Dow Chemical 2009 Annual Report Download - page 41

Table of Contents
The Dow Chemical Company and Subsidiaries
PART I, Item 1A. Risk Factors.
The factors described below represent the Company’s principal risks.
The Company operates in a global, competitive environment in each of its operating segments and geographic areas.
The Company sells its broad range of products and services in a competitive, global environment. Dow competes worldwide on the basis of quality, price,
technology and customer service. Increased levels of competition could result in lower prices or lower sales volume, which would have a negative impact on the
Company’s results of operations.
The earnings generated by the Company’s basic chemical and basic plastic products vary from period to period based in part on the balance of
supply relative to demand within the industry.
The balance of supply relative to demand within the industry may be significantly impacted by the addition of new capacity. For basic commodities, capacity
is generally added in large increments as world-scale facilities are built. This may disrupt industry balances and result in downward pressure on prices due to
the increase in supply, which could negatively impact the Company’s results of operations.
The Company’s global business operations give rise to market risk exposure.
The Company’s global business operations give rise to market risk exposure related to changes in foreign exchange rates, interest rates, commodity prices and
other market factors such as equity prices. To manage such risks, Dow enters into hedging transactions, pursuant to established guidelines and policies. If
Dow fails to effectively manage such risks, it could have a negative impact on the Company’s results of operations.
Volatility in purchased feedstock and energy costs impacts Dow’s operating costs and adds variability to earnings.
Purchased feedstock and energy costs account for a substantial portion of the Company’s total production costs and operating expenses. The Company uses
its feedstock flexibility and financial and physical hedging programs to lower overall feedstock costs. However, when these costs increase, the Company is not
always able to immediately raise selling prices and, ultimately, the ability to pass on underlying cost increases is greatly dependent on market conditions.
Conversely, when these costs decline, selling prices decline as well. As a result, volatility in these costs could negatively impact the Company’s results of
operations.
The Company is party to a number of claims and lawsuits arising out of the normal course of business with respect to commercial matters,
including product liability, governmental regulation and other actions.
Certain of the claims and lawsuits facing the Company purport to be class actions and seek damages in very large amounts. All such claims are being
contested. With the exception of the possible effect of the asbestos-related liability of Union Carbide Corporation (“Union Carbide”), described below, it is the
opinion of the Company’s management that the possibility is remote that the aggregate of all such claims and lawsuits will have a material adverse impact on
the Company’s consolidated financial statements.
Union Carbide is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. At
December 31, 2009, Union Carbide’s asbestos-related liability for pending and future claims was $839 million ($934 million at December 31, 2008) and its
receivable for insurance recoveries related to the asbestos liability was $84 million ($403 million at December 31, 2008). At December 31, 2009, Union
Carbide also had receivables of $448 million ($272 million at December 31, 2008) for insurance recoveries for defense and resolution costs. It is the opinion of
the Company’s management that it is reasonably possible that the cost of Union Carbide disposing of its asbestos-related claims, including future defense
costs, could have a material adverse impact on the Company’s results of operations and cash flows for a particular period and on the consolidated financial
position of the Company.
If key suppliers are unable to provide the raw materials required for production, Dow may not be able to obtain the raw materials from other
sources and on as favorable terms.
The Company purchases hydrocarbon raw materials, including liquefied petroleum gases, crude oil, naphtha, natural gas and condensate. The Company
also purchases electric power, benzene, ethylene, propylene and styrene to supplement internal production, as well as other raw materials. If the Company’s
key suppliers are unable to provide the raw materials required for production, it could have a negative impact on Dow’s results of operations. For example, in
2005 and 2008, the Company experienced temporary supply disruptions related to major hurricanes on the U.S. Gulf Coast. In addition, volatility and
disruption of financial markets could limit suppliers’ ability to obtain adequate financing to maintain operations, which could have a negative impact on
Dow’s results of operations.
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