Hi, good, oh, are we on?
Yep, good.
Hi, good morning. My name's Jeff Zekauskas. I analyze chemicals for J.P. Morgan in North America. It's my pleasure this morning to introduce the management of Eastman Chemical. Representing Eastman is Willie McLain, who's the Chief Financial Officer of Eastman and has been CFO since 2020. Accompanying Willie is Greg Riddle, who's the head of Investor Relations at Eastman, who's in the fifth row, and he's always very, very helpful. The format today that we'll have is one of fireside chat, and so what I'm going to do is welcome you, Willie, to our conference. And I think the question that's on people's minds these days is your methanolysis project in Kingsport, and I was hoping you would give us a little bit of an update on it.
Thanks, Jeff, and glad to be here today, and thanks for the interest in Eastman for those in the audience. Just a quick update for those that have been following us: we have constructed and are mechanically complete in bringing up the operations of the world's largest polyester recycling facility, and we call that molecular recycling. Also, it will have the most diverse set of feedstocks as you think about going from clear polyester to all of the complex colors and different forms. With this facility, ultimately what we're looking to do is to bring new applications and new products to the market. As we think about the operations, I would say we have finished the mechanical completion. We are still in the, I'll call it, early stages of production. With that, we're still lining out the process.
We are behind the schedule that we had originally set, but we are continuing to make strong progress towards that. The key items that we're dealing with today are, I would call it, mechanical in nature. So as you think about building a facility during the COVID environment, we were exposed to some of the, I'll call it, product quality. So there's been a higher stage of, I'll call it, infant mortality as you think about equipment during that initial startup, as well as just the construction with the labor force. All that being said, it's mechanical in nature, and in many cases, we're taking the facility down, safely addressing those, and then bringing back up. I'm highly confident that the Eastman team will resolve these mechanical issues with our partners.
The exciting thing for me is, at this point, we have now run this process from end to end, from the waste on the front end through the, I'll call it, the back end where we produce DMT, which is the key product that we're interested in, and building those complex polymers and applications. Throughout that entire process, our in-process, I'll call it, samples are inspection quality. So at this point, the technology is working. I've seen the pictures and the quality, and I'm excited about bringing this to market, the entire Eastman team, for our customer base. We are excited. We are close, and we look forward to bringing that to fruition. We are not going to publicly announce this being successful until it is up and running safely and continuously so that we can serve our customers on an ongoing basis.
We will announce that when we reach that point. We believe that we're very close to that point, Jeff.
Okay. If we think back to sort of the original time frames when the technology was going to come on stream, maybe it was the very beginning of 2023. Whenever a new plant is brought on or a new technology, there are always challenges. For many companies, Eastman included, but Air Products, other companies, capital costs have gone up. In your opinion, Willie, with capital costs rising for Eastman in making methanolysis facilities, was a good portion of that non-inflationary? That is, there were issues with maintaining the right workforce, keeping the construction going as you hit unexpected hurdles. In other words, can we read from the inflation in the building of the first plant to inflation in the building of future plants, or was there something unusual about the building of this one?
I would say there's probably three factors, Jeff. I think you've highlighted one key one, which is the workforce and having a stable, ongoing workforce post the COVID environment. That was a key factor because the quality and the efficiency at which the workforce was able to construct this was not the norm. I would say in addition to that, as you think about also, I think we've been, as we've talked about, we were continuing to design this facility as we chose to start the construction. I would say that was another key factor. And then I would say inflation is the third factor as you think about that. So it's efficiency, effectiveness. It's completing the design while you're constructing it.
And now, as we think about building plant two and three, we have those learnings, processes, and building out partnerships with E&C firms that we think we can specifically address those and bring those costs back under control as you think about the methanolysis facility. Also for the France project and the second US project, the other key factors are building polymer lines and infrastructure. The variability around those is much tighter than building a, I'll call it, the first of its scale type of circular recycling technology. So the three factors plus bringing those learnings together, I think, set us up for success in France and the second U.S. project.
From your point of view, it may be that the inflationary costs that are tied to the building of the next two plants are smaller.
What I would say is I think we're already seeing mitigation on some of the key commodity materials, on the time to reserve work facilities. Also we're looking at bringing modular construction to the next two plants. All of those are factors that should bring down inflationary impacts.
These are large capital investments for Eastman. When you think about the returns of the projects that you plan to build, how do you approach it? Will you build the plants and see if the customers come? Do you want a certain kind of customer commitment before you build the plant or at a certain level? How do you approach the building of the next two plants?
So I would say for the audience and those online, there's two business models. The first facility that we've constructed at our Kingsport, Tennessee facility is our advanced materials. So it is about, I'll call it, the innovation cycle, and we've got a decade of growth. And that business, polyesters compete on, I'll call it, clarity, chemical resistance, and toughness. And now we're bringing a fourth dimension that our competition and also alternative products can't compete with, which is sustainable products with lower LCAs. And we compete there on the value created for our customers. And it's a win-win as we make their applications at the consumer level. An example would be we've been using a bridge technology for over the last two years where we're bringing our renewed products to the market.
So our customers have been able to test consumer demand, consumer pricing around a sustainable product versus a fossil fuel product. There's great opportunity as we think about space for us to enable our customers to win, as well as Eastman in that business model. I'll go next to the second U.S. project. The second U.S. project is about providing a sustainable solution to the packaging industry. This is not about a product. We've been clear. We exited the PET business in 2010. This is about a solution that we can provide that is sustainable and also meets the fitness for use and applications. Mechanical is needed to have a successful recycling for us as consumers, but it can only meet certain levels of fitness for use, whereas molecular recycling is infinite. We can provide that to companies and partners like PepsiCo.
We can do that in a manner that's over a longer-term contract with sustainable product margins so that we deliver solid returns for our investors. As you would think, you're moving multiple factors forward. So those factors include contracting strategy for customers, feedstock strategies, the construction that we just talked about, government policy, and incentives. And as you wrap that all together, you're bringing that forward. And we've committed to be disciplined. I think Eastman has a track record and a history of being disciplined. So we're bringing all of those forward. And as we hit those milestones, we'll hit the financial investment decision.
But two different models, and you can think of the France project as being roughly 50/50 between the two models as we look to grow our specialty plastics asset footprint in the markets where there is demand for sustainable products like France and the EU, and then also supplying some of our key global partners within that market as well for packaging. So that's the business case, and we continue to be disciplined. We're excited with the fact that as you think about Eastman being leveraged to the economic recovery, that we have this plan in Kingsport coming up now, that enables us to accelerate the recovery because of that unique differentiation of adding a new capability that our peers and competitors cannot.
So I'm trying to understand exactly what you've said. So before you build the next two plants, there's a certain level of customer commitment based on milestones that you would hit that you wish in advance. Is that the structure? Or you'll build the plant, it'll be a good product, and then what you'll do is you'll see what the demand is like and what the returns are like.
For the circular solution, we will have the contracts signed before we do the construction of the facility. As we think about our global footprint for our specialty plastics and the innovation-driven growth model, there it will be about how we're seeing the demand, how we're seeing the recovery in our key markets like durables, personal care, medical. All of those will come into it. And as we fill out the capacity and build the Tritan facility, there will be decisions that we will see progress as we make that decision on France.
So is it fair to say that this business model is different from all of Eastman's current business models because what you wish to have is more of a fixed return or a minimum fixed return on the capital that you put in the ground?
For the circular solution.
For the circular solution.
That is exactly correct.
Right. It's funny because Eastman historically has generated an enormous amount of free cash flow, and now your capital expenditures are higher in order to support this level of growth. It seems that what you want to do is you want to trade the lower free cash flow generation for a higher investment return that's more predictable over a longer period of time. Is that fair?
I would say it's fair. I would just highlight, to your point, over the long term, Eastman has been a strong operating cash flow generator. As we think about as strategies evolve and how you allocate that, I think we've also been balanced in growing our dividend, allocating any excess cash to share repurchases when we're not applying that to bolt-ons or organic growth. With the demand that we see with the economic environment on a go-forward basis, we think that there's better returns that will be consistent as we look at our fibers and chemical intermediates cash flow and reinvest this into a sustainable future.
So my memory is that this technology is old Eastman Kodak, or is it a developed version or an evolved version of old Eastman Kodak technology where it would take X-ray film and break it down into its chemical components and make new film? It's hard for me to imagine that other companies can easily do this in that you've been working on this off and on for decades. Do other companies have similar polymer technology? Or when you look across the competitive landscape, do you think other companies are bringing these kinds of plants on stream?
Yeah. One thing I would clarify is there's lots of technologies. And often I like to be clear that in the polyester space, I would say we're unmatched with our history. So we have 70 years of polyester technology history of operations. To your point, we've operated the technology that we're bringing to market, obviously enhanced to handle a broad base of feedstocks. But we did that for 30 years. And Polyester Renewal Technology is very different than pyrolysis. As we look at what we're doing, we're taking out asset footprints. We're taking what was already a purified fossil fuel and recycling that into its molecular components. That's DMT and ethylene glycol in this case. Pyrolysis is putting it back into a cracker or an earlier stage of a cracker. So from that, we're differentiated.
Also, as I think about the scale of operations and the global footprint that Eastman is bringing to bear, we're operational right now with the Polyester Renewal Technology and methanolysis. We're seeing and see how complex it is for someone that has the history and the capability. So it reviews my confidence that that first mover advantage will be important and potentially longer than I would have even expected.
Okay. So maybe if we can switch to, I guess, the 2024 earnings environment. When I think of Eastman's earnings aspirations for 2024, I think your stated range is something like $7.25-$8 versus $6.40 last year. The largest component of the earnings growth is volume. What are volumes like and how have volumes begun the year? And how do you feel about 2024 earnings?
Well, sitting here today, Jeff, what I would highlight is, I'll call it at the highest level, I would say we're in line with the expectations that we set out in early February. As I go through our segments, first I'll start with advanced materials, specialty plastics, and our durables business within that business, I would actually say is a bit better as we've started the year. I think it's confirming that destocking has played out and that we're seeing a little better momentum. As I think about our films business, and I think automotive in general, it's been a bit slower in China to the start of the year. I think that's broadly seen across the transportation sector. So that's starting out a bit slower. We'll see if that's Chinese New Year.
We'll see if that's consumers waiting on, I'll call it, the liquidity that the government's going to put into market. But typically, it's just a transitional. So sitting here today, we actually expect advanced materials to still be in line and approaching that $100 million expectation for Q1.
For the first quarter.
Again, we've seen momentum through the quarter as we had outlined that we would expect to see. As we look at additives and functional products on the ag front, I would say there that it's better than we had expected.
Better.
That maybe our expectations of the continued destocking were more than is actually playing out. As you think about other end-markets like coatings, personal care, those are pretty much in line with expectations. I would expect additives and functional products to actually be above the guidance for Q1 that we.
Because of agriculture.
Primarily because of agriculture. On the fibers front, I would say our volumes are coming in line with our expectations. But I would say on the operational cost front, we've all seen lower natural gas at our Kingsport facility. That's a key part of the operations for that business. That's playing out better. There we expect fibers to be above our expectations that we had previously guided. Now coming to the chemical intermediates front, we had some modest impacts from the winter storm. I would say propane early in the quarter was quite elevated. As you think about from the cracker to the derivative, it's been a headwind. Probably a little bit lower than our original guidance. Ultimately, there's some positive things on the CI front as we're seeing that mitigate here in the back part of the quarter.
You're also seeing, I'll call it in the acetyl chain, some operational difficulties. Those are probably solidifying that sequential improvement in the Q2. But sitting here today, again, like I said, I think we're solidly in the range that we had outlined. And that also includes the impacts of slower startup for our methanolysis facility.
When you take a step back and think about chemical intermediates just for a moment, one of the things that you said, which I think is true, is that propane prices have come down a little bit and part of it is seasonal. It's also the case that propylene values have really moved upward. Is chemical intermediates poised? Things can change, but is it poised for more strength in the second quarter than you saw in the first as a base case?
Sitting here today and the factors you described, if that were to play out, the answer would be yes. Obviously, there's also the timing of the flow through, the benefit of the lower cost structure, which as you highlighted, is seasonal. The other aspect continues to be how do we see the demand uplift and then the China economy? So how many products are coming from China into Europe and do they come to the U.S.? So we still need, I'll call it, strengthening in areas like industrial building and construction. But what you outlined from a, I'll call it, input as well as just propylene, those factors would be positive from a trend basis as we've gone through Q1 and set up for Q2.
Is this a year where your development costs are meaningful? How does Eastman think about its development costs in the light of the new products that it wishes to bring to the market and the progress that it wishes to make in the circular economy?
Yeah. I think as we go through the year, obviously, the cost of the first project, and we keep most of the development costs for these products not within our segments, but within other. I think you can expect the development cost to be most elevated here in Q1 as we're starting up the operations and proving out the plant. Additionally, as we were talking before we went on the air, there's products like in our Carbon Renewal Technology , like Aventa, where we're gaining momentum as we do with our customer base test marketing, where we take, I'll call it, recycled content into our carbon renewal and our gasifiers, combine that with wood pulp that's certified, and you've basically got a biopolymer with sustainable inputs.
Now we can take that and go into the marketplace and compete with a product that is certified for composting, not only in industrial, but in the home environment. Obviously, there's tensions in certain applications. You can think of trays that your poultry sit on. So we can take that from a polystyrene and put it into a biopolymer that meets consumer and food grade needs. So we're excited about that innovation. Obviously, you've got to show a level of results. As a CFO, I'm going to tell you that we've got to deliver on our $75 million and also on the milestones of each of these programs. It'll be elevated here in the first half. It would come back to more normalized as we go through the year.
And then as we hit the milestones with other projects, we would update you on where those development costs would go.
We cover some of the packaging companies. Some of the packaging companies have talked about innovative products that they have for all different kinds of meats that replace expandable polystyrene. You don't need various pieces of material to absorb liquids. They very much like the product. Do you sole source it to anyone, or are these products that you sell across the board to any packaging company that would want to use them?
Yeah, Jeff, great question. As I sit here today, we're dealing with brands, and then we're dealing with the supply chain. So there's not exclusive arrangements. We're excited about the demand that we're seeing. To your point, there are certain partners that are at different stages in the test market. But this is about Eastman being a sustainable solutions provider. We've talked about the polyester renewal. You combine that with the carbon renewal. And that is the focus of our strategy, enhancing the quality of life in a material way with these solutions that no one else can provide.
So one of the things I think that's on the mind of investors are changes in prices. And when you look at Eastman, you have a very integrated model. And I think that in general, the prices have been positive in advanced materials. And the prices have been more negative in adhesives and functional products, additives and functional products. Why is that? Or where are the price pressures that you're experiencing, and where are the areas where there's still room for pricing?
So as I think about, I'll speak to your point on additives and functional products first. As we think about that business and the footprint, so personal care, ag, and those in markets, there are input costs that are quite variable. And that's where we have cost pass-through contracts so that we have those, I'll call it, consistent margins over the long term that are generating returns on these assets. So those contracts are because we can provide the solution for those companies. So in that sense, I'll say that that's more like what we're trying to drive with our sustainable solutions as well. I'd say on the advanced materials front, there again, I think in 2023, we made significant progress on resetting our prices in the films portion of our business. The prior year, there had been substantial industry issues in supplying VAM PVOH.
And those contracts have been adjusted to enable that to not occur in the future when there's a dislocation like that. So all in all, both of those businesses, it's about the value creation that we can provide by taking our technology, the market insights of going downstream and with our direct customers, and then delivering a solution, an application that differentiates them in the marketplace. And different contract structures enable you to achieve that. So there I'm more focused on the volume and the recovery because I'll call it the margins and the value creation is there at the margin level in both advanced materials and additives and functional products. Last year, we had a $450 million impact due to volume mix.
Negative.
Negative. And as I sit here today, we're seeing 85%+ of our in-markets that we can basically say destocking has played out. Now it's at what pace does primary demand improve, move forward? And with that, how does supply chains restock? Those types of upsides of restocking are not in our base case forecast.
So, is it the case that you can feel the durable goods market recovering, or are we still shrinking in volume terms, but at a much slower pace?
What I would say is at this point, it's clear that the destocking is over. To your point, we're not calling an inflection. But there is a belief that as the general economic, that we will grow with that recovery versus it's still contracting. We do not see that.
One of the very successful parts of Eastman's income statement or its sort of segment performance is its fiber business in that I think you went from something like $140 million in EBIT in 2022 to maybe $420 million in 2023. Are those numbers sustainable over a longer period of time, or was 2023 unusual for you?
I would say 2023 was the culmination of a multi-year by our commercial team, but also as the industry has evolved. So at a high level, I would highlight one, the decline of tow used into the cigarette applications has declined at a slower pace. And in many cases, the sophistication of the filters as those have evolved into new product applications and the brand launches has actually consumed capacity because these new filters run at slower rates. So that's taking capacity out. Additionally, in Eastman's case, whether it's Naia or products like Aventa that's consuming our flake capacity, those are at variable margins that compete with our acetate tow business. We're indifferent. We want to work with partners that innovate and also that will pay prices that a sustainable return that we can reinvest over the long term.
So as you think about that playing out over multiple years, along with additional suppliers in the market taking out capacity and refining that has led to where we are today. I believe that that can be structural. The confidence that we have in 2024, 2025, and even 2026 sitting here today is we've got multi-year contracts that are in place, and we're not letting those run out. We're looking at how do we re-up those as each year comes out so that, again, from an investor base that people have confidence into this being the cash flow that enables us to fund our growth and innovation without having to go to the capital markets to do so. So it's a strength. I think this is back to where it should be, which is where it was in 2014 and prior versus the 120 was the right normal spot.
Maybe to conclude, Eastman is self-financing. That is, your financial leverage is not rising. Is there room with your investments in methanolysis over time to repurchase shares or to return more cash to your shareholder base?
So yes. I mean, we have a growing dividend. We increased that, I guess, for the 14th year this year. Also, we've highlighted that we'll be repurchasing more shares in 2024 than we did in 2023. We're disciplined. We're going to keep a strong investment grade balance sheet. Part of that is with the growth of EBITDA, with the, I'll call it, the core recovering. And then as we add the growth from the investments in the Kingsport facility and beyond, that'll enable us to do both, in my view.
Okay. Thank you very much for coming again this year. We hope to see you next year. We hope to hear an update on the methanolysis technology again.
Excellent.
Okay. Take care. Thank you.
Thank you for your attendance.
Thanks, everyone.
Some of that with nuclear right now. Mike took off because everybody thinks it's popular.
Hi. Good morning. I'm Jeff Zekauskas. I cover chemicals for J.P. Morgan in North America. This morning, it's my pleasure to welcome the management of Dow. Representing Dow is Jim Fitterling, who's been CEO of Dow since 2018. Previous to that, he managed the Dow entity under the Dow DuPont structure. Jim is a tremendously experienced executive who's managed, and maybe, Jim, you've been at Dow for 40 years.
40 years.
40 years, and has managed Dow's most complex businesses, ably. In the front row is Pankaj Gupta, who is the head of investor relations at Dow and has encyclopedic knowledge of what Dow does. The format today is a fireside chat. I think Jim has some introductory remarks to make. We welcome you to our conference.
All right. Thank you, Jeff. It's great to be here and nice to see all of you. Dow continues to work to demonstrate our commitment to financial and operational discipline as we navigate a pretty dynamic macroeconomic environment out there and also continue to invest for long-term profitable growth. We're making good progress on our decarbonizing growth strategy, including our Path2Zero project in Fort Saskatchewan, Alberta, where we announced the final investment decision at the end of last year. In the Path2Zero project, since the end of last year, all of our long lead time equipment items have been locked in, which further demonstrates our focus on making sure that we're cost-effective and managing risks of the project. This quarter, we also entered into a long-term agreement with Pembina to supply and transport up to 50,000 barrels per day of ethane.
Pembina brings leading ethane supply and transportation expertise as well as extensive integrated value chain. With this latest agreement, we've locked in the majority, I'd say close to 80% of our cost-advantaged ethane supply with multiple suppliers in the region. Construction on Path2Zero is on track to begin in the second quarter of this year, which will be another important milestone. The project itself will create the world's first net-zero, Scope 1 and 2 emissions, ethylene and derivatives complex. Overall, this single project is expected to deliver $1 billion of EBITDA growth at full run rates over the economic cycle. Our Fort Saskatchewan project will have a lower capital intensity than our Texas-9 cracker, which, since it started up in 2017, has delivered more than 15% return on invested capital.
That project in Saskatchewan builds upon the foundation of Texas-9, where we proved our best-in-class execution, capital efficiency, reliability, and emissions reduction. In addition to our decarbonizing growth strategy, we continue to advance our transform the waste strategy via intentional actions, strategic partnerships, and offtake agreements. In the fourth quarter, Valoregen in France achieved mechanical completion of a 15,000-ton per year mechanical recycling line. Mura Technology in the U.K. commenced commissioning, which is expected to contribute 20,000 tons per year of advanced recycling capacity. Both Valoregen and Mura expect to reach full commercialization in the second half of this year. All in, we expect our initiatives to develop a circular ecosystem to generate more than $500 million of incremental run rate EBITDA by 2030.
As we execute on the long-term strategy of decarbonizing growth and transforming the waste, we also are leveraging our competitive advantages, our early cycle growth investments, and our operational discipline to make us well positioned to create shareholder value. When you look at our portfolio, the differentiation in our portfolio with structurally advantaged assets from a cost position, global scale, and strong cost positions enabled us to competitively support global demand growth over the cycle. Healthy oil to gas spreads, which are supported by growing natural gas and natural gas liquids production in the U.S., favor our cost advantage and our ability to capture margin momentum. We've also taken actions to position Dow for profitable growth, including ongoing execution of our near-term investments that are expected to deliver approximately $2 billion in incremental underlying EBITDA by mid-decade.
Since 2021, we've added investments and capacity to unlock approximately $800 million of incremental mid-cycle EBITDA through our near-term organic growth investments, which include our FCDH unit in Louisiana, which makes propylene from propane, our alkoxylation capacity investments in the United States and in Europe, which go to attractive segments in our Dow Industrial Solutions and Consumer Solutions businesses, such as consumer and pharmaceutical applications. In addition, we've invested in multiple downstream silicone debottlenecks globally to address fast-growing applications in mobility and electronics. We're on track to achieve the remaining $1.2 billion of our near-term EBITDA target by mid-decade, enabled by lower risk and higher return growth projects. These investments support faster payback, higher return on invested capital, and lower risk projects and are focused on opportunities with greater demand resiliency throughout the cycle.
In addition, we've improved our cost profile, delivering more than $1 billion in targeted savings in 2023. Our discipline and balanced approach to capital since SPIN has given us the financial flexibility to continue covering all of our capital allocation priorities as we navigate the bottom of the cycle while investing countercyclically in higher return organic growth projects to capitalize on the next upside in the global economy. Looking back over four decades, Dow's balance sheet is in the best position it's been at this time in the cycle. We have a strong investment-grade credit rating. We're executing high return organic growth projects. We're executing them on time and on budget. All of our debt is at fixed rates with no substantive debt maturities due until 2027. We have approximately $13 billion of available liquidity. We delivered approximately 96% cash flow conversion in 2023.
Our continued focus on tightly managing costs and maximizing cash flow led to that 96% cash flow conversion. This year, we have more than $1.5 billion in Unique-to-Dow cash levers that we expect to deliver on. In total, we've returned approximately 90% of our operating net income to shareholders since SPIN, which is well above our 65% target over the economic cycle. We continue to navigate near-term macroeconomic dynamics with mixed indicators across the markets we serve. We saw some positive indicators, including an 18-month high in global manufacturing PMI, moderating inflation levels in the U.S. and in Europe, and a normal seasonal uptick in new and existing U.S. home sales in January. High interest rates still continue to limit overall consumer demand, primarily in consumer durables and in building and construction markets.
In the United States, polyethylene contract prices settled at $0.0005 per pound in January and remained flat in February. The price increase early in the quarter was primarily driven by continued strength in both domestic and export demand, as well as tight supply in the early part of the year due to some impacts of winter storm Heather in the U.S. Gulf Coast. In Europe, despite lower sequential energy prices due to the mild winter, near-term consumer and industrial demand remains weak. In addition, geopolitical tensions in the Red Sea have led to higher freight costs globally. In China, we expect to see demand recovery in the second quarter after a slower February due to the Lunar New Year, with overall 2024 economic growth at a similar level as 2023.
We'll continue to leverage our competitive advantages and diverse portfolio to capture demand and deliver volume growth in most of our value chains as the markets recover. With all the puts and takes, we expect first quarter revenue to be flat sequentially and EBITDA to be up sequentially. This is in line with the previously provided guidance at our fourth quarter earnings call and the current consensus. In February, we issued $1.25 billion of green bonds to support eligible green projects, including our Fort Saskatchewan project, further demonstrating our financial commitment to higher value sustainability investments. The issuance received significant market interest, was well oversubscribed, and allowed us to get highly competitive rates and our lowest spreads in 25 years. The 10-year bond was priced at Treasury plus 105 basis points. The 30-year bond was priced at Treasury plus 130 basis points of spread.
Throughout the cycle, our strong financial position has enabled us to continue investing in both decarbonizing growth and transform the waste strategies, each of which will support profitable growth into the next decade. We expect to increase underlying earnings by more than $3 billion and reduce Scope 1 and 2 emissions by an additional 5 million metric tons versus 2020, while also commercializing 3 million metric tons per year of circular and renewable solutions by 2030. Altogether, we remain confident in the long-term earnings growth trajectory. We will continue to lead the industry to a more sustainable future while maintaining a disciplined and balanced approach to capital allocation. With that, Jeff, I'll turn it back to you.
Thank you for that summary. So I was looking at the three slides you brought. And it looks like there's about 50 items on the three slides. And so I was wondering that as the CEO of Dow Chemical, what do you focus on? Or when you think of your own principal priorities in 2024, where do you devote your energies? And what are the analytical puzzles that you try to crack?
I would say, well, people, obviously, number one, you can't do all this without a great team. So we work hard on culture to try to attract and retain the best people that we can get. I spend a lot of time on policy because I think in order to deliver on these strategies, whether it's Dow's strategy or the energy transition in general, you need good policies to support that. And more and more, the politicians need industry at the table to really have a good understanding of the supply chains. Politics have changed a lot. We don't have the institutional knowledge of how things are made or where they're made. And so spending a lot of time to do that. I would say it's more than education, but it's just a deeper understanding of that. It takes time.
Then an awful lot of time with the team and the business units going through their priorities and challenging that, stress testing that, making sure that what we're delivering matches up with what we're seeing in the external marketplace so we get a gauge of are we winning or losing, gaining ground or falling further behind. Then portfolio. We invest in the dollars in the right place in the portfolio. Are there parts of the portfolio that we can liberate some cash, like we're doing with infrastructure today? And how can we redeploy that cash so that the next trough is higher than the last and the next peak is higher than the last? And that's what we're trying to do with the organic investments right now.
So one of the things that I see on your slide is it says you've locked in a majority of long-term cost advantage ethane supply in Canada. What does that mean? So in the United States, I think people mostly buy ethane under shorter-term contractual arrangements. What does it mean to lock it in for 2027 to 2029?
Yeah. The Canadian market's very different from the U.S. market. You don't have as much downstream infrastructure in the Canadian market as you do in the U.S. And there's fewer players. And so typically, to develop a project like our project in Canada, you work with the large players to develop the fields that will supply your project. There is a gas gathering system like we have at Henry Hub. There's the AECO system in Canada. For more than a decade, for more than 20 years, that has always been a lower-priced source of ethane than the U.S. Gulf Coast. It's ranged as high as $0.90 a million BTU, if you think about it in gas terms, cheaper than the U.S. Gulf Coast. And so we call that the Alberta advantage. But what it requires you to do is you have to have a long-term view to the project.
You've got to make a long-term commitment to be able to get those projects to be bankable for the downstream or the upstream suppliers. And then you have a really strong long-term partnership with them. So Pembina and Wolf are two of the primary suppliers for this. They'll supply the vast majority of what we get. And then Wolf is also the company that has the carbon capture trunk line called the Alberta Trunk Line that will take the CO2 from the Path2Zero project to sequestration.
Does that mean that you know your ethane price in 2027? Or does it just mean that you know your ethane volumes from particular suppliers?
We have good line of sight to what the price will be now through then. Yeah. And obviously, you look relative to market, right? You know that the market will move during that time period. But you know relative to market where you're going to be.
Does that mean that the ethane would be priced relative to whatever Canadian gas is in 2027?
That's a good way to think about it because in Canada, the way the policies are set up, they want to keep the ethane and the propane in province if they can to create higher value out of it. They might move the natural gas into the North American market, the U.S., to be able to access a bigger footprint.
So what you've done is you've assured your supply. And then you've also assured that you're not faced with some volatile eccentricity of ethane price relative to natural gas.
Right. I think that's why I mentioned policy earlier, right? You need to make sure that the Alberta government, the federal government are going to support long-term growth of natural gas. And it's obvious that Canada will. They need to. They're going to need it for reliable power supply. So they're facing some of the similar challenges that we face in the U.S. Electricity demand is going up for the first time in more than a decade. And it's going up pretty substantially. And so we're going to have a hard time. We won't have enough baseload power to provide all that electricity. The only thing that you can do in the near term would be a gas-fired power plant with some kind of a scrubbing system to get the CO2 out or maybe hydrogen carbon capture if you want reliable baseload power.
Otherwise, you're talking about gas without scrubbing or coal to be able to deliver it because you'll not get a nuclear plant up in that time period. And the wind and solar and batteries won't provide it.
That's coal, right? Yeah.
And they've experienced it like in the U.S. that we're experiencing it right now. They've experienced it this winter, had to import power from Saskatchewan or from Saskatchewan to Alberta in the really peak cold months to beef things up.
When you think about your today, the price of natural gas in the United States is, I don't know, $1.50 per MMBtu.
Yeah, $1.60 probably. Yeah.
Yeah, $1.50, $1.60. When you have your base case for what your gas costs will be in 2027, is it three or five or four or some other number?
Yeah. I think our long-term when we look at long-term, I think there's a lot of logic that says in that 250-350 range as you look out, say, five years. For the gas market, beyond five years is I mean, there's no physical market even one year out. It's a month-to-month thing. And we don't tend to financially hedge natural gas. We physically hedge it. We use so much natural gas that we look at physical hedges to manage it. But just based on supply-demand balances and the low cost and the speed at which we can get capacity online because of the shale gas, it looks to us like 250-350. And what we saw during really peak times during COVID was we bumped up above $5. You could have excursions like that if things got extremely tight in the wintertime. You could see that happen.
That happened to be when Ukraine-Russia conflict started. European natural gas prices were $30 per million BTU, maybe as high as $60 on the spot market at times. So I think the U.S. has got a great long-term low-cost position. Canada's got a great long-term low-cost position. And that's what underpins everything we decide to do downstream. That's the structural cost advantage that we can build the rest of the business on.
So you don't have a view that so much LNG will be exported out of the United States that it will really lift the gas price or make the gas price more global. Your base case is that the United States will remain at a discount to the world. Is that fair? And why do you think that?
Well, I don't think there is a global competitive LNG market, but there are very few suppliers to it: Australia, Qatar, United States, a few others, a handful of others. But maybe six make up the global supply. And so the United States is so prolific and low-cost that even if we export as much as is on the books, the net back cost here is still the lowest. We have so much industry here. We have so much competitive advantage for export business that it always will work itself out that we get the lowest net back here. And so from a market standpoint, it's been proven time and time again that more supply and more exports actually favor lower U.S. energy costs and are a key part of America's competitive advantage.
I think that's why you see the pushback right now on things like the pause on LNG permits. I don't think it'll be a long pause. That's at least I take the Secretary of Energy at her word. She said that. But the reality is somebody's going to supply that natural gas. We don't. The Qataris will. If we don't, then I think we run the risk that we start to see our gas price move up. People won't produce because they won't see the demand. And so when they don't produce, the machine slows down like we've seen in the oil sector. And when that slows down, it takes two-three years to get it back up. And those prices start to rise.
Can you describe, Jim, why it's important to make net-zero polyethylene in 2027? What is it about the world that makes that product attractive? Or why Dow wants to make that kind of polyethylene?
Sure. Yeah. Well, I'll just talk about net-zero anything, right, for that matter. I think the trend I think the public and the trend on the need to address carbon emissions, to have a chance to have a fight against climate change, I think the general public has already voted. There's a problem, and they want to see it addressed. We see it come through our value chain at the consumers, the retailers, the brand owners, and the demands that are being made for product. And we see it when they launch new products, when they launch a new product that has recycled packaging or has a net-zero aspect to it or any kind of sustainability aspect to it, we see the sales pop up. So now, nobody's willing to pay at any price for anything. You've got to be low-cost to be able to do it.
One of the things from a policy standpoint that enables us to do it is a price on carbon. Canada has a price on carbon, and they have a carbon emissions trading system. They also have support like we do in the U.S. with the IRA for investment tax credits for these type of investments for new technology. That's important because with most energy assets, you have a useful life of 30, 40 years. And so you always run into energy assets being end-of-useful life. And what do you decide to replace them with? If you don't have a policy to drive a net-zero transition, then the easiest thing for somebody to do is replace it with the same technology that they've got today, and they understand. If you've given them some incentive to move, they'll move to the next technology. And then you've lifted the whole thing.
So that's why we pursued it, one. Policies are in a great place in Canada. We have kind of an elegant design. I mean, maybe it's unique to the ethylene chain. But you take ethane to crack it to make ethylene, and you make two byproducts, methane and hydrogen. And you take those byproducts, and instead of burning them directly in the furnaces, you go through an Autothermal Reformer where you can make pure hydrogen, and you can more easily scrub the CO2 out of it because it's more concentrated. You sequester the CO2, and that's where the price for carbon comes in. You recover some of that. And then you take that pure hydrogen back to the furnaces. So it's really a circular loop. And that's what fires the furnaces. And you've got ethylene, essentially, with zero Scope 1 and 2 emissions.
I think as we look longer term and how we get the value out of that ethylene, it could come through polyethylene. It could come through other ethylene derivatives if the market develops and the policy develops to support allocating that zero-carbon ethylene across businesses to other uses. I think you're starting to see that people that have made commitments to reduce their Scope 1 and Scope 2 or maybe, in some cases, Scope 3 emissions where they might look to us as a feedstock supplier will want that. They may want to make claims on that with their product. But they want to make sure that it's backed up by data and by good science. When we go to make a net-zero ethylene, we know for sure that we've got 0 CO2 emissions. We can monitor and measure that. We can mass-balance it.
We can get an accounting firm to sign off against it. And we can provide that certification that they need as opposed to, say, an offset where somebody might say, "I'm going to go plant 1 trillion trees and do this." And over time, that doesn't deliver the same amount of CO2 reduction. So I think it favors technology investments that can be low-cost. And I think it helps the brand owners to be able to meet the customer's needs and make claims that are valid claims so they're not accused of greenwashing.
Maybe just a last question on this. Using Canadian ethane is historically very inexpensive. And you're building at scale, and you've got infrastructure that's already in place. Are these assets as low-cost as what you have in Texas, in theory?
Yes. Yes. You'll have a little bit higher operating expense for the scrubbing out. You've added a unit operations for the Autothermal Reformer. So you've got a higher operating expense to scrub it out, a little bit higher capital cost. But they'll be very competitive with U.S. Gulf Coast. It'll be a first-quartile cracker, even with hydrogen firing. That's possible because you've got a policy on a price on carbon to be able to recover it and possible because you have Investment Tax Credit support from the Canadian government to help.
Supplement.
Supplement that. But even on its own, even if you didn't do it with the cost base we've got on the ethane, it's a very competitive project.
So in terms of Dow in 2024 and 2025, I see Dow as in an unusual position. And what I mean by that is, historically, a fair amount of EBITDA volatility comes from the specialty plastics or polyethylene operation. But in the cycle that we have now, the volatility is really coming from silicones or the Performance Materials business and from the MDI business inside of II&I. And part of the issues that those businesses have is that it's not only that demand is weak, but that supply has been added by mostly in China in both businesses. And so when you look at those businesses, do you see them as recovering in a hockey stick fashion or more in a glide pattern because of the capacity that's been added?
Yeah. In polyurethanes, for example, I would say in Performance Materials and in II&I, within those, I mentioned Industrial Solutions and silicones, which are continuing to grow. The siloxanes' capacity in China has been a drag on silicones. The propylene oxide capacity has been a drag on polyurethanes. So I think polyurethanes tends to move up with the housing and construction and durable goods markets. And you see it move up. I mean, it can move up in a stairstep fashion as you start to get projects through. It only tends to spike when you see outages or unplanned events that would cause an outage in the industry. So if you lose a big these are big-scale applications. So if you lose one somewhere, it makes a big impact.
I would say isocyanates tend to hold up better than propylene oxide because propylene oxide goes into a lot of lower-value foams and things that are not high quality. Isocyanates going into rigids, into automotive mobility, whether it's internal combustion engine or EVs, they are the highest-efficiency insulation that's out there. It's polyurethane insulation. So the construction side tends to drive it on many fronts. We see it in cold storage. You see it in commercial construction. You see it in residential. You see it across the board. I think that'll pick up. China has the same exact situation that we do, which is low housing and low construction right now. So when that picks up, I think you'll see that move it as well. But I would say PO, I would expect more of a glide path. Isocyanates is running 70%-75% operating rates.
So it may have some areas where it kind of takes off a little bit as demand takes off. Siloxanes, most of the new capacity is in. The downstream demand continues to grow for siloxanes. Electronics drives a lot. Last year was not a strong year for electronics. This year, I expect to be up more than 10% in the electronics sector. So that'll be a good driver. EVs and batteries have been a big consumer, consumer personal care. High-rise construction or any big commercial construction that uses a lot of glass will use a lot of silicones to glaze that glass in place. So I think the outlook for those is going to continue to be good. And then I would say on coatings, it's really architectural coatings is driven more by residential construction and a little bit commercial construction.
That one is starting to pick up a little bit. We're expecting about 3% this year volume on architectural coatings. I think it'll start to ramp up as interest rates come down. You'll start to see the number of permits applied for pickup. There is some pent-up demand out there in the U.S. right now in the housing market. There's a shortage of available units for people that want to buy homes. It's the mortgage rates right now. They're kind of causing people to pause before they move in. If you think that you're on the cusp of maybe the Fed lowering rates, you might want to delay your decision a bit, see if you could get a lower rate. That feels like where we are.
When you think about Dow and its investments outside of North America, whether it be in China or Europe or other regions, are those areas less attractive over time relative to North America? And is it the case that, over time, Dow would like to maybe have a smaller presence in some of those offshore regions because of their cost structures?
Yeah. If you look in China today, we're in the market more with downstream investments to support local Chinese supply. We don't have a big cracker integrated footprint there. Our view is you've got to import oil. You don't have natural gas liquids. Even though Asia has become a little bit better on the cost curve because Europe has moved to the high position, the reality is they're both high cost. And so our view is the advantage of being in the U.S. or Canada or the Middle East is going to be stronger longer term. I think the thing we have to watch out for in any of the geopolitical tensions is just the unintended consequences. If we get into both parties here seem to be looking at tariff as a way to manage this, which can be a very blunt instrument.
And so we have to make sure that we're in a good position to be able to protect our market and our franchise. But it doesn't necessarily mean we have to invest big capital in there. And we've seen a big move already. I mean, if you look at how hot Mexico has become, an awful lot of the friend-shoring or near-shoring that's happened has been Chinese investment in Mexico to bring the supply chains closer to home. So we have to watch those trends too. You have to have low energy cost. I mean, energy hits us two ways. It's our feedstock. And so it drives the feedstock cost. But it's also our highest cost of converting all of those materials into materials. We're not unlike steel. It doesn't take as much energy to make plastic as it does steel.
Steel, aluminum, glass, other material transformations, they take a lot of heat and a lot of steam. So you've got to have low energy costs. You've got to have low feedstock costs. You've got to be able to execute with capital discipline, which we can do here. Canada, China can do as well. Then you have to have access to market. And that requires a lot of research and development. What you can make today and what's competitive today may change two or three years from now. So you need to make higher-quality materials. You've got to meet demands from the brand owners. And I think that's kind of an advantage that we have that may not be easy for the investor to see.
But when we get into things like recycling, it's not just as easy as saying, "I'm going to buy waste plastic and recycle it mechanically or advanced recycling." You've got to make a product out of that material that meets, in some cases, food-quality specs, that meets the aesthetics that a brand owner wants in their product package, something that you would buy off the shelf if you went into a store and you saw it and said it was recycled. You would have confidence in it, and you would buy it. That requires a lot of innovation capability. And we are uniquely positioned to help those companies as they scale up to be able to make high-quality products out of the recycled content.
Well, what I take away from that is that it's good to have a large footprint in North America. Thanks very much, Jim, for your presentation. We hope to see you again next year.
Great to see you. Thanks, Jeff.
Thank you.