Dow Chemical Bets Big on Bioplastics

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If The Graduate were made today, Mr. McGuire might not be so keen on plastics. By now it's a mature industry, with 500 billion pounds of the stuff produced every year. But hidden in that massive trove is a segment that hopes to capture the same explosive growth predicted back in 1967. Say it with me: "bioplastics."

Setting up a sustainable shop
Dow Chemical
(NYS: DOW) generates a significant portion of its earnings ($11.6 billion worth of sales in 2010, or about a fifth of all revenue) through its plastics division. The climbing costs of petroleum and a rising tide of environmentalism have boosted interest in bioplastics. The concept is hardly a new one, but bioplastic adoption has just begun to take off, having been hampered in the past by a lack of scale and greater cost efficiencies offered by petroleum-based plastic. However, Dow has found a cost-effective answer in Brazil and plans to set up operations capable of producing approximately 350,000 metric tons of sugarcane-derived polyethylene per year. A drop in the global plastics bucket, but every environmentally friendly drop is a good one, right?

Since plastics only account for about 5% of total U.S. petroleum consumption, it's unlikely that even a complete shift toward bioplastics will devastate oil producers. Dow's shift toward bioplastics produces at a lower cost (negating the need for pricey oil) by controlling the entire chain of production, from the sugarcane field to the processing plant. Its nearest (literally and professionally) direct competitor is Brazil-based Braskem (NYS: BAK) , which operates a similar sugarcane-based polyethylene plant with a production capacity of 200,000 metric tons.

This is another dip in the pond for Dow, which previously tried to develop a new corn-based bioplastic with Cargill but decided to abandon the partnership and the product in 2005. Why? It's hard to get people to accept new products, according to Luis Cirihal, Dow's executive in charge of the new sugarcane project. After Dow walked away from the partnership, Cargill doubled down on the corn-based bioplastic, renamed its manufacturer NatureWorks LLC, and should soon expand its manufacturing capabilities.

Late to the party, but bringing lots of favors
Dow's polyethylene effort begins in the midst of what has been a huge rise in bioplastic demand. Bioplastic consumption has increased by several orders of magnitude since 2000, and total bioplastic production capacity is expected to increase sixfold, to 2.1 million tons, by 2013. Despite its late start, Dow's plans dwarf the capacities proposed by smaller bioplastics rivals Cereplast (NAS: CERP) and Metabolix (NAS: MBLX) , which anticipate total production capacities of 88.4 million pounds and 110 million pounds, respectively. To put that in perspective, Dow's proposed 350,000 metric ton capacity is equivalent to more than 770 million pounds. Dow expects that its combination of scale and sustainability will allow it to command a premium over standard plastics, which might put the squeeze on smaller bioplastic producers.

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At the time this article was published Fool contributorAlex Planesholds no position in any of the companies mentioned in this article, but appreciates their sustainability efforts in a tree-hugging-hippie kind of way. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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