tied JVs and margin compression in isocyanates at the Sadara joint venture. With regard to SEDARRA, as we've discussed before, one of the key items we're working on is receiving certification for passing the lender reliability test. The key milestone required for the JV parents to be released from their guarantees of SEDAR's debt financing.
The process to receive take 6 to 9 months and we're progressing on that timeline. We've made good progress thus far and have essentially isolated the last gating item to a logistics services agreement. We are in active discussions with our partner, the JV, and the lending syndicate to resolve this issue. Based on the progress to date, we're on track to formally receive certification in the second half of this year. Moving to Slide 6 and our modeling guidance for the third quarter.
As usual, we're providing specific guidance for our top line revenue expectation as well as several items below the EBIT line. With regard to our segment expectations, we're providing our guidance on a sequential basis in response to investor feedback and to reflect the most relevant comparison in today's environment. At the total down level, we expect EBIT tailwind sequentially, including more than $40,000,000 from cost synergy savings and stranded costs removal, as well as more third party outages that are impacting our operations in the third quarter. In Performance Materials And Coatings, we siloxinc pricing in the 3rd quarter remaining about at the same level as we exited the 2nd quarter, which means that 3rd quarter average pricing will be down sequentially. On the positive side, our formulated silicones demand and margins continue to hold up very well, showcasing the resiliency in our differentiated businesses that are closer to consumer.
Moving to the Industrial Intermediates And Infrastructure segment, from a pricing perspective, current forecasts estimate MDI prices to trend relatively flat with 2nd quarter levels, and M and G prices on average are projected to soften on a sequential basis, As such, we expect equity earnings results to be lower than the second quarter due to these factors. Additionally, Sadara's operations are being negatively impacted by the liability of a third party industrial gas supplier, which is limiting production in JV's polyurethane chain. The supplier is actively addressing the issues and the JV currently expects to ramp to normal operations by the middle of the quarter. Sadara currently estimates this limitation to have a $20,000,000 impact to Dow equity earnings in the quarter. And finally in the Packaging And Specialty Plastics segment, we expect robust Packaging demand to continue.
We see feedstock price trends continuing to drive lighter cracker feed slate in the U. S. And Europe, which will further reduce our top line sales of coke products. From an industry supply demand perspective, new ethylene capacity is expected to come online in the U. S.
Will likely put some upward pressure on ethane prices. This segment will be impacted by a planned cracker maintenance turnaround in the Netherlands as well as an issue that we're dealing with in Argentina. Late in the second quarter, there was a significant countrywide power outage in Argentina, which also spread the neighboring countries. The power outage abruptly shut down our ethylene operations. We have teams on the ground assessing the damage and beginning repairs.
And our best estimate today is that the facility will be offline for at least the entire third quarter and is expected to have approximately $100,000,000 impact on our results. I'll now turn it back to Jim to cover the performance in our segment as well as our near term outlook.
Thanks, Howard. On Slide 7, Performance Materials And Coatings, operating EBIT was $214,000,000, down 27% from the year ago period, primarily driven by Loxane's March compression, higher planned turnaround spending, and performance monomer shipping restrictions from our Deer Park, Texas location, due to a tank farm fire at a 3rd party facility, which we highlighted in our modeling guidance on the last earnings call. Consumer Solutions sales declined as price and volume gains in the U. S. And Canada were more than offset by price declines in Asia Pacific and EMEA.
And volume declines in EMEA and Latin America. Blower demand in automotive and consumer electronics end markets. Coatings and performance monomer sales declined primarily due to lower volume The business was also impacted by wet weather that drove a delay in seasonal demand for coatings applications in the United States and Europe. On Slide 8, Industrial Intermediates And Infrastructure operating EBIT was $154,000,000, down from the year ago period due to local price and volume clients and margin compressions in isocyanates and MAG that impacted both our core business and joint venture results. While urethanes and construction chemicals sales declined on lower isocyanates pricing and currency headwinds in Europe.
Volume gains in isocyanates and systems applications were offset by declines in polyols, propylene oxide and propylene glycol. Industrial Solutions reported lower sales due to declines in local volume and price. Demand in growth in Asia Pacific and Latin America was more than offset by volume declines in the U. S. And Canada and EMEA, driven by softer demand in agriculture, automotive and electronics end markets, as well as reduced supply due to planned maintenance turnaround.
Equity losses for the segment were $78,000,000, driven by margin compression at the Kuwait and Sedara joint ventures. On Slide 9, operating EBIT for the Packaging And Specialty Plastics segment was $768,000,000, down 17% from the year ago period. Margin compression in polyethylene products and reduced equity earnings more than offset demand growth for packaging applications benefits from $4,000,000, down from the year ago period based on lower earnings from the Kuwait joint ventures. The packaging and specialty plastic business reported lower net sales due to reduced polyethylene product prices and currency headwinds. However, the business achieved 3% volume growth led by a double digit gain in Asia Pacific and increases in EMEA.
From an end market perspective, Growth was led by industrial and consumer packaging and health and hygiene application. And in hydrocarbons and energy, sales decline on both lower volume and local price. The volume decline was primarily driven by increased internal ethylene consumption and our feedstock selection, as well as a planned turnaround in Germany, which led to a further reduction in hydrocarbons co product sales. Let's now turn to Slide 10, where I'll close with our near term outlook. In light of the current market dynamics, we're taking several actions to continue to the operational levers within our control.
1st, the macro environment is cautious, largely driven by geopolitical volatility, and prolonged trade negotiations, which continue today. The net result is a continuation of a short term buying pattern and decreased visibility along value chain. Bottom line, today, we still see the global economy expanding, but the pace of growth is slower particularly in Europe and in China. The U. S.
Remains fairly robust in consumer non durable sectors However, spending on big ticket items like home builds, autos, durable goods and consumer electronics remains tepid globally, and we're closely watching consumer confidence measures, which showed some softness during the second quarter. 2nd, pricing in our intermediates are expected to continue to move sideways in the near term as a result of the business environment. You'll recall that prices dropped in the fourth quarter of 2018 on a rapid destocking across our product chains, plus a sharp decline in oil. Prices settled in the first quarter of 2019, and we saw positive signs going into the second quarter, but those trends reversed. As macro uncertainties escalated.
While we're not counting on any immediate trade resolutions, we are still of the view that a path forward on that front can be a catalyst for improved market sentiment and a return to more normalized supply chains and volume patterns. 3rd, feedstock trends have improved. Since our last earnings call, ethane prices in the U. S. Continued to decline and today, the forward curve has moved lower.
We believe that ethane prices could rise modestly going forward as frac spreads are near 0 today, and we expect new ethylene demand coming online, but we continue to see a much more subdued price trajectory and a much lower probability of any ethane spike. In Europe, LPG continues to be favored This is important for Dow as we have industry leading LPG flexibility in Europe, with the capability to produce up to 60% of our ethylene from LPG. And as you would expect, throughout the second quarter and today, we have been utilizing this flexibility. In short, These feedstock trends play to Dow's flexibility strength
attend
to execution plan moving forward. 1st, we will continue to leverage the strengths of our business model, and that includes benefiting from our feedstock flexibility continuing to manage We have more cost synergy savings and stranded costs for removal to accomplish, and we have a clear line of sight to get to it. We will also keep a tight lid on discretionary spending. 3rd, with the softness we see in our intermediate's pricing, we need to continue selling up and optimizing our product wheel. That means staying focused on driving more captive use of our intermediates into higher value add products, such as coatings and silicones formulations and pu systems.
And finally, on our investments, we are reducing our 2019 CapEx target from $2,500,000,000 to $2,000,000,000. This is the prudent action to take as it gives us time to slow down some investments that require more market visibility, while maintaining our asset base, improving reliability and preserving our ability to invest in quick win incremental expansions to deliver value growth, even in the current business environment. Our view, this is not the time to invest in a major greenfield project. Here are a few examples of the actions that we are taking. We have decided to postpone the advancement of our feasibility study for a new world scale siloxanes plant, as we have more incremental debottlenecks in our silicones franchise.
Year to date, we have completed 5 of the 18 downstream silicones capacity expansion that we have on deck for 2019. We recently agreed to acquire our partner's stake in our Thai HPPO joint venture for a net cash outlay of approximately $150,000,000. This transaction is expected to close After a detailed analysis of project returns and future demand growth, we have decided to postpone our planned 450,000 ton polyolefins expansion in Europe, and we will continue to push forward select process innovations especially those that move us down the cost curve, reduce capital intensity, and lower greenhouse gas emissions. This is something in Dallas wheelhouse, Catalysts and process technology developments have historically represented Paul Mark Advancements for Dow and the industry. These near term actions reflect service well over the longer term.
Our purpose built portfolio and leading business positions, our leaner cost structure and our suite of incremental high return growth investment. These factors will continue to differentiate Dow and drive our earnings in a tough environment. Going forward you can continue to count on the Dow team to remain focused on driving a leaner cost structure running our assets efficiently, optimizing the value of our integration, growing our differentiated positions, and continuing to be disciplined, capital and resource allocators. Now I'll turn it back to Neil to open the Q And A.
Thank you, Jim. With that, let's move on to your questions. I would like to remind you that our forward looking statements apply to both our prepared remarks and the following Q and A. Operator, please provide
you. And our first question today will come from Vincent Andrews with Morgan Stanley.
Thanks and good morning everyone. I'm wondering if you could just sort of give us an update on where your views are on polyethylene supply and demand sort of not just for the back half of this year, but maybe into 2020 2021. There seems to be a lot of debate out there. Again, over exactly how much supply is going to come, not just in the U. S, but, also in the rest of the world, whether it's China or parts of Eastern Europe.
So your updated pot sale very helpful.
Hi, good morning, Vince. Yeah, on polyethylene operating rates and supply demand balances, our view is that we've kind of been at a plateau here of about 87, 88% operating rates in polyethylene globally. And I think we're going to continue to see that extend out over the next couple of years. Mainly, we went back and took a look at what's happened with projections on capacity adds since back to 2007. And when you look at that whole track record of reported versus what actually happens, there were 64 projects that were supposed to start up in 2019 or beyond, only 18 of those could be tied back to that original forecast.
And 13 of the 18 were supposed to come online already and every single one of them has been pushed back from its original start date. So I think some of these projections, whether it's about ethane prices, spiking at the back half of the year, or whether it's about, plummeting operating rates, are a little bit tough to understand. The market's growth is there. We had good growth in the quarter. We had double digit growth in China, both in polyethylene and in downstream silicones.
So the market demand growth is there. And I think the biggest issue really in the integrated chain has to do more with the ethylene supply demand balances. And that's because everybody in the U. S. Has been integrating and so that merchant ethylene has driven of the margin out of the U.
S. Ethylene integrated margins.
And next we'll move to David Begleiter with Deutsche Bank.
Thank you. Good morning. Jim and Howard, just on the Q3 guidance, looking at slide 6, you call out headwinds of roughly $277,000,000, tailwinds of $90,000,000. So I guess a net 1 80 headwind. What other headwinds to headwinds do you see from the base business in Q3 versus Q2?
Yes, I'll take a shot and then ask Howard to comment because I think there are 2 sides on this thing. I think you've got the headwinds and tailwinds in there. I mean, we see pricing moving sideways basically in the third quarter. I would say with one exception, I expect siloxanes in Asia Pacific because of where we ended the quarter, that will have an averaging effect on the third quarter. So that may have a little bit of downward pressure on siloxanes.
The rest of silicones is holding up well. And that the headwinds part is really heavily influenced by Argentina and the issue that Howard mentioned on the quote. So obviously, we're going to do everything we can to try to get back as soon as we can, but still it's going to be the quarter, to make those repairs and our estimate there is $100,000,000. Howard, any any other on the financial side that you got?
Yes. Good morning, David. I would say just, when you look at that slide, it's pretty balanced between the headwinds and the tailwind. So you referenced, and Jim talked about the $100,000,000 in Argentina and the $20,000,000 I talked about on the call with in the period remarks on Sadara. And then you got $90,000,000 of lower turnarounds, lower planned turnaround spending sequentially and then the cost synergies coming out.
So minus 90 plus 120, it's kind of a balanced approach.
And then we had increase in cash from operating activities in quarter. So that was up $200,000,000, year over year. And we continue to come off of those integration expenses. We got a lot of integration projects and separation projects actually, that wind up third quarter, 4th quarter. So that sets us up nice for 2020.
We expect the year over year decline in those separation costs of about $1,000,000,000 next year.
And next we move on to Jeff Zekauskas with JP Morgan. Thanks very
much. Some consultants think that polyethylene prices in June, or down 0 point 0 $3 pound because of unofficial discounts and other consultants think that prices were flat. Which do you think is the more accurate representation of the June domestic polyethylene market? And then secondly, CPchem is buying NOVA Chemical. Did you guys bid for that?
Jeff, our view on polyethylene prices as they were flat in June. And I expect they'll continue to move sideways here into the third quarter. Regarding Nova, our only discussions with Nova obviously are around, settling the issue we've got with them over the E3 crack or so. Had no other discussions with them.
And next we'll move to Christopher Parkinson with Credit Suisse.
Thank
you. When you return your comments last year regarding the flat margin benefits in isocyanates, Eloxanes, etcetera, that would act as 19 headwinds Can you just very quickly revisit your quantitative assumptions in this calculations and just give us an update on where we stand today? Given the initial magnitude. Just any thoughts would be helpful. Thank you.
Yes, at the time, we saw a stepped down obviously in China based on new capacity that came on in China, within the siloxanes area. And so we saw that move down. And our view obviously was we were going to continue to invest downstream to convert more of our own siloxanes into finished materials. It's a little bit worse than we had forecasted at the time and it's lasted a little bit longer than we had expected. But otherwise, everything else is on track.
And the growth on the downstream silicones is on track. We had double digit growth in China in the quarter. We had good growth around the world. So you see consumer markets like health and beauty care. You see large commercial, residential or large commercial buildings like skyscrapers and things, those continue to move forward.
Some softness obviously in the applications that go into electronics and auto, but all else remains on track.
And we'll move on to P. J. Juvekar with Citi.
Good morning, P. J.
Can you talk about your feedstock slate into the crackers? You talked about ethane supply demand. But looks like BUgun was the cheapest feedstock by almost 0 point 6 dollars compared to ethane on a COE basis. So how much butane can you push into the crackers on the Gulf Coast? And then secondly, on polyethylene, we've had destocking since second half of last year.
So where do you think inventory stand today relative to normal And if you can address U. S. And China there, that would be great. Thank you.
Butane was the cheapest and we maxed as much butane as we could. In fact, in the quarter, we brought on a butane vaporizer in Louisiana to help us increase the amount of butane that we could put in there. So we continue to look at places where we can do that. It's a function of both how much butane can you get at a location and then how much can you vaporize to move in to the crackers. So we'll continue to do that.
The other big move obviously recently has been propane. So propane naphtha spreads have widened And we've been cracking some propane in the fleet as well. Propane ethane ethane had been favored most the second quarter, but just here recently propane actually moved into the money. So we moved in a little bit there. Look, we all the investments we've made, over the last 5 years were not just growth oriented.
They were also to expand our NGL capability and expand our flexibility. And that's paying off. And the propane trend that I mentioned really has a big impact on Europe. So we've been back to maxing LPG cracking in Europe for most of the year. I would say, I think the rest of the balances on destocking, inventories are coming down, working capital is coming down.
I think people are being a little bit more hand to mouth and their purchases. People are not being very speculative. And so we see that. I don't think that there's been any dramatic increase in any inventories in any part of the world.
And next move to John McNulty with BMO Capital Markets.
Yes, thanks for taking my question. So, Jim, I mean, it looks like the macro is certainly moderating. Maybe we're not in a global recession yet, but I guess, how do you about stress testing your model around cash flows and earnings if we do slip into some sort of a recession at this point given the pressures you've already been facing?
Right. Let me just talk about the market macros first. And then I know I have Howard then make a few comments on stress testing because it'll tie back to what we talked about on last call about the work that we did on setting up the new Dow I think the market is really kind of 2 different markets right now. So if you looked at it geographically, China and Europe are having some big pressure right now, more so than the U. S.
So the U. S. Economy is holding up relatively better. However, if you look at it from a market standpoint, automotive, is down from last year. Last year was obviously a peak year.
For global light vehicle production, and we're down and those forecasts have continued to be revised down for the year. That has a lot of direct impact, but then it has an awful lot of indirect impact on content, that hits our industry. Electronics are down. So it's the 7th consecutive month. We've seen a contraction in new orders for electronics.
That hasn't been that way since 2012. Home builds, the sentiment around architectural billing index is down about 400 basis points year over year. And durable goods have been down 3 of the last 4 months. And to me, this is the confidence factor in the market. And we typically see when people are concerned about the outlook individual consumers, they tighten up on big ticket purchases.
And so that's reflected. The consumer non durable side, health and beauty care, packaging purchases, things that people do every day go out to eat, these kind of things, those numbers, retail numbers are looking pretty good. And so, packaging, silicone formulations, coatings formulations, pu systems, that's holding up pretty well. So I don't think we're in a recession. It doesn't feel like we're in a recession.
I do think a trade resolution will bring some confidence back into people and brighten the outlook and confidence is huge in these markets. Howard, maybe just a little recon on cash and the focus on cash, which we did, this quarter to make sure that we're generating good operating activity cash flow.
You bet. Good morning, John. I would say on cash flow, I mean, our cash from operating activities was up to $100,000,000, even though earnings were down versus a year ago. On an apples to apples basis, you have to adjust for the AR securitization. And on an apples to apples basis, it was flat.
So we generated flat cash from ops, even though earnings were down, we generated almost a $1,000,000,000 of cash flow from operating activities. To your stress test point, if you just look, if you just take the first half, based on your moderating point, John, you take the first half EBITDA and then annualize it, you're looking at about a $7,500,000,000 annual run rate. You subtract out interest and taxes of about $1,500,000,000. You're at $6,000,000,000. You heard the guidance that Jim gave on the call of lowering CapEx from $2,500,000,000 to $2,000,000,000.
We guided to $1,000,000,000 of integration and separation costs this year. Because of the separation and the spin out from DowDuPont, that most of that spending now in the first half is behind us. So that will sequentially be a tailwind, but that's $1,000,000,000 for the year. So subtract that from the $4,000,000,000. You're talking about $3,000,000,000 of discretionary cash.
For dividends or buyback other things. That doesn't include any benefit from non operating cash.
That doesn't include any benefit
from working capital improvements. Pretty proud of the Dow team with a focus on cash inside the company is very, very high and we'll be continuing to drive that cash flow conversion up. So we feel really good about that going forward.
And next we'll move to Bob Court with Goldman Sachs.
Good morning. This is Dylan Campbell on for Bob. Could you help on kind of ethane costs? It seems like sentiment demeanor in that day market has shifted pretty considerably since prices spiked above $0.60 a gallon last year and have fallen pretty considerably since then. Help diagnose and maybe just give us a little bit more context on why you don't think prices spike in the back half of the year.
Can you give a little bit kind of a diagnosis of what has occurred over the last year or so?
Sure. I think at a high level, Dylan, it's delays in new cracker startups And then some on time and early startups of new fractionators. And what that did is obviously drove a change in what the forward outlook would be on an ethane curve. There is excess US ethane supply throughout the period from now until 2023. So the balance is going to be long, and I think that hasn't changed.
New cracker delays have taken that ethane down, ethane demand down by about 275,000 barrels per day. So that means the inventories got bloated and you saw frac spreads go, they actually went negative at the end of the quarter. They're back to breakeven or maybe slightly positive. And honestly, I think they could stay here to maybe a dollar frac spread in this near term period. And a little bit will depend on the timing and success of some of these cracker startups.
You've got good oil production, out of the Permian, the Eagle Ford, the SCOOP, the STACK. Those are really close to Mount Bellevue. You've got 1,200,000 barrels a day of new wide grade pipelines. They're going to feed Mont Belvieu by first quarter of 20 and then 6 new Gulf Coast fractionators have been announced for startup in early 2020, and those have a combined capacity of 800,000 barrels per day $450,000 of that is purity ethane. So that's what's led to the situation that you've got here.
Gas demand is going to be at a gas inventories are going to be at a 5 year high, or 5 year average at the end of this year. We haven't been there for couple of years. I think our view is that we're going to see these kind of prices for ethane for the near term here.
And next, we'll hear from Jonas Oxgaard with Bernstein.
Good morning, guys.
The disconnect between stick P price and export price is now at, I think, like, a 4 year high. And historically, these disconnects never last. But the export price is pretty much exactly in line with Asia price. The only correction that looks plausible is for U. S.
Domestic to come down. You give a little bit of color on why it has stayed so high for all the disconnect stage so large for so long and how do you see that evolving?
Jonas, I think, I think everybody had anticipated that with, with tariffs, it would really shut off the whole China market. We haven't seen that. The demand for product in China has been strong. We were up double digits into China in the quarter. And I would also say you've got growth in other parts of the world, which are sizable as well.
So Southeast Asia, obviously, coming is Africa. So I think there's enough market demand around the world that it hasn't forced that to happen. There are also some just built in logistics hurdles here in the U. S. It's very much a railcar market.
And so there's a delta that has to be maintained there and it's protected there. But overall, I haven't seen that pressure on that. I think we've And I think that's where we're going to continue to see that pressure until we see the derivative capacity and the length in the ethylene market really get back in line.
And moving on, we'll hear from Hassan Hamid with Olympic Global.
Good morning, Jim. Jim, it seems that, the glycol market continues to be pressured, right? And as I take a look at sort of a bunch of moving parts over there, obviously polyester, a big sort of end user. So I would imagine, you know, the whole China trade war side of things is playing a role. But just beyond that, it seems inventories in China are quite high for glycol.
And there is incremental supply coming online. So how are you guys thinking about sort of the near to medium term side of things within glycol. I mean, is it a situation which will quickly get resolved if there is a trade war resolution or are there sort of fundamental near term issues there?
Yes, I think, you're right, Hassan, that glycol pricing relative to last year is down almost as much as that drop we saw in oil price in the fourth quarter, about 35%, 40% have been pretty stable at these levels for quite a while. There is inventory in China, obviously, that traders are trying to work down. You've seen some rate cuts at, some of the higher cost manufacturers trying to dial down really to get their operating rates to balance demand. Polyester is running pretty well in China. So I haven't seen like a big demand, drop on polyester in China.
I think those operating rates are good, but I do think if trade came off, you would see some of producers, there'd be a little bit more aggressive in some of the retailers here, specifically here in the U. S, would probably be a little bit more, open to purchases and not looking to shift their supply positions to other countries away from China.
Lawrence Alexander with Jefferies. We'll have our next question.
Yes, hi. This is Nick Cecero on for Lawrence. Just a quick follow-up comment on, question on the MUG inventory. I was wondering how long it would take maybe to work down some of those levels in China?
That's a good question Nick. Typically, we see these kind of corrections and MEG would typically take, under a strong growth format, maybe a quarter to work through. And I think you'll see some of these traders under pressure to get this from a cash flow standpoint to get this worked out by the end of the year. So I think that's why people have been making adjustments on operating rates to try to balance things out. I would be surprised if they would want to carry these inventories through the year end.
And next we'll hear from Frank Mitsch with Fermium Research.
Good morning, gentlemen. In your discussions about pricing, you indicated that you thought third quarter would really see flat sort of pricing, although you did have a concern on siloxanes, but I look at Slide 10, and we see that IHS is forecasting MDI prices to move up through the quarter. And so I'm curious as to what your outlook is on MDI. Do you agree with that notion that MDI should be moving up? What is your outlook there?
Hey, good morning, Frank. I think some of these forecasts on pricing are really tough as you go out into the future. MDI has been stable at these prices. Even MEG being low, it's been stable at these prices. Siloxanes, I have expect maybe somewhere we thought that they might tick up a little bit, but they've been pretty stable as well.
I would think for MDI to move up, you're either going to have to have some turnaround outages or you're going to have to see a real pull on the demand side of the equation to make that happen. Our outlook for them is flat. And I would just also say the forecast that we had on these ethane prices that they were going to go up dramatically at the end of the year. And we were not at the time we were saying we don't see that happening. And as we sit here today, it didn't happen.
So I just think in this macro environment, it feels like 3rd quarter is going to be kind of a sideways quarter like second quarter.
And we'll move on to Kevin McCarthy with Vertical Research Partners.
Yes, good morning. Jim, I was wondering if you could compare and contrast what you're seeing in the polyurethane business an intermediate versus systems. And then on Slide 11, I think you have a comment about driving greater internal consumption of intermediates. Is that a reference to polyurethanes? Maybe you could just provide a brief update on the strategy to go further downstream there as well.
Sure. Thanks, Kevin. Let me just touch the last one first. I think the biggest impact on internal consumption of our intermediates is really ethylene to polyethylene ethylene to EO derivatives. We had historically been that short buying material.
And as we've back integrated and take advantage of shale gas, we're using more of that for our own downstream consumption. So the reason we highlighted that, on the release and in the speaking comments that Howard made is because that typically would have been trade sales about ethylene or some other product to the market. And so the revenue line can look lighter even though our downstream sales are good. And it's just an adjustment in those numbers. On polyurethanes, I think the biggest impact right now has been on automotive.
So as automotive seating and different parts that go into the auto industry, as those light vehicle builds have slowed down, that's kind of backed up some of that change. Now systems going into things like spray foams, systems going into cold chain, refrigerated containers, going into insulation production for panels for, especially commercial and big residential and commercial projects. That continues to look pretty good. And anything we can do into the adhesive space with the exception of obviously adhesives into automotive, which gets a little bit a little bit slow down has been pretty good. There are pu sales into appliances.
So as those durable goods to slow it down, for example, in refrigerators and maybe in some panels for dishwashers and things, you'll see a little bit of an impact there. I think that's the biggest impact on polyurethanes. We'll continue to move more of those intermediates to downstream systems because we can work with the end use customers to make finished products that really give them an advantage in their product and an ability to capture higher value. And that's what we want to do long term, whether that's coatings, taking monomers into coatings, or taking polyurethane intermediates in the systems or taking more of our plastics into higher grade materials for packaging, health, and hygiene siloxanes into silicones, that's a consistent strategy. We're going to continue to do that across the board.
And we'll move on to Steve Byrne with Bank of America.
What's Dow's headcount right now versus a year ago? And given these macro headwinds, have you reassessed opportunities to cut fixed costs? And similarly, what ability do you have with your joint ventures to push more aggressive cost cutting given the near term outlook?
Right. So our target headcount for the new Dow, once we completed all of our streamlining and really To do this, we had done, external benchmarking with the best of the best. Our idea was to be best in class competitive was to get to a headcount of 37,000 globally. And we will be there at the end of this year. In fact, we've accelerated some of those moves that we plan through the year, we've accelerated some of those.
And so that's why you see cost synergy savings coming out in advance of what we've said. Always continue to take a look at that. Headcounts is part of our fixed cost, but it is only a fraction of it. So when you get to the number of sites that we have around the world, you also have to look at contractual relationship services and other things that we do. So there's a heavy emphasis right now in manufacturing and engineering on all of that.
Peter Holicki and his team are obviously looking at what does the future now need to look like in terms of footprint and where we have opportunities to consolidate. We're doing that. And then the rest of this $600,000,000 of savings we got to come out through this year, is really getting after a footprint, consolidate I would say outside of manufacturing into things like getting lab consolidations done, which we've done a lot of this year, for example, in Europe and here in North America. Office buildings and other things. So we're making good progress on that and we keep doing it.
We were fortunate that we were already in this mode coming out of the spin so that we we had the machine moving and we could go in at the beginning of second quarter and say going to be a tough quarter. We gotta keep the pressure on. So we did put some incremental, targets in front of them. And then on top of that, we're gonna put the CapEx numbers down there. And we'll get them down to $2,000,000,000 this year.
And if it gets worse. I don't expect it's going to get recessionary, but if it gets into that kind of frame, we still have room to move.
And we'll move to John Roberts with UBS.
Thank you. I think I heard you talk about discontinuing a European polyethylene project, but didn't you also have a 2022 startup in the Gulf Coast planned and is that still on track? Yes, we did, John. Thanks for the question. We had a plant in Europe, to take advantage of the link we had in ethylene there.
And we had a plant in the U. S. Gulf Coast. What the business has done is gone and relook at both of those projects. I think they do want to continue to pursue a U.
S. Gulf Coast project because of the cost position that we have here. And they've decided to defer the one that's in Europe. And I would say postpone is the right answer. I think at some point in the future, it might make sense But given all the things that are going on right now and the market outlook is probably not the right time to do that.
And next we'll move to Alexei Yamurag.
Good morning. Thank you. Jim, thanks for the color on CapEx. Will you consider keeping CapEx close to $2,000,000,000 in 20.20 demand and margins do not improve? I'm gonna keep it tight until I get better visibility on the market.
I think we need to get a trade deal resolved to get some confidence back in this market, at least on the industrial side of things, right? I think the consumer is still strong. But on this industrial side of the market, segment. And you've seen reports coming out from some big, heavy equipment industrials that are also slowing down. We need those are high content uses for our materials.
We need to see some pickup there. When we see some pickup there, then we'll take a look at whether it's the right time to move back in. Meanwhile, those silicones projects, we have a couple of EO derivatives projects that are underway right now. This 150,000,000 to buyback the other half of the Thai HBO joint venture. These are high return projects and immediately accretive.
So we are gonna do, though, I don't want to postpone those. Those are right in the sweet spot of what we need to do. And we've got to make sure that we maintain these assets and keep the reliability up. All of our CapEx does not necessarily go just into growth It also has to make sure that we improve our cost position through this cycle so that the next cycle, we're able to weather the next cycle as well.
And that will conclude today's question and answer session. At this time, I would like to turn the call back over to Mr. Neil Charray for any additional or closing remarks.
Thank you everyone for joining our call. We appreciate your interest in Dow. For your reference, a copy of our transcript will be posted on Dow's website later today. This concludes our call. Thank you.
And that will conclude today's call. We thank you for your participation.