The threat of a continued closure of the Strait of Hormuz sounds like a macro horror story for most industrial stocks. For Dow Inc. (DOW), however, it’s already sent the stock 77% higher over the past six months and could continue to act as a catalyst in the event of prolonged shipping restrictions.
A significant share of the world’s polyethylene, the plastic used in everything from packaging to pipes, is produced in the Middle East using oil-linked feedstocks, the International Trader Publications blog shared.
Disruptions in that region tighten global supply and push prices up. At the same time, higher oil prices raise production costs for naphtha-based rivals everywhere, reports Financial Content. Dow sits on the other side of that equation, making polyethylene from cheap U.S. ethane.
When global prices rise and competitor costs spike, Dow sells its products at higher prices. This means the company’s margins expand without the company having to do anything differently.
Supply shock is reviving Dow’s polyethylene earnings
Dow’s outlook changed with management’s latest market view. In April, management said Middle East disruptions would persist through 2026, which will tighten global polyethylene supply just as Dow’s U.S. ethane-based production system gains a stronger structural cost edge.
The clearest near-term proof point is Dow’s next-quarter guidance. The company projected about $12 billion in revenue in Q2 and roughly $2.0 billion in EBITDA, a sharp sequential jump from $9.8 billion in revenue and $873 million in EBITDA in Q1.
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Beyond the macro tailwind, Dow has been running a restructuring program with plant closures, headcount reductions, and procurement savings, and expects roughly $1.1 billion in cost reductions from those actions in 2026. Those savings carry more weight when they’re landing on top of already expanding margins rather than trying to offset weak pricing.
Management also pointed to pricing momentum across every business and region, which gives the recovery a broader footing. If polyethylene tightness holds through 2026 as management expects, Dow stands to earn more by selling into a market increasingly priced off higher-cost supply.
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Dow’s balance sheet buys time while the thesis plays out
One concern that has faded is near-term balance sheet stress. Dow holds more than $4 billion in cash and roughly $14 billion in total liquidity, with no major debt maturities until 2029.
That runway means management can absorb a weak cash-conversion period without being forced into expensive refinancing or difficult dividend decisions.
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The more important question now is whether stronger EBITDA actually shows up in free cash flow. In Q1, Dow generated $600 million in free cash flow from $1.12 billion in operating cash flow. That $1.12B in operating cash flow helped fund a quarterly dividend costing $252 million.
The Q2 result will be a good test of whether the current margin expansion is translating into higher free cash flow available for shareholders.
Why Dow stock could keep climbing
- Middle East supply disruptions tighten polyethylene markets and lift global pricing.
- Higher oil-linked feedstock costs pressure naphtha rivals and widen Dow’s cost advantage.
- Broad-based price gains across Dow’s portfolio improve fixed-cost absorption and drive EBITDA growth.
- Stronger plant utilization turns spread improvement into outsized earnings growth because Dow’s asset base carries high fixed costs.
What could break the thesis
- Polyethylene tightness eases faster than expected and compresses spreads, weakening margins.
- Export channels face logistics or trade friction, limiting Dow’s ability to realize global pricing on its U.S. cost-advantaged production.
- Customer restocking fades after initial price moves, exposing that part of the volume lift was timing-related rather than end-demand-driven.
- Energy and raw-material inflation inside North America narrows the feedstock advantage.
Key takeaways for Dow
Tighter global supply has raised pricing just as Dow’s U.S. ethane-based system has become more advantaged against higher-cost global producers.
The clearest proof point is the company’s roughly $2.0 billion Q2 EBITDA target, which sets up a sharp reset from the $873 million in EBITDA the company reported in Q1. Dow’s cash balance and long debt runway give management time, but stronger EBITDA needs to drive durable free cash flow.
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